ICE

[cottonpicken]

Bduke,what do you think of my idea of the cwb being a
brokerage?

[bduke]

Cottonpicken... Theoretically I like the idea.

My concern is its cultural. I consider culture to be the experiences, attitudes and
expectations which drive behaviour.

The embedded culture in the CWB is a risk, especially without exceptionally strong
leadership.

If a John DePape were to become the CEO and issue strict ultimatums and 60 day
deadlines to comply with the new BoD's policies, and his benchmarks, it could be
dominant.

By compliance I mean behavioral adjusting or leaving the firm.

The CWB does have very intelligent people. I think some of the old guard would be
problematic.

Cheers... Bill

[parsley]

#3. Enjoy. More to come when you have
digested some of this. Pars

In early 2008, MF Global broker Evan Dooley
found his way around the company's trading limit
controls and managed to lose $141.5 million
trading the wheat market. The episode was a
blow to the market's confidence in MF Global just
as the company was scrambling to refinance a
$1.4 billion bridge loan that it took out in
conjunction with its initial public offering.

To deal with the bridge loan, MF Global needed
capital, but it also needed to regain the market's
confidence. At the time that Flowers invested, MF
Global was leveraged at 39-to-1 -- as compared
to 24-to-1 at Lehman Brothers prior to its
bankruptcy -- with nearly $19 billion of its
financing coming through repurchase
agreements, a type of short-term borrowing that
financial companies use. More than $8 billion of
those repos could be pulled in 24 hours or less.
For most publicly traded companies, market
confidence is a nice luxury; for MF Global, it was
a must for survival.

Luckily for MF Global, Chris Flowers brought both
money and market confidence. Flowers, through
the J.C. Flowers II investment fund, agreed to
invest a minimum of $150 million -- and up to
$300 million -- in MF Global via convertible
preferred shares that paid an annual 6%
dividend.
And though he may not have quite the brand
equity of Warren Buffett or George Soros, to
many on Wall Street an investment from Flowers
is a very big deal. In fact, Flowers is so respected
in the financial world that in 2008 he was called
on to be a key player in sorting out the industry
in the very depths of the meltdown, including
acting as banker during Bank of America's
(NYSE: BAC  ) ill-fated acquisition of Merrill
Lynch. Even here at The Motley Fool,
insurerEnstar Group (Nasdaq: ESGR  ) remains
a recommendation of the Global Gains
newsletter, largely due to the presence of J.C.
Flowers' ownership stake and the deal-making
prowess of Chris Flowers.

The confidence boost from the Flowers
investment appeared to pay off quickly for MF
Global as the company was able to secure
further funding a month later, including a $450
million financing commitment from a bank
syndicate.

As good as the Flowers investment was for MF
Global, though, the timing and nature of the
investment was also great for Flowers. Rather
than waging a rancorous proxy campaign to gain
a board presence -- a tactic of many hedge fund
managers that often puts them at odds with the
board -- Flowers was a welcomed outside
investor and a well-respected name in the world
of finance. That made it far more likely that
strategy and hiring recommendations from Chris
Flowers and the J.C. Flowers-appointed board
member, David Schamis, would find very
receptive ears on the MF Global board.


Changes happened quickly following the J.C.
Flowers investment. In early June, the former
CEO of the Chicago Board of Trade, Bernard
Dan, was brought in as the chief operating officer
of North America to help whip the company back
into shape.
Dan was quickly promoted to global COO and
then, just four months after joining the company,
he was named CEO. It was a relief for many
investors as they'd been clamoring for CEO
Kevin Davis to leave. In the short time that the
company had been trading on public markets,
investors had seen the stock clobbered in large
part due to sloppy internal controls under Davis'
watch. One particularly blunt shareholder said, "I
think Davis should be taken out and shot." 

The market provided its stamp of approval by
sending MF Global's stock skyrocketing 45%
following the announcement.
The environment wasn't kind to MF Global, but
Dan appeared to be taking reasonable steps to
expand the company's business, while
simultaneously cutting back unprofitable areas
and continuing to tighten controls. 

Early efforts had the company shutting down its
Western Canada operations, applying for primary
dealer status, and expanding its operations in
Japan in an effort to gain a stronger foothold in
Asia. During the summer and fall of 2009, the
company went on a hiring spree, bringing in a
small army of new executives including the
positions of general counsel, head of European
government bond trading, head of repo sales,
chief economist, global head of fixed income,
and COO of North America.

If you were looking for the quintessential Wall
Street banker, you couldn't do much better than
J. Christopher Flowers. A Harvard graduate and
chess whiz, Flowers, with his eggish head,
thinning hair, and glasses, fit the finance-wonk
caricature to a T.

But it was Flowers' razor-sharp intellect and
comfort with the complex numbers involved in
financial-institution deal making that made him a
standout banker at Goldman Sachs. His rise
through the ranks of the then-private partnership
was nothing less than meteoric; he was named a
partner at 31 -- the youngest ever at the time. 
Internal politics helped cut Flowers' career short
at Goldman, but there were plenty of
opportunities available to a former Goldman
Sachs superstar. His first major splash out of
Goldman would prove to be a career-making
deal as he elbowed his way through the
inhospitable Japanese bureaucracy to secure a
role in the rescue of Long-Term Credit Bank
(now Shinsei). Flowers finagled a sweetheart
arrangement that relied heavily on Japanese
government guarantees and allowed the
company to reintroduce itself to the public
markets. Private-equity leading light David
Rubenstein of Carlyle hailed the transaction as
"the most profitable private-equity deal of all
time." Flowers reportedly walked away with $1
billion.

From there, he bucked the tough times of 2002
and raised $900 million for the first fund under
the J.C. Flowers & Co. shingle. With Flowers still
very much riding on his reputation at Goldman
and the grand-slam Shinsei deal, the second
J.C. Flowers fund closed in 2006 after raising an
impressive $7 billion. In 2006, the 48-year-old
nabbed a spot on the Forbes 400 list with an
estimated net worth of $1.2 billion.
Flowers was off to the races investing the $7
billion in capital from J.C. Flowers II. The fund
made major commitments to Dutch bank NIBC
Holdings, Germany's HSH Nordbank and Hypo
Real Estate, and the now-public equity of Shinsei
Bank. Even though Flowers was making many of
these investments in the face of a fearsome
global financial meltdown, his confidence in
himself and his ability to deliver for his investors
was unwavering. 

In June of 2008 -- following the JPMorgan Chase
(NYSE: JPM  ) rescue of Bear Stearns, the Bank
of America bailout of Countrywide Financial, and
Britain's nationalization of Northern Rock --
Flowers told investors in the J.C. Flowers II fund
that they were looking at "the Super Bowl of
investment" and that it was "no time to be sitting
in the bleachers." He maintained that "every
single investment will make money," proclaiming
the eventual internal rate of return, or IRR -- a
measure of annualized returns -- of the fund
would be 23%.

But the wheels were already starting to come off.
While investors waited for Flowers to produce
some more of his Shinsei magic, many of J.C.
Flowers II's major investments were floundering.
HSH Nordbank sustained massive losses and
eventually had to take a government bailout. The
trusts that held J.C. Flowers' stake in HSH
declared bankruptcy in early 2010. The German
government was likewise forced to rescue Hypo
Real Estate as it turned into an even bigger
disaster. Germany's Special Financial Market
Stabilization Funds (Sonderfonds
Finanzmarktstabilisierung, or SoFFin) stepped in
with a hefty bailout that paved the way for a full
nationalization of Hypo, forcing Flowers to sell
the fund's stake at a fire-sale price.

Flowers narrowly missed scoring a big win with
NIBC when Iceland's Kaupthing Bank pulled out
of a proposed deal to buy the bank for $4.4
billion in early 2008. The bank eked out a profit in
2010, but its pre-tax income was less than a third
of what it was in 2005. Meanwhile, Shinsei,
which in many ways made Flowers' career, only
exacerbated the funds' problems as its share
price cratered.

As if that wasn't enough, Flowers' reputation as a
banker was called into question as well. Bank of
America absorbed gargantuan losses thanks to
its acquisition of Merrill Lynch. When the deal
was struck, B of A's CEO at the time, Ken Lewis,
praised Flowers' work on the deal, emphasizing
that Flowers' team did "very, very extensive" due
diligence.

In its 2009 letter to shareholders, Enstar Group, a
J.C. Flowers portfolio company and an investor in
the J.C. Flowers funds, disclosed that it had
written off $61.6 million of the $96.9 million that it
had committed to J.C. Flowers II due to the
fund's poor performance. According to the most
recent data from Preqin, a leading source of data
on alternative-asset managers, the IRR for J.C.
Flowers II has been -29% versus 6% for other
funds in its benchmark group.

Those disastrous returns put Flowers' first big
fund in the fourth quartile of its benchmark group,
a place where asset manager careers go to die.

By early 2010, it was clear that more change was
needed at MF Global. To be sure, in some ways,
the company was moving in the right direction.
The new people and tighter compliance that
Bernie Dan brought in kept the company out of
the news without any repeats of the Dooley
fiasco. 

However, the bottom line showed that the broker
was still far from healthy. In March 2010 the
company reported an $89 million net loss -- its
fifth straight quarterly loss. 

It appeared that expansion was no longer
enough for the broker to prosper. Commissions
had been under pressure for years. The Federal
Reserve's efforts to pull the economy out of its
tailspin meant unheard-of lows in interest rates,
which helped crunch what the company could
earn on brokerage deposits. And atCME (NYSE:
CME  ) , where MF Global did much of its trading,
average daily volume slipped 20% between 2008
and 2009 while the total notional value traded on
its exchanges plunged by a third.
Meanwhile, it was increasingly looking like
Flowers would have to pull a rabbit out of his hat
to salvage J.C. Flowers II and his reputation. And
it was all unraveling as Flowers was attempting
to raise another$7 billion for J.C. Flowers III.

Aside from solidifying the suspicion that Chris
Flowers was a one-hit wonder who got lucky with
Shinsei, a fizzling-out brokerage firm certainly
wasn't going to be of any help. On the other
hand, the turnaround of a revered name in the
brokerage business might help Flowers reclaim
his mojo. Or, perhaps even better, he could find
a way to set a turnaround in motion that would
transform the broker into something much larger -
- and much more profitable.

Flowers reaches out to a friend
Except to the extent that a floundering economy
soured New Jersey voters, the fact that Jon
Corzine lost his first gubernatorial re-election bid
right at the same time that MF Global was
desperately in need of a new direction was
largely coincidence. The fact that Flowers
reached out to Corzine to provide that new
direction is, however, no coincidence.

The two finance titans had a relationship
stretching back to Goldman Sachs when Flowers
was the star financial institution's banker and
Corzine was the firm's chairman. 

Flowers played Corzine's right-hand man in the
chairman's crusade to take the company public --
a push that was eventually successful, but cost
both men their jobs. After Goldman, they
remained friends: Corzine tapped Flowers to
manage some of his fortune while he was in
politics, and the duo rubbed elbows as fellow
board members for the New York Philharmonic.

According to reports at the time, it took just
seven days from the time that Flowers first
reached out to Corzine about the job for his pal
to sign on the dotted line, agreeing to step into
the CEO and chairman roles at the broker. 

MF Global gave Corzine $1.5 million in salary, a
$1.5 million signing bonus, and a $3 million
target bonus for his first year. Showing just how
much faith Flowers had in his former boss, he
also made Corzine an operating partner at J.C.
Flowers and gave him a 3.5% carried interest in
J.C. Flowers III -- a significant share of the
investment profits that the private equity fund
was entitled to. The latter arrangement had the
potential to be far more lucrative for Corzine than
his pay from MF Global.

And, with that, Bernie Dan became part of MF
Global's history with little more than a mention
that he was resigning from MF Global "for
personal reasons."
But there was no time for a teary farewell for Dan
-- this was an exciting time for MF Global. It now
not only had a Wall Street superstar standing
behind the company, it had a Wall Street
superstar -- perhaps of even greater proportions -
- calling the shots internally. And soon after
Corzine's joining, MF Global also got a shiny new
turbocharged strategy to target big profits.

Though Corzine was unable to win the votes of
the citizens of New Jersey, the stock market
voters came out in his favor, boosting MF
Global's stock 10% the day after the hiring
announcement. The stock continued to rise soon
after, tacking on 27% over the next month. It was
a show of blind faith in a leader who had been
out of finance for more than a decade and had
no track record of success in a turnaround effort.
It was a show of faith that would ultimately prove
dead wrong.

[wauchope]

you guys ought to deal with a cattle buyer and then you'll find out what shady means.

[wilagro]

So in essence ALL commodities produced by farmers and ranchers are subject to pricing determined by GAMBLERS who use the financial trading world as their playground where they make the rules and interpret them as they please.

How precious is that?

[parsley]

Institutions make rules to grab wealth. Kings
routinely tithed you into poverty; governments
declared war on you, formally and killed you.
And in the good old days Wil, I'd don my horned
helmet, hop a boat, and slice your cousins to bits
as I dragged you out the door by your hair.

But wait, there's hope. Rule of law slows down
the institutions. The Internet retards governments
because now the world can read, and be
honest, you'd volunteer. pars

[parsley]

#4


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 re-election 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 former Corzine senate staffer told us that the
senator's staff strongly encouraged him to not 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 the
company in multiple new, more profitable
directions.

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 that worked with him,
"friendly" and "approachable" are words that
came up often. Former MF Global trader Michael
Fitzgerald, 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
engaging 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."

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 that 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 that 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."

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 Mike Fitzgerald 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 (NYSE: 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 the
company 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 that 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 Committee on
Agriculture, 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.

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.

[parsley]

#5


#5

When he got up on the morning of Oct. 25, Jon
Corzine knew he had a tough day ahead of him. 

Beginning at 7:30 a.m. Eastern time he would be
presiding over a conference call to discuss MF
Global's results for the second fiscal quarter
ending Sept. 30. The numbers weren't good, and
on the previous day credit ratings agency
Moody's had downgraded the broker to one
notch above junk status and warned that the
rating was under review for a possible additional
downgrade. 

Part of Moody's rationale pertained to a huge
trade involving the government bonds of five
troubled European nations -- a trade Corzine
himself had "strongly advocated" and that he was
now managing personally.

Eight days prior, The Wall Street Journal
reported that one of the firm's regulators, the
Financial Industry Regulatory Authority, insisted
in August on an increase in the amount of capital
at MF Global's U.S. broker-dealer subsidiary
specifically in relation to that very trade. As
Corzine later recounted in Congress, "Some of
MF Global's counterparties decided to reduce
their exposure to the company, requiring some
adjustment in our financing." 

Corzine didn't know it yet, but the article had
sealed the firm's fate; the attention it received set
in motion a series of events that would end two
weeks later in a bankruptcy filing.

FINRA was also demanding that MF Global
include a specific disclosure concerning the
European sovereign debt trade, known as "repo-
to-maturity," in the earnings press release that
would go out just before the start of the call. The
disclosure figured prominently in the release and
included a table breaking down the $6.3 billion
exposure between five countries: Italy, Spain,
Belgium, Portugal, and Ireland.

With the table indicating Italy as the largest
country exposure -- half the total amount -- the
timing of the release was awful. The European
sovereign debt crisis had been the primary focus
of markets worldwide through much of the
summer. In the early hours of Oct. 25, while New
York was asleep, six hours ahead in Rome talks
between Silvio Berlusconi and his coalition
government partners failed to produce an
agreement. The Italian government was veering
toward collapse.

Although MF Global's public filings contained
detailed information on the positions and their
risk, no one had really paid it much attention until
The Wall Street Journal published their article.
With increasing urgency, investors were asking
themselves what exactly a repo-to-maturity was,
and how much could MF Global lose on them?

Brought in to turn MF Global around, Corzine was
now under immense pressure, and he knew he
could expect some probing questions on the call.
If he could just ride out the trade until its last
maturity in December 2012! At maturity, the
bonds MF Global bought and simultaneously
used as collateral would be redeemed at par and
any unrealized losses due to fluctuating bond
prices would revert to zero. Corzine was not
unaccustomed to pushing high-stakes situations
to the limit; he had pulled through two similar
ones at Goldman Sachs (NYSE: GS  ) .

In 1986, Corzine had been called back to duty on
a trading desk to take on the responsibility for
managing a massive bet in the U.S. Treasury
bond market which threatened to saddle
Goldman Sachs with $150 million in losses (this
was back when $150 million was real money and
Goldman was a much smaller firm). After five
agonizing and intense months -- during which
Corzine reported to the management committee
every other day -- the trade began to move his
way and he ended up turning a $10 million profit.

In 1994, Goldman had a horrendous year. The
firm's proprietary traders -- for which Corzine was
responsible as co-head of fixed income -- had
made a huge bet on interest rates and they were
mowed down when the Fed unexpectedly raised
rates in a series of hikes. Corzine and the other
co-head, Mark Winkelman, had sanctioned the
trade, which racked up hundreds of millions of
dollars in losses over a period stretching several
months. Many of Goldman's partners became
genuinely concerned about the longevity of their
capital account, to a point where 40 partners left
at the end of 1994 -- much more than normal
attrition.

Despite this, even Stephen Friedman, the senior
partner of the firm, couldn't get Corzine to reduce
the size of the positions. Corzine was confident
and refused to countenance any doubt. "The
worse it appears, the better the reality," he said.
"The probability is strong that if we hang on, and
even increase our position, this can be a real
winner."

In one respect, however, Corzine's present
situation was very different from those he had
experienced at Goldman Sachs. Back in 1994,
Corzine was only required to justify his positions
to a senior partner (Goldman was still a private
partnership then). Facing the scrutiny of the
public markets -- including analysts, institutional
shareholders, and regulators -- was a different
ballgame altogether, with a very different set of
rules. He certainly wasn't used to people telling
him what to divulge and when.

While media accounts often suggest MF Global's
trade is "complex" or "sophisticated," the basic
idea behind a repo-to-maturity transaction is very
simple. It's comparable to buying a rental
property in order to pocket the excess of the
rental income over the cost of the mortgage. With
a repo-to-maturity, MF Global borrowed money
in order to buy European bonds and put the
bonds up as collateral on the loan (just as a
house is collateral on its mortgage). The point of
the trade was to collect the difference between
the yield on the bonds and the borrowing rate.

Repo-to-maturity refers to the fact that the term
of the loan coincides with the maturity of the
bond, at which time MF Global receives the face
value of the bond, which it uses to repay its loan.
In a textbook version of this trade, with no risk of
default on the bond and a secure loan, the profits
you earn are riskless. Of course, the textbook
version assumes you'll still be alive to complete
the transaction at maturity. In the real world, for a
financial firm to stay alive means paying careful
attention to all manner of things that may have
nothing whatsoever to do with the trade itself.

The trade itself was far from risk-free. Corzine
was heavily focused on the possibility that one or
several peripheral European countries would
default on their bonds and he was satisfied that
this was well mitigated by the European Financial
Stability Fund, or EFSF. Never mind that the
EFSF had offered no specific guarantees backing
Italian or Belgian debt, or that many investors
were questioning the size of the EFSF,
particularly in regard to Italy, which has the
world's third-largest government bond market.

During the earnings call, Corzine told analysts
that "the structure of the [European sovereign
debt repo-to-maturity] essentially eliminates
market risk," reasoning that any unrealized loss
on the bonds would vanish at maturity once the
bonds were redeemed at their par value.

If we return to our housing analogy, let's imagine
you've arranged at the outset of your housing
investment to sell the property at a pre-arranged
price. The sale will occur simultaneously with the
end of the tenancy and that of your loan.

In the meantime, you can have the house
reappraised as often as you like in order to
establish its value based on current transaction
values in your neighborhood (for a trading book,
that process is known as "marking-to-market").
Remember, however, that you have already
contracted to sell the house at a set price at the
end of your ownership period. Provided your
buyer is reliable, you needn't concern yourself
with any of the fluctuations in the value of the
house between the time of its purchase and the
sale.

Corzine's reassurance didn't satisfy the analysts
who were listening closely; they wanted hard
numbers to make their own assessment. "Henri,
are you able to break out the 0.7 million [loss in
the principal trading activity] between market-
making losses and maybe mark-to-market
writedowns related to the European sovereign
portfolio?" asked Howard Chen of Credit Suisse,
addressing the question to MF Global's CFO,
Henri Steenkamp.

"There is zero [loss] related to the European
sovereign portfolio," Corzine interjected. These
were his trades and no one was following them
closer than he was.
The analysts already had the breakdown of the
trades by country and by maturity, and Corzine
had spent quite a bit of time describing the trades
and their risks during his prepared remarks. "Why
are we discussing this?" he must have thought to
himself, "These positions haven't moved and
even if they had, the losses would vanish at
maturity."

The analysts weren't letting up. Roger Freeman
of Barclays Capital followed Howard Chen.
Among other points, Roger wanted to know what
kind of haircut banks were currently requiring on
the same bonds (the haircut is the discount
between the face value of the bonds and the
amount they are willing to lend). Corzine and
Steenkamp found themselves quoting prices for
specific European sovereign issues. It's
completely unheard of for the executive
management of a broker-dealer to know the
prices of individual bonds in the firm's inventory.

Instead of quelling concerns, each new question
was drawing more attention to the trades and
raising newones. This was just what Corzine
wanted to avoid: He understood the risks
attached to this European sovereign debt
exposure and he was managing the positions
personally -- that should have been the end of it
as far as he was concerned. Corzine felt the
trades had become a distraction, that they had
"clouded [investors'] perceptions with respect to
our other progress."

You'll have to stick around
In a very narrow sense, Corzine was right: A
default on those bonds remains unlikely and
market risk would have had no impact if MF
Global had been there to collect at maturity. The
trade would almost certainly have been profitable;
unfortunately, the size of the trade itself created
a material risk that the firm would never see the
maturity date. In the context of a wider set of
risks -- earnings volatility, a credit downgrade,
and liquidity risk, to name but three -- he was
dangerously wrong.
Years earlier, Corzine displayed the same rigid,
compartmentalized thinking under eerily similar
circumstances. While he was head of the fixed
income division at Goldman Sachs, he was eager
to put a large position in farm credit bonds and
sought approval from the two co-senior partners
of the firm, Robert Rubin and Stephen Friedman,
explaining that the expected return was attractive
and the risk of default was virtually nil as the
bonds had the implicit backing of the U.S.
government. The issuer was Farmer Mac, a new
government agency that has a similar function to
that of Fannie Mae and Freddie Mac for
agricultural and rural properties.
Impossible or just highly unlikely?
Rubin and Friedman challenged Corzine, asking
him what would happen in a crisis scenario in
which the government declined to stand behind
Farmer Mac. In his autobiography, In an
Uncertain World, Rubin recounts:
"That's silly." Corzine replied. It was
inconceivable to him that the government would
not honor its moral obligation, and in a sense he
was right. But Steve and I didn't want Goldman
Sachs to cease to exist after 130 years because
something that we agreed was virtually
inconceivable actually happened ... the decision
to limit the risk was right.

No outright bond default was required to destroy
MF Global. Corzine was considering the risks of
the trade -- such as default risk -- as if each one
were self-contained. In his prepared statement to
the House Committee on Agriculture on Dec. 8 --
over a month after the bankruptcy -- he had the
gall to remark that "as of today, none of the
foreign debt securities that MF Global used in the
RTM trades has defaulted or been restructured" -
- as if that somehow mattered! He couldn't
imagine that less-prominent risks could band
together and produce the same result, with
regulatory risk, business risk, and earnings risk
combining to force a rating downgrade, thereby
creating liquidity issues. Worse still, MF Global
was holding a dangerous combustible perfect for
igniting that process: leverage.

MF Global was leveraged to a level that Corzine
himself had recognized as imprudent. In October
2010, just prior to his joining the firm, he told
FinancialTimes in a video interview, "We have to
be disciplined; we can't go running 30:1 leverage
ratios on our balance sheet." In fact, that ratio
was rarely below30:1 during Corzine's tenure. At
30:1, a 3.5% impairment in the value of a
financial firm's assets is all it takes to wipe out
shareholders' equity.
Leverage has other effects beyond magnifying a
firm's losses; it also contributes to raising the risk
of a credit rating downgrade. Ratings agency
Moody's had told MF Global that it needed to
manage its leverage ratio down into the 20-times
range in order for it to keep its Baa2 rating, which
was on negative watch and had been throughout
Corzine's tenure.
When you're at risk of a downgrade, a Baa2
rating isn't a great place to start from, either. 

It's "medium grade, may possess some
speculative characteristics," and "Ba" is below-
investment grade, i.e., junk status. If you're a
soap manufacturer, a rating downgrade doesn't
harm your activity per se; if your business is
money, on the other hand, peoples' perception of
your ability to repay your obligations is like the
oxygen level of your franchise. The lower it
drops, the more difficult it becomes to operate;
below a certain level, it's terminal. 

Under those circumstances, it behooved MF
Global to manage its relationship with the ratings
agencies with exceptional care and consideration
-- they were certainly more important than any
client. As the former senior partner of Goldman
Sachs, it must have been difficult to swallow the
fact that MF Global did business at the pleasure
of Moody's and Standard & Poor's.

MF Global had a solid-looking risk management
organization -- on paper. Its hierarchy of different
risk committees overseeing every flavor of risk
(market, credit, liquidity, operational, etc.)
resembles the one at Goldman Sachs, which is
the gold standard for risk management on Wall
Street. However, Corzine -- who "strongly
endorsed" the trade -- was outside that hierarchy
since he reported to the board exclusively.
Although he discussed the trade with the board
and with MF Global employees, as CEO, there
was little chance he would receive open or
adequate feedback from people whose reporting
lines all ended on his doorstep. Corzine was, in
effect, negotiating position limits directly with the
board.

In 2010, Michael Roseman, at the time the firm's
chief risk officer, actually presented Jon Corzine
with several sobering potential scenarios in the
event of a credit rating downgrade. Corzine
rebuffed him, dismissing the most pessimistic
scenarios as unrealistic -- perhaps even
impossible. In January 2011, 

Roseman was informed that the chief risk officer
role was being handed to someone else; he left
MF Global in March after a handover period.

On Oct. 25, trading volume in MF Global shares
surged more than 10 times from the previous
day's volume. By 4 p.m., the stock had lost 48%
of its value. Two days later, Moody's and Fitch
Ratings administered the death blow by
downgrading MF Global to junk status. The
company's fate was no longer in Corzine's
hands, as the downgrade triggered margins calls
and requests for customer redemptions, sparking
a classic run on the broker. Five days later, on
Oct. 31, MF Global filed for bankruptcy in the
U.S. Bankruptcy Court for the Southern District of
New York. 

Jon Corzine had been CEO for 587 days.

[RidgeRunner]

on a positive note...I got my money back from them today. Just in time for xmas.

[parsley]

#6
" the emperor showed them the label sewn inside
his worn-out suit. 'Goldman,' they said
admiringly. 'They are the finest of weavers. We
were wrong to doubt him.'"
-- "Emperor Corzine's Goldman clothes,"
Financial Times, Nov. 2, 2011

Global(OTC: MFGLQ) is a unique event in the
annals of American corporate history: To my
knowledge, it's the first time a CEO
singlehandedly bankrupted his firm through
actions that the board of directors was not only
knowledgeable of, but had indeed expressly
sanctioned. "That takes some talent!" quipped
Roderick Hills, a former chairman of the SEC,
when I put this to him -- and the deeper you dig,
the more surreal things become. I looked at
three groups that had an oversight role with
regard to MF Global and how they performed in
this farce. Only one came out of the review
unscathed.

If the opening premise wasn't enough for you, let
me add that I've never seen a board with more
financial experience -- all of the directors had
worked in finance. 

David Gelber, in particular, had been the chief
operating officer of ICAP -- the world's largest
inter-dealer broker -- as well as COO of HSBC
Global Markets, on top of having held senior
trading positions in foreign exchange and
derivatives at Citibank and HSBC.

Overseer No. 1: The board
Let's imagine that you're in charge of hiring a
senior trader who will be responsible for a new
proprietary trading desk that is a key part of your
firm's turnaround strategy. You're doing this in
the context of extremely challenging markets in
the aftermath of the worst financial crisis since
the Great Depression.

A headhunter you sometimes work with thinks
she's got a great candidate. "In fact," she says,
"you'd be lucky to get him."
"There is one thing, though," she continues,
"Nothing serious, mind you. It's just that he hasn't
worked in finance for over a decade and the last
time he held day-to-day trading responsibilities
was almost a quarter of a century ago."

Relevant vs. non-relevant
Once you set aside the very impressive title of
former senior partner of Goldman Sachs, and
focus on specific, relevant information, the
proposition above reveals itself in all its glorious
absurdity, a choice that could only be the product
of collective madness or extreme desperation.
And yet, that's exactly the choice that the MF
Global Board of Directors made.

The board hired Jon Corzine for the job and
almost immediately gave him the authority to
make gazillion-dollar trades. I'm not referring here
to the official hiring of Corzine as CEO, but to his
unofficial hiring as senior trader when the board
allowed him to become directly involved in the
firm's proprietary trading in addition to his
executive responsibilities. Doing so, they violated
a cardinal principle in risk management:
Segregation of duties.

Breaking the first rule
Nick Leeson bankrupted Barings Bank in 1995
because he could settle his own trades, but in
this case, Jon Corzine didn't exploit the situation
to conceal any activity -- on the contrary: The
European sovereign debt trades were disclosed
to the board, and to analysts, accountants, and
shareholders. Instead, it enabled him to "strongly
advocate the [European sovereign debt] trading
strategy" -- his words -- at the board level.

As CEO, Corzine reported exclusively to the
board, so he was outside the established risk
management hierarchy. Normally, a trader would
need to justify any limit request at multiple levels
as it escalates through the organization. Although
Corzine did have to go through the charade of
having the chief risk officer formally request
increased position limits for the European
sovereign debt trade, he was effectively
negotiating directly with his board. Once that was
the case, no amount of risk committees or
sophisticated analytics could help.

Are you now ready to step deeper down into the
rabbit hole with Jon Corzine? It turns out that he
was in an almost identical situation earlier in his
career at Goldman Sachs.

As I mentioned in the previous chapter, 1994 was
a traumatic year for Goldman Sachs. As the Fed
executed a series of interest rate hikes beginning
in December 1993, Goldman's fixed income
division -- of which Corzine was the co-head --
produced losses totaling hundreds of millions of
dollars over a period that stretched from the
beginning of the year through the summer. 

The losses had a devastating effect on morale
and partners were gravely concerned as they
watched Goldman's losing positions deteriorate
month after month the wealth they had
accumulated in their capital account. Forty
partners left Goldman at the end of 1994 -- a
much higher number than the normal attrition
rate.

Fool me once
One of the reasons 1994 was so painful was that
Corzine did not order the positions reduced
quickly enough, and one of the reasons for that
was that he had two roles: co-chief financial
officer and co-head of fixed income.

 I can do no better than this former Goldman
partner who described the problem (the quote is
from Bill Cohan's superb book, Money and
Power: How Goldman Sachs Came to Rule the
World):
He [Jon Corzine] wasn't independent. You just
really need independent control functions and it
is just critical that you have that to run any kind
of trading business. You need to have people on
the control side and the compliance side to
independently mark the books, to go head to
head with the traders, to have a totally
independent career track. And you need to look
at everything in terms of size.

That lesson applies no less to MF Global in 2011
than it did to Goldman Sachs in 1994.
The evidence is all over his bond sheets
Does all this sound too bizarre to be true? We
know for certain that Corzine was MF Global's
CEO and there is plentiful evidence of his trading
role. The Wall Street Journal reported that he
used to walk out of management meetings to
check the markets and that he himself placed
orders on occasion, based on a list of prices left
with an assistant. One trader I spoke to said that,
in contrast to the former CEO, Corzine "loved to
prowl the trading floor every day he was here." 

On Oct. 25, Corzine stated openly in his last
earnings call, "Our [European sovereign debt]
positions and the judgment about risk mitigation
steps are my personal responsibility and a prime
focus of my attention."

Another design flaw in the reporting lines
contributed to marginalizing the chief risk officer,
and with him, the risk function. 

According to the most recent 10-K report, "the
Chief Risk Officer ("CRO"), who reports to our
President and Chief Operating Officer, is
delegated certain authorities from the Board."
Given the structure, logic would dictate that the
CRO at minimum report to the board of directors
or a board committee rather than the president
and COO. In this case, the president and COO
happened to be Bradley Abelow, a former
Goldman Sachs partner who was the treasurer
and then the chief of staff in the New Jersey
statehouse while Corzine was governor.

It's certainly possible to identify other
weaknesses within MF Global, but I prefer to
repeat the two most important points: First, other
than Jon Corzine himself, the board of directors
bears the heaviest responsibility in MF Global's
failure. Second, the board's gravest mistake --
other than hiring Corzine in the first place -- was
to ignore a cardinal rule of risk management: the
segregation of duties. Once they allowed Corzine
to wear two hats as an executive and a trader,
the odds of the firm failing increased
exponentially.

Overseer No. 2: Regulators
For now, we'll ignore the role of the regulators in
regard to the issue of segregation of funds --
we'll be addressing this later in the series.
Instead, we'll focus on regulators' performance in
monitoring the firm and its risks.

MF Global is a situation in which I'm impressed
by regulators' actions -- and that's not often the
case. Back in mid-March, the Securities and
Exchange Commission sent a letter to the broker
asking them to defend their accounting treatment
of repo-to-maturity transactions and explain the
impact on their financial ratios (including
leverage) for the fiscal year ending on March 31,
2010. John Corzine had come onboard only a
week prior to that date and the only RTM
transactions the broker had on were backed by
U.S. Treasuries. This suggests MF Global may
already have been using aggressive accounting
in "de-recognizing" (i.e., removing) assets from
their balance sheet through that mechanism.

De-recognizing assets for fun and profit
This favorable accounting treatment may have
been part of the attraction of these particular
transactions for Jon Corzine as an easy way to
make some large bets without increasing the
stated leverage of the balance sheet. 

Here's how it works: It's possible -- under certain
conditions -- to treat the repo-to-maturity
transaction as if you were selling the bonds to
someone even though all you're doing is putting
up bonds as collateral on a loan. If you retain the
market risk, the default risk, and the credit risk
(and a few others), you own the bonds -- full
stop. Your house is collateral on your mortgage;
do you say you've sold the house to the bank
and remove it from your personal balance sheet?

To address the very distortion this treatment
creates, the Financial Industry Regulatory
Authority (FINRA, a self-regulatory body) asked
MF Global in June to boost the amount of capital
at its U.S. broker–dealer in recognition of its
exposure to its European sovereign debt trades
(which didn't figure on the broker's balance
sheet). Around mid-August, FINRA informed the
broker they would have to comply and make a
public filing to disclose it.

They disclosed the capital increase in an 8-K
filing on Sept. 1. Then The Wall Street Journal
picked up the story of the capital increase on
Oct. 17, and the death march began.

Ask and you shall receive
Investors and analysts could have asked
themselves the same questions that FINRA must
have asked itself: What is a repo-to-maturity?
What is the size of the positions? What are the
risks involved? The answers to all of these
questions and more are available in considerable
detail in the company's filings, particularly the 10-
K report for the year ending on March 31, 2011.
In terms of transparency, this was the furthest
thing from a rogue trading scandal.

In this case, FINRA could have saved itself the
time and effort if MF Global had no possibility of
using repos to mask leverage. A change in the
rule -- had it already been in place -- might have
saved MF Global from itself by constraining its
ability to put on proprietary positions in that size. 

Consider that once you add the $6.3 billion
European sovereign debt exposure back to the
firm's stated assets, the leverage ratio rises from
an already-high 30:1 to 35:1. DespiteAIG (NYSE:
AIG  ) , Bear Stearns, Fannie Mae, and Lehman
Brothers, we continue to see some financial
executives who are unwilling (or incapable) to
exercise due caution in the use of leverage.

Overseer No. 3: Credit ratings agencies
Ratings agencies aren't regulators, but they
certainly have an oversight function due to their
official status in the financial landscape. How did
the two most influential agencies, Moody's
(NYSE: MCO  ) andStandard & Poor's, perform?
The answer: Not well.

To their credit, Standard & Poor's (a unit of
McGraw-Hill (NYSE: MHP  ) ) did point out in an
April report on brokers that MF Global had a
"material exposure" to European sovereign debt;
unfortunately, the report said it was "concentrated
in higher quality issuers." At least the part about
the "material exposure" is right.

Standard & Poor's didn't, however, update its
warning in the Industry Report Card of Aug. 31.
By that time, MF Global had provided a sensitivity
analysis specifically for the European sovereign
debt positions which showed that an increase of
10 basis points in bond yields would produce a
$10.7 million loss (a basis point is one-hundredth
of a percentage point). 

This was almost identical to the equivalent figure
for U.S. government and federal agency
obligations ($10.6 million). But Spanish and
Italian bond yields are a lot more volatile than
U.S. ones. The higher the yield rises, the higher
the losses you suffer on your bonds (bond yield
and price are inversely related). Year-to-date, the
yield on the Italian two-year bond has ranged
between 2.3% and 7.9% -- a difference of 565
basis points. In comparison, the U.S. two-year
bond yield has stayed within a range of 70 basis
points.

Proprietary trading has a bright future behind it
Even the S&P update on Oct. 26 -- which placed
MF Global on "CreditWatch with negative
implications" -- still stated that the European
sovereign debt trades were client-related. The
ratings agency still hadn't understood that the
trades were entirely proprietary -- a massive bet
using the firm's own capital. 

The report even refers to MF Global's "plans for
future proprietary trading activity" -- perhaps they
meant funeral plans?

In an email, I asked the analyst who authored
the report to explain on what basis he had written
that. He referred me to the media relations
manager for financial institution ratings who
would only state that "we stand by our published
statements." Personally, when I find out that I've
written things that are demonstrably false, I
prefer to retract them.

S&P waited until Oct. 31 -- the day MF Global
filed for bankruptcy -- to downgrade MF Global.
As far as Moody's goes, I could find no evidence
of any warning or even mention of MF Global's
European sovereign debt positions at any time
prior to the first downgrade on Oct. 24. By its
own admission, Moody's understood the
magnitude of the firm's European sovereign debt
exposure only in the weeks leading up to the
bankruptcy and only after discussions with
company executives.

Moody's doublespeak
Al Bush, the Moody's analyst who covered MF
Global, said in November that MF Global's public
disclosure was "ambiguous and continues to be"
and stated that "we were surprised to find out
that they had a large off-balance-sheet
proprietary position in sovereigns." I can certainly
understand how an analyst that follows the
company might be surprised -- if they had
neglected to read the company's annual report.
Those comments are a bald-faced attempt at
whitewashing. 

As I described earlier, MF Global's disclosures
were clear, 
comprehensive, and frequent. Bush did not reply
to an email asking him how to reconcile his
surprise with a set of specific disclosures I
referred him to.

In any case, the "ambiguous disclosure" defense
doesn't hold water. Even if MF Global's
disclosures were ambiguous, the size of the
positions alone should have compelled the
analyst to address any ambiguity with the
management.