Corzine’s Next Act After MF Global: A Hedge Fund
F. Scott Fitzgerald’s famous observation that there are no second acts in American life may hold true in certain arenas, but is demonstrably false when it comes to Wall Street, where there are second acts and even third acts. Indeed, it will be interesting to see whether Jon Corzine, whose trades at MF Global helped precipitate the firm’s downfall, will prove successful in persuading his peers to give him another slug of money to run.
A Career Founded on Excessive Risk-taking
After all, Corzine has already engineered several remarkable transitions in his career. The former Goldman Sachs trader’s exploits as an excessive risk-taker are well chronicled in William D. Cohan’s book “Money and Power: How Goldman Sachs Came to Rule the World.” In 1986, for example, Corzine put together a massive arbitrage involving US Treasuries with coupons that were 50 basis points apart. For a number of months, the securities did not move as expected and the firm was in the hole for hundreds of millions of dollars, which was then a meaningful sum of money for the investment bank. Although Corzine was in management by that point, he personally manned the trading desk for the next seven months to unwind the trade. When the bonds finally started to behave according to expectations, what was once a potential $150 million loss turned into a $10 million gain.
And in 1994, Corzine presided over an errant bet on the direction of interest rates that cost the firm $100 million a month and led to a mass exodus of partners. The power vacuum that resulted from so many partners bailing on the firm actually helped lead to Corzine’s eventual ascendance as Goldman’s CEO. Once at the helm, Corzine converted the private partnership into a publicly traded company. Soon after Goldman went public in 1999, Corzine walked away with an estimated $400 million, which he used to finance his successful Senate and gubernatorial campaigns.
The Downfall of MF Global
Corzine lost the New Jersey governorship to Chris Christie in 2009 and emerged as MF Global’s new CEO in early 2010. Corzine had hoped to transform the commodities brokerage into a diminutive Goldman Sachs, but his $6.3 billion play on the sovereign debt of two troubled European nations eventually triggered a liquidity crisis late last year. During Corzine’s tenure as a trader at Goldman, the firm was still a private partnership, which afforded Corzine time to work out losing trades. By contrast, MF Global was a publicly traded company that had to face a quarterly reckoning with analysts, credit rating agencies, regulators, and the financial media.
The firm turned a bad situation into a potentially criminal one when it commingled brokerage customer funds with trading funds over a several-day period prior to the firm’s bankruptcy, which was among the largest bankruptcies in US history. Such sloppy controls and inattentive accounting somehow caused roughly $1 billion in customer funds to simply vanish.
Complex White-collar Crime Cases Can Be a Muddle
Amazingly, Corzine’s reputation may be irrevocably tarnished, but the latest reports suggest the ensuing criminal investigation is unlikely to lead to any charges against him. Of course, Corzine himself has yet to be interviewed by federal investigators in the 10 months since they began examining the details of the firm’s downfall, though it’s anticipated he’ll agree to such an interview next month. That’s standard operating procedure for white-collar crime investigations, which start with relatively junior employees and work their way up the hierarchy.
It’s not the first time the complexity of such an investigation has led to minimal penalties for what was apparent malfeasance. That aspect of the case is reminiscent of the 1994 trading scandal surrounding Joseph Jett, a trader at the former investment bank of Kidder, Peabody & Co. Jett devised a scheme that exploited a flaw in the firm’s computerized trading system that enabled him to book phantom profits. His ploy was eventually discovered because it required him to roll each round of trades into ever-larger trades that eventually caught the attention of General Electric’s management, which was the owner of the firm at the time. Though Jett’s $348 million in faux profits morphed into nearly $100 million in actual losses once his deceit was uncovered, he was ultimately cleared of the more serious charge of securities fraud. Instead, he paid a $200,000 fine and had to forfeit a little more than $8 million in performance-based bonuses.
Still, the fact that Corzine may escape sanction has caused consternation among conservative pundits and some Republican politicians. In addition to having been the Democratic senator and governor of New Jersey, Corzine has also been a major fundraiser for the Democratic Party, raising $500,000 as a bundler for President Obama’s reelection campaign. While it’s likely that Corzine’s political career and fundraising abilities would ordinarily garner him access and influence to favorably bend the federal bureaucracy to his will, one wonders whether such cynicism is overwrought. Given the fallout from MF Global’s implosion, it’s difficult to imagine that any politician would be willing to nudge investigators on Corzine’s behalf.
Blow-ups Don’t Always Ruin a Trader’s Career
The same reports also noted that even after everything he’s been through, Corzine still possesses the same hubris that helped make him a star trader: He intends to launch a hedge fund once the dust settles. While this inspired much clucking among pundits in the financial media and blogosphere, it’s not nearly as farfetched a notion as it might seem at first blush. In fact, other disgraced traders have emerged from previous blow-ups to run money again.
For example, John Meriwether, who was famously profiled by Michael Lewis in the classic “Liar’s Poker,” went from being a top trader at Salomon Brothers to launching Long-Term Capital Management (LTCM), the hedge fund that nearly brought down Wall Street in 1998. Meriwether subsequently launched another hedge fund in 1999 that produced steady returns until it shuttered during the Great Recession following a 44 percent drawdown. He then created two more hedge funds in 2010, though this time around they were only seeded with a little more than $32 million total. Even so, it’s instructive that there are some investors who are still willing to give Meriwether the hedge fund world’s standard 2 and 20 (a 2 percent management fee and 20 percent of profits).
Though Corzine is only trading his family’s wealth at present, at least one Wall Streeter bravely asserted his willingness to let Corzine run some money for him. SkyBridge Capital founder Anthony Scaramucci admittedly doesn’t share Corzine’s politics, but said he would have no problem investing in a Corzine-helmed hedge fund because he believes it would make money.
That gets back to one of the financial arena’s fundamental realities: While the wider world operates according to relationships and reciprocity more than merit, the venal world of Wall Street remains largely merit based. Even questionable behavior can be overlooked if an individual is still capable of producing gains.
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