MF Global: The gamble that didn't pay off

The collapse is the final humiliation for Jon Corzine, says Stephen Foley

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The Independent Online

The ambitious investment bank MF Global, one of 22 elite "primary dealers" licensed to trade with the Federal Reserve, has collapsed into bankruptcy after disastrous bets on eurozone government debt, marking the humiliating end of a Wall Street comeback for the former Goldman Sachs boss Jon Corzine.

The spectacular failure came after a weekend of fruitless sale talks, and underscored the fragile nature of confidence in financial institutions and the dangers of placing big wagers with a bank's own money. MF Global, with a history that stretches back more than two centuries, unravelled with extraordinary speed over the course of a week, as its bonds were downgraded to junk and it admitted spiralling losses in its trading division.

Clients and trading partners began pulling their business from the firm last week, and MF Global derivatives traders were yesterday refused entry to the Chicago Board of Trade. The New York Federal Reserve withdrew the company's prime brokerage licence because it had burnt through its capital cushion and was no longer a safe trading partner. Exchanges around the world said they would only deal with MF Global clients who were closing their accounts, rather than conducting any new trades. The company's shares were halted by the New York Stock Exchange, pending news that optimists still hoped might include a sale of the business.

But then, before lunchtime in New York, the company formally filed for Chapter 11 bankruptcy protection. KPMG were meanwhile appointed as administrators to wind down its UK unit, which employs 725 people, under the Financial Services Authority's Special Administration Regime.

The company had assets of $41bn and debt of almost $40bn as of last month, according to its Bankruptcy Court filing, putting it seventh on the list of the largest bankruptcies in US history, after the likes of Lehman Brothers, WorldCom and Enron. JPMorgan Chase and Deutsche Bank are among the firm's largest unsecured creditors.

The company has its origins in a broking business founded more than 200 years ago in London by James Man, which focused mainly on trading sugar and other commodities. Expanding into derivatives, it had become the fourth-largest player in the $4.5 trillion-a-day global futures market by the middle of the last decade. The brokerage business was eclipsed, however, by Man Group's other business managing hedge funds, and the UK parent company decided to spin off MF Global in 2007. The following year, a rogue wheat trader's unauthorised dealing cost the company $141.5m, forced it to go to the private equity firm JC Flowers for a recapitalisation, and led to the ousting of the former chief executive.

It was JC Flowers' founder Christopher Flowers, a former colleague at Goldman Sachs, who introduced Mr Corzine to the company last year and who backed his ambition to turn MF Global into a mini-Goldman Sachs.

The strategy for building the company including hiring traders to invest the company's own capital, as well as starting to buy US government debt as a primary dealer. With poor profitability at the core business, Mr Corzine urged traders to take on large bets which, if they came off, would catapult the firm into the big league. These included $6bn of bets on eurozone sovereign debt that Mr Corzine was certain would pay out because European leaders promised to prevent a default from countries such as Italy and Spain. The promises, though, didn't stop the value of the bonds from falling, creating a widening hole at the centre of the company's finances.

As recently as last week, Mr Corzine was refusing to back down from the trades. "Over the course of the past year, we have seen opportunities in short-dated European sovereign credit markets and built a fully financed, laddered maturity portfolio that we actively manage. We remain confident that we have the resources and expertise to continue to successfully manage these exposures to what we believe will be a positive conclusion in December 2012."

His statement was accompanied by news of widening losses, however, and triggered a collapse in confidence. Moody's downgraded MF Global bonds to junk status and launched a broadside against the dangerous bets that Mr Corzine had laid, noting that MF Global's $6.3bn exposure to foreign government debt was five times the company's capital cushion.

Last night it was clear Mr Corzine had failed in his "re-engineering challenge". In the early hours of Monday morning, talks about selling the company to Interactive Brokers collapsed, and a Chapter 11 filing became inevitable.

The comeback that failed

There is no getting round it, MF Global's demise is the ultimate humiliation for Jon Corzine. In the third and surely final act of his career, he had hoped to erase the legacy of his ignominious exits from Goldman Sachs and from New Jersey politics. Instead, he will for ever be known less for his feats than for his defeats.

Mr Corzine clawed his way from a small family farm in Illinois to the chief executive job at the mightiest investment bank of all, Goldman Sachs, via the Marine Corp reserves and an MBA at the University of Chicago. A bond trader at Goldman, he rose through the ranks by helping to turn the staid old advisory firm into a powerhouse trading company. In the end, though, he couldn't co-exist with his co-chief executive, Hank Paulson, and the putsch came while Mr Corzine was on holiday indulging his love for skiing in 1999.

The flotation of Goldman made Mr Corzine a fortune, almost half a billion dollars by most reckonings, and he parlayed that money into a political career. A lifelong Democrat, he won the New Jersey Senate seat and, six years later, the Governorship. But he appeared to have a tin ear when it came to political realities and by the end he cut a hapless figure. A 2007 car accident that nearly killed him, in which it was revealed he wasn't wearing a seatbelt, became a metaphor for his administration. Even five campaign visits from President Barack Obama couldn't win him re-election in 2009, and he went down to defeat by Republican Chris Christie.

Stephen Foley