 |
Jon
Corzine’s failure “is OK because MF Global is not such a large institution
that
it’s going to bring down the entire financial system with it,” Neil Barofsky,
a
former special inspector for the U.S. Treasury’s Troubled Asset Relief
Program,
said on Bloomberg Television’s “InsideTrack.”
Photographer: Richard
Perry/The New York Times/Redux
|
Jon Corzine’s risk appetite helped destroy his firm. It also provided an object
lesson for Paul Volcker’s campaign against proprietary trading on Wall Street.
Nineteen
months after former New Jersey Governor Corzine became chairman and chief
executive officer, MF Global Holdings Ltd. (MF) yesterday filed for bankruptcy.
Corzine’s decision to boost risk-taking, including a $6.3 billion wager with
the firm’s own money on European government debt, triggered the collapse.
Volcker, a
former Federal Reserve chairman, pushed to curb wagering by financial firms
that have federal guarantees or are so entrenched in markets that they’re
deemed too big to fail. Regulators and the industry are wrestling over the fine
print in the so-called Volcker rule, which takes effect in 2012. Now, three
years after Lehman Brothers Holdings Inc. (LEHMQ) failed, MF Global’s implosion
and a probe into whether client money is missing may buttress the argument for
tighter trading limits.
“In the
wake of 2008, when we all should have learned a lesson, Jon Corzine told me
himself that it was a relatively staid, not risk-oriented firm and he needed to
ratchet up the risk,” William Cohan, author of “Money and Power: How Goldman
Sachs Came to Rule the World,” said on Bloomberg Television. “Well, he does
that and it blows up in his face and for the first time he can’t unwind the
trade. Honestly I’m still shocked and it should not have happened.”
MF Global,
with 2,894 employees and $2.5 billion in capital as of Sept. 30, wouldn’t have
been affected by the rule, unlike larger rivals such as Goldman Sachs Group Inc. (GS) or JPMorgan Chase & Co. (JPM)
‘Bad Bets’
Corzine’s
failure “is OK because MF Global is not such a large institution that it’s
going to bring down the entire financial system with it,” Neil Barofsky, a
former special inspector for the U.S. Treasury’s Troubled Asset Relief Program,
said on Bloomberg Television’s “InsideTrack.” “If this is Goldman, if this is
JPMorgan, if this is any of those institutions, we’re going to have to go in
and bail them out and we’re going to bear the brunt of their bad bets, not the
shareholders and possibly the debt holders.”
Corzine,
64, learned the strategy of making big trading bets during his 24 years at New
York-based Goldman Sachs, which he ran from 1994 to 1999 before being forced
out. It was the most profitable securities firm in Wall Street history before
converting to a bank holding company in 2008, when smaller rival LehmanBrothers went bankrupt.
‘The Big
Leagues’
“Jon
Corzine made his bones at Goldman Sachs by going big,” said Cohan, a Bloomberg
View columnist who interviewed Corzine for his book on Goldman Sachs. “I see
this as a case of Jon Corzine ramping up the risk that MF Global was taking,
trying to put it into the big leagues of investment banking, make it more like
Goldman Sachs.”
While
Corzine sought to recreate the Goldman Sachs that he remembered, the firm’s
current management was reducing risk- taking -- in part in response to the
Volcker rule. It closed Goldman Sachs Principal Strategies, a prop-trading team
that bet primarily on equities, and the Global Macro Proprietary Trading desk,
which wagered on bonds, currencies and commodities.
The Volcker
rule also will require Goldman Sachs to reduce investments in private equity
and hedge funds to no more than 3 percent of each of the funds -- or 3 percent
of Goldman Sachs’s Tier 1 capital. In the latest quarter, such investments were
responsible for the firm reporting its second quarterly loss since going public
in 1999.
‘Implemented
Quickly’
“Mr.
Corzine’s activities at MF Global are exactly what the Volcker advocates wanted
to protect against,” Richard Bove, a bank analyst at Rochdale Securities LLC,
wrote in a note to clients. “It is exactly why they were so adamant that the
regulators were not enough to stop speculative activities and a strict law had
to be passed to stiffen regulator actions.”
Bank
executives including Goldman Sachs Chief Financial Officer David A. Viniar and
Morgan Stanley CEO James Gorman, 53, have noted their firms’ cooperation in
shutting down stand-alone prop-trading businesses while warning of reduced
market liquidity if the rule is interpreted too strictly.
“The
Volcker rule needs to be fully implemented quickly to ensure that banks can no
longer put taxpayers at risk for making the kind of proprietary trades MF
Global made,” U.S. Senator Carl Levin, a Michigan Democrat who pushed for the
rule, said in an e-mailed statement.
U.S.
regulators are investigating whether hundreds of millions of dollars are
missing from client accounts at MF Global, according to a person with knowledge
of the matter. Corzine and Tiffany Galvin, an MF Global spokeswoman, didn’t
respond to e-mail and phone messages requesting comment.
‘Up in
Smoke’
A version
of the Volcker rule released by regulators last month already has been
criticized by banks and analysts. Brad Hintz, an analyst at Sanford C.
Bernstein & Co., said the rule may shave 25 percent from fixed-income
trading desks’ revenue. The Office of the Comptroller of the Currency estimated
that it will cost banks $917 million for raising more capital and an additional
$50 million in compliance and legal expenses.
Arthur Levitt, a former Securities and Exchange Commission chairman and adviser to
Goldman Sachs, said Wall Street lobbyists will fight to postpone and weaken the
regulations.
“This is
going to be a long slog, and much of that rule that you see today is going to
go up in smoke,” Levitt, a Bloomberg LP board member, said on “Bloomberg
Surveillance” with Tom Keene and Ken Prewitt on Oct. 13. Levitt said he was
speaking for himself and not expressing the views of Goldman Sachs.
Avert
Failure
MF Global’s
board had met through the weekend in New York to consider options including a
sale to avert failure, according to a person with direct knowledge of the
situation. Following a record loss announced last week, MF Global was suspended
yesterday from doing new business with the New York Federal Reserve, according
to a statement on the regulator’s website. Trading in MF Global’s stock also
was halted.
MF Global
shares declined 67 percent last week and its bonds started trading at
distressed levels amid its disclosures of bets on European sovereign-debt. MF
Global held talks with five potential buyers for all or parts of the company,
including banks, private-equity firms and brokers, said the person, who asked
not to be identified because the talks were private.
Early
yesterday, MF Global told regulators it didn’t have a deal “and reported
possible deficiencies in customer futures segregated accounts held at the
firm,” the Commodity Futures Trading Commission and SEC said in a joint
statement. The regulators said they decided a bankruptcy led by the Securities
Investor Protection Corp. would be the best way to safeguard customer accounts
and assets.
‘A
Risk-Taker’
“MF was
highly leveraged and I think Corzine came in trying to do what he did at
Goldman Sachs,” Levitt said yesterday on “Bloomberg Surveillance.” “He was a
risk-taker, and the markets went against him.”
Stand-alone
proprietary-trading groups at six bank holding companies -- Bank of America
Corp., JPMorgan, Citigroup Inc., Wells Fargo & Co. (WFC), Goldman Sachs and
Morgan Stanley -- had a net loss of about $221 million from June 2006 through
the end of 2010, according to a July 13 Government Accountability Office
report.
The
business of betting money for banks’ own accounts produced positive net revenue
in 13 of the 18 quarters examined, totaling $15.6 billion, and generated losses
of $15.8 billion in the other five quarters, according to the report. The study
didn’t address prop trading conducted in other groups besides the stand-alone
desks.
‘Exceptions
and Loopholes’
Regulators
including the SEC, Federal Reserve, OCC and Federal Deposit Insurance Corp.,
issued a 298-page proposal of the Volcker rule on Oct. 11. The agencies are
seeking public comment on the draft and may make changes before it takes effect
July 21.
The Volcker
rule, as written in the Dodd Frank Act, had “so many different exemptions and
exceptions and loopholes that it almost became nearly impossible for the
regulators to fashion a rule that can live up to its original intent,” said
Barofsky, a Bloomberg Television contributing editor.
Among the
exceptions are trading of U.S. government and government agency obligations and
anything that assists a firm in making markets for clients or hedging those
positions. While Wall Street lobbyists have helped to water down the bill, the
Treasury Department didn’t fight hard enough for it after the Volcker rule was
added to the Obama administration’s original financial-reform proposal,
Barofsky said.
‘Late
Add-on’
“Remember,
this was sort of a late add-on to what was originally proposed in regulatory
reform and I don’t think that their heart was necessarily in the legislative
process,” Barofsky said. “So you see all these exemptions that really are going
to enable a lot of different types of trading to go forward even under the
Volcker rule.”
Deputy
Treasury Secretary Neal Wolin supported the rule when he testified with Volker,
an Obama administration adviser, during a February 2010 hearing before the
Senate Banking Committee. Barofsky didn’t work on the Volcker rule during his
tenure as special inspector for TARP.
“The
Volcker rule is an important component of the reform of America’s financial
system and a provision that would not have been in the legislation but for the
strong advocacy of the president and the Treasury Department,” Colleen Murray,
a department spokeswoman, said in an e-mailed statement.
The
bankruptcy also may influence debates related to other parts of
financial-industry rulemaking. MF Global, alongside hedge funds and brokers,
had succeeded in urging the CFTC to open access to derivatives clearinghouses
for firms with less net capital than Wall Street’s largest swaps dealers.
The CFTC
completed a rule on Oct. 18 that would require clearinghouses to open access to
firms with at least $50 million in net capital. Clearinghouses would still be
able to scale a member’s participation depending on how much capital a company
holds above $50 million. Wall Street’s largest derivatives- dealers have said
members need experience and adequate resources to manage defaults.
To contact
the reporters on this story: Christine Harper in New York at
charper@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net;
Silla Brush in Washington at sbrush@bloomberg.net
To contact
the editors responsible for this story: David Scheer at dscheer@bloomberg.net;
Lawrence Roberts at lroberts13@bloomberg.net
Related Articles:
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.