Jon Corzine: The Wrong Man for the Job
While Jon Corzine's resume may have made him look like a tremendous asset for a company like MF Global (OTC: MFGLQ), he was unquestionably the wrong man for the job. The spectacular implosion of the firm was almost inevitable from the day that he agreed to take over as its CEO.
In many ways Jon Corzine had reached the pinnacles of business and politics. He rose from Goldman Sachs' bond desk to lead the division and eventually the company. After Goldman, he was elected both a U.S. senator and a state governor. However, at almost every turn Corzine's sky-high ambitions slammed headfirst into brick walls.
At Goldman Sachs, Corzine's bullheadedness, particularly with regards to Goldman's initial public offering, put him at odds with other key players in Goldman's hierarchy, including Henry "Hank" Paulson, who would later become the U.S. Treasury secretary. Corzine eventually got his way and Goldman hit the public markets, but his crusade cost him his job.
After Goldman, Corzine won a spot on the U.S. Senate by personally financing the most expensive senatorial campaign in history, but his policies were so far left that they hit a brick wall with the largely Republican-run Senate during his term. Corzine spent tens of millions more of his own money to win the New Jersey gubernatorial election in 2005. He found himself battling the back-alley deal culture that often dominates Garden State politics, enduring a scandal involving the president of New Jersey's largest union, presiding over a government shutdown, and ending up on the receiving end of the first and only attempted recall of a New Jersey governor. Ultimately, Corzine lost his first reelection bid in a fractious contest with Republican Chris Christie.
When longtime friend J. Christopher Flowers called Corzine to discuss the top job at MF Global, the decision was a quick and easy one. The money was nothing to sneeze at, particularly the share of J.C. Flowers & Co.'s profits that Flowers offered up by making Corzine an operating partner. More importantly for Corzine, though, the MF Global job offered a much-needed shot at redemption.
A glorious rebirth awaits
A former Corzine Senate staffer told us that the senator's staff strongly encouraged him not to run for governor in New Jersey. But it was of no use. Corzine, he told us, is drawn to "charity cases and disasters," and he plowed his way into the Garden State's gubernatorial battlefield anyway.
Since Corzine was being paid millions to run MF Global, it's hard to think of it as a charity case -- but it was certainly a disaster. Though the broker had a history that stretched back hundreds of years, it had never really found its legs as a stand-alone public company after being spun off from Man Group. A trading scandal shortly after the IPO sent the company reeling, and while a confidence-boosting investment from Chris Flowers helped temporarily, the global financial crisis and an increasingly challenging environment for brokers battered the company relentlessly.
Corzine joined at the end of MF Global's fiscal fourth quarter -- a quarter in which it lost $89 million, its fifth straight quarterly loss. And with the company levered at 37-to-1, it had the definite potential to quickly turn from disaster into outright catastrophe.
In his first quarterly conference call, Corzine emphatically declared that the company's "fiscal 2010 performance ... [was] completely unacceptable." He continued, "Going forward these are not the kinds of results that MF Global management will tolerate nor should its shareholders." During the same call, Corzine subtly hinted at his key thrust for MF Global -- a thrust that would eventually be its undoing -- when he said that he would have the company "extend [its] client facilitation efforts to include principal risk-taking across most product lines."
It wasn't until two quarters later, though, that Corzine referred to the push as an effort to turn MF Global into a "full-service global investment bank."
In theory, it was brilliant. By itself, the broker business was under pressure and unlikely to suddenly turn around and become wildly profitable. Looking back to the fiscal year that ended in March 2007 -- the last full year that MF Global reported a profit -- the company's operating earnings as a percentage of revenue was roughly 8%. But at Corzine's former employer, Goldman Sachs, operating profits were more than 25% of revenue for roughly the same period.
There was much work to do, but MF Global's brokerage business provided a perfect foundation to build an investment bank around. The brokerage operations that it knew so well could provide a base of business. Plus, it put the company in many of the right places and in touch with many of the right people to expand MF Global in multiple new, more profitable directions.
Country comes to Wall Street
If Chris Flowers was every bit the image of a Wall Street investment banker, Jon Corzine was none of it. Born in a small town in Illinois, his father was a farmer and part-time insurance salesman and his mother was an elementary school teacher. The family lived modestly and his parents never had a credit card.
Corzine went to public school and spent his high school years focused on football and basketball. He learned well-worn middle-class lessons like, "You've got to work for everything you do," and, "When you get beat, you've got to get up." He went to the state college and married his high school sweetheart.
Even after rising to the top rungs of finance and politics, Corzine never fit the mold. He was known for his thick beard and fuzzy sweaters, both anomalies in the clean-shaven, pinstripe-suit culture of Wall Street. One former staffer from Corzine's Senate days said it wasn't unheard of to see the senator in shoes with holes in them.
In conversations with those who worked with him, "friendly" and "approachable" are words that came up often. Former MF Global trader Michael Fitzpatrick, who joined the firm in 2007, said that while he'd seen former CEO Bernard Dan "once or twice," Corzine was very present and regularly engaged employees. Another former MF Global employee said that Corzine knew a lot of lower-level people by name and was constantly "walking around, smiling, and saying hello to people."
Will the real Jon Corzine please stand up?
But while much of Corzine's upbringing and comportment may have made him an unlikely financial master of the universe, financial risk-taking may have simply run in his blood. The driving force behind Corzine's father's aversion to financial risk was the fact that Corzine's grandfather had levered up his personal balance sheet ahead of the Great Depression, at one point owning 2,500 acres of farmland and a bank. When the downturn hit, the family lost everything.
All signs point to Jon inheriting his grandfather's drive for success through risk-taking. In The Partnership, author Charles Ellis describes Corzine as "a strongly intuitive risk taker and a relentless trader." In William Cohan's Money and Power, Cohan notes that at Goldman, Mark Winkelman was appointed as co-head of fixed income "to tame some of Corzine's more reckless trading instincts." Meanwhile, a former Goldman Sachs partner who worked with Corzine noted, "Everything to him, if it was a position, if it was a hundred, he liked it better at two hundred and he liked three hundred better than two hundred."
In fact, at Goldman there may have been deep concerns even as the partnership at Goldman tapped Corzine to run the entire company. In Money and Power, Cohan writes, "The fact remained that Goldman had selected as its new leader the very person who had just presided over a complete meltdown in Goldman's fixed-income business and who, as a result, never fully had the trust and faith of the firm's investment bankers."
As if his thirst for risk wasn't troubling enough, Corzine coupled that with a juggernaut's drive to get his way when he thought he was right. As former Goldman Sachs Vice Chairman Bob Hurst put it, "It's not that he always thinks that he's right; it's that he knows that he's right. That's dangerous." A Senate staffer who spoke on background echoed that sentiment, saying that when it came to challenging Corzine, "You're not going to talk him out of it if the numbers are on his side."
Corzine displayed this bullheadedness a great many times throughout his career. He was pushed out of Goldman Sachs in part because of his unrelenting push for a Goldman IPO. But it wasn't just that effort. When he decided that Goldman needed to grow through a merger, he plowed ahead with unilateral meetings with potential merger partners, leaving Goldman's executive committee out of the process. When participating in the coordinated bailout of hedge fund disaster Long-Term Capital Management, he put $300 million of Goldman's capital on the line even though he'd been authorized to commit only $250 million.
Politically, Corzine's "damn the torpedoes" approach was seen early on in the cash-blitz approach to his Senate campaign. While he was governor of New Jersey, Corzine presided over the state's first-ever government shutdown, which he ordered as a gambit to get the state's Legislature to agree to his proposed budget, and, in particular, an increase in the state's sales tax.
Corzine's hardheaded nature had serious personal consequences as well. He and his wife split in 2002, and she later lamented that his quest for political power had caused him to leave his family behind. And in the wake of a devastating auto accident that left the governor in critical condition, his chief of staff tacitly acknowledged that Corzine often didn't wear his seatbelt and added, "Those of you who know Governor Corzine know that he's not always amenable to suggestion."
Nothing from nothing
In hindsight, it's hard to overstate how wrong Jon Corzine was for the CEO role at MF Global. MF Global was a company in turmoil. There was a void in stable leadership, a void in clear direction, and, thanks to the merger with Refco and the significant turnover in the years that followed, an undoubted void in stable culture of any sort, let alone risk management. A former MF Global employee described the company as operating out of "silos" that were essentially "different groups with different cultures." Former MF Global trader Michael Fitzpatrick similarly described it as "individual fiefdoms," though he noted that it's not necessarily an unusual thing for an older commodities trading firm.
What MF Global needed was a conservative, plotting CEO, perhaps an executive seasoned in turnarounds or restructurings. With the bottom line under water, leverage at extreme levels, and the market already looking askance at the firm, there was little room for error.
What MF Global got was a growth-obsessed risk taker who was generally unwilling to build any sort of consensus before barreling ahead with whatever course of action he thought was best. At Goldman Sachs, the approach earned him the ire of Hank Paulson and other powerful partners at the firm. At MF Global, it was tantamount to allowing a known arsonist run wild in a munitions shed.
The way that Corzine approached the strategic transition was immediately revealing. While turning a brokerage into a "full-service global investment bank" could mean many things -- adding advisory services, asset management, prime brokerage, etc. -- Corzine made the initial push in principal transactions. That is the slice of a "full-service investment bank" that could potentially produce profits the quickest -- but was also by far the riskiest.
A story from a former MF Global insider is telling: A younger trader made an error in entering a trade and caught it a short time later. Traders focused on executing trades are generally taught early on to cut an error short immediately whether the error is in their favor or not. In this case the error was in MF Global's favor and Corzine found out about it. He told the young trader to "let it ride."
Meanwhile, Corzine set to work recreating the employee base to support his approach. Many of the existing traders were uncomfortable with the idea of taking on principal positions and so Corzine started bringing in a new batch of traders -- through selective hires as well as a freshly instituted training program -- that would be more willing to take on risk. He also hired a young, hotshot hedge-fund punter to build out the company's principal strategies desk.
The upper levels of the executive suite saw wholesale change as well. In the fall of 2010, Bradley Abelow -- who worked under Corzine at Goldman and was later his chief of staff while he was the governor of New Jersey -- was brought in as the company's chief operating officer. Chief Risk Officer Michael Roseman, who reportedly questioned Corzine's approach at times, was replaced by Michael Stockman in January of 2011. Stockman was previously the North American chief risk officer for UBS (NYS: UBS) , the Swiss investment bank that absorbed some of the worst losses during the financial crisis. Two months later, the well-seasoned chief financial officer of the company, Randy MacDonald, was moved elsewhere in MF Global, and the young, less experienced Chief Accounting Officer Henri Steenkamp was promoted.
In the fiscal fourth-quarter earnings conference call, Corzine hailed the changes as "upgrading in those areas where we recognize the opportunity to align staff to strategy." That's a nifty way to put it, but what Corzine was really doing was building a management team that would let him do whatever he wanted -- particularly when it came to risky trading decisions.
With a close relationship that reached back to their days at Goldman, it'd be no stretch to call Abelow a Corzine crony. The woes of Stockman's previous employer suggest he may have a pretty liberal interpretation of controlling risk. And besides, Stockman's position was set up so that he reported to Abelow. And as for Steenkamp, while he may have been a competent candidate for CFO, what's a 34-year-old going to say to the former chairman -- and, at one time, CFO -- of Goldman Sachs?
With Corzine molding the decision makers at MF Global in his own image, it appeared increasingly unlikely that there would be anybody at the company that would challenge Corzine's views. This may not have been anything new for Corzine. In Money and Power, William Cohan writes that Corzine's second in command, Hank Paulson, "believed Corzine surrounded himself with his cronies, who told him what he wanted to hear."
That left only the board to pull the reins on Corzine. Corzine happened to be a board member himself and J.C. Flowers controlled a second board seat through David Schamis. As for the rest of the directors, Corzine showed his willingness to play hardball with them, at one point threatening to resign if the board didn't go along with his strategy. In testimony in front of the House Agriculture Committee, Corzine described the incident as "offering" to resign if the board had lost confidence in him, but surely a savvy player like Corzine understood the crippling market reaction that would have followed if he had suddenly left the company.
Beneath calm waters
Even as Corzine was installing an executive team that was unlikely to challenge him, in many ways there appeared to be less reason for anybody to want to challenge him. In his first quarter as CEO, the company reported a small profit. The company would go on to produce profits on an operating basis for four of the first five quarters that he was at the helm. On the balance sheet, total leverage was reduced from 37-to-1 when Corzine started to 30-to-1 by the end of June 2011. In early 2011, the company was also named a Federal Reserve primary dealer, a huge coup for the company that would potentially open up new business lines as well as major new customer relationships.
But if things were starting to look better from the outside, there were turbulent waters churning beneath the surface. Behind the scenes, the "relentless trader" in Jon Corzine came out. The principal trading specialist he'd hired had left, and it appeared that Corzine gave himself the unspoken anointing of "CEO trader" as he built a massive trading position that would eventually lead to the complete undoing of MF Global.
In the next chapter, we deconstruct the trade that brought down MF Global. Click here to read all about it.
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