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MF Global

Bankruptcy, Scandal and Jon Corzine

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MF Global

Jon Corzine

MF Global Overview: MF Global was a leading financial futures and derivatives brokerage firm until, on October 31, 2011, it filed for bankruptcy. This made MF Global the eighth largest corporation (by assets) to fail in United States history, and the largest in the financial sector since Lehman Brothers in 2008. Lehman remains the largest corporate bankruptcy ever in the United States, followed by Washington Mutual, the latter merged into JPMorgan Chase in a deal arranged by the FDIC. At the time of its filing for bankruptcy, MF Global had $41 billion in assets.

The Failure of MF Global: Chairman and CEO Jon Corzine championed overly aggressive proprietary trading strategies that brought down MF Global, ignoring risk management best practices in the process. This is among the lessons from Jon Corzine that people in other firms would do well to learn. Follow the link for details.

Through much of October 2011, Corzine and his executive management team desperately tried various schemes to stabilize MF Global's financial position. First they tried to gain cash infusions, then they attempted to sell the company. Both initiatives foundered when the leading rating agencies downgraded MF Global's debt to near junk status. A last minute deal in which MF Global would be sold to Interactive Brokers foundered late on Sunday October 30, 2011 due to discrepancies in its books that indicated a shortfall of about $900 million in client accounts; this figure shrank to about $600 million later in the week (source: The Wall Street Journal, November 1 and 3, 2011).

Jon Corzine as Chairman and CEO: As a specialized player in a lesser known corner of the financial services industry, MF Global was largely unknown to the general public until March 23, 2010. On that date, former New Jersey Governor John Corzine, who had just left office after an unsuccessful bid for a second term, was named chairman and CEO of MF Global. Defeated in his bid for a second term as governor in November 2009, Corzine's term of office ended in January 2010. Prior to entering politics (initially as a United States Senator from New Jersey, elected in 2000), Jon Corzine had a lengthy career on Wall Street, starting as a securities trader and culminating with his rise to CEO of Goldman Sachs. Thus, Corzine was a highly accomplished Wall Street veteran with the requisite technical expertise to run a firm like MF Global, rather than a figurehead hired solely to leverage his political connections and name recognition. His vision for the firm was to expand into investment banking.

In addition to becoming chairman and CEO of MF Global, Corzine simultaneously was named an "operating partner" of private equity firm JC Flowers, which held a 10% stake in MF Global at the time. Critical to Corzine's assumption of both positions was networking with a close friend, Chris Flowers, a former colleague at Goldman Sachs who heads JC Flowers.

Big Losers: The net loss to JC Flowers from the MF Global bankruptcy, after factoring in dividends received, is about $47.8 million. JPMorgan Chase and Deutsche Bank are the leading unsecured creditors of MF Global, with $1.20 billion and $1.02 billion, respectively, at risk.

Missing Client Funds: Soon after the bankruptcy filing, strong indications of malfeasance at MF Global began to surface. The MF Global scandal (follow this link for details) grew as the estimates of missing client funds rapidly ballooned from $633 million to $1.2 billion, officially reaching $1.6 billion by February 2012. The exact whereabouts of these funds have continued to elude investigators and the forensic accounting experts working with them.

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