Sunday, November 6, 2011

Reckless CEO Jon Corzine trashes investment firm

In March 2010, Jon Corzine, a former Goldman Sachs CEO and New Jersey U.S. Senator and Governor, joined MF Global as CEO to turn it into a major investment banking force. In an apparent effort to get big fast, he placed a $6.3 billion bet on the recovery of sovereign debt from Belgium, Ireland, Italy, Portugal and Spain. Additionally, the firm was leveraged at a ratio of about 40:1. This week, as investor confidence eroded, the firm’s stock collapsed, bankruptcy was filed, Corzine resigned and up to 2,000 staff members are likely out of work.

Excessive leverage frequently results in economic disaster. As discussed in previous notes, in 2004 the U.S. Securities and Exchange Commission provided an exemption to five investment banks to increase their leverage ratio to 40:1, up from the industry standard of 12:1. The firms were Lehman Brothers, Bear Stearns, Merrill Lynch, Goldman Sachs and Morgan Stanley – each either collapsed or needed significant government bailouts. Corzine’s mix of excessive leverage and speculative bets demonstrated minimal regard for risk management. Hopefully, the investment industry and its varied regulators (in this case, the U.S. Commodity Futures Trading Commission) will learn from this incident.

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