Editorial: Case study in ills of Wall Street
Jon Corzine, former chairman of MF Global, in a photo during his days as New Jersey governor (Oct. 20, 2009) Credit: AP
When Jon Corzine returned to Wall Street after stints as a New Jersey U.S. senator and governor, people thought he would make quite a splash.
They got that right: Corzine's brokerage firm, MF Global Holdings, filed for bankruptcy last week. Firms come and go, of course. But the collapse of this one was especially shocking, and manages to embody almost everything about Wall Street that has sparked such enduring -- and justifiable -- outrage on Main Street. That includes reckless borrowing and risk-taking, creative accounting, political connections, fragmented oversight, a cavalier attitude toward the customers' money, and of course, inevitably, outsized compensation for the chief executive.
All that's missing to complete the grotesque picture is a government bailout. In short, MF Global offers a remarkably vivid case study of what's wrong with our financial system. To see why, it's worth running through what happened.
When Corzine lost a gubernatorial re-election bid to Chris Christie in 2009, he went back to the investment world. The former chief of Goldman Sachs early last year took the helm at MF Global, a modest brokerage he worked to turn into a smaller-scale version of the investment bank he'd once run.
Corzine also worked to prevent the Commodity Futures Trading Commission from tightening a key restriction on how brokerage firms use their customers' funds. The influential Corzine got his way, and Wall Street dodged yet another regulation.
Corzine was convinced that the European Union wouldn't allow its troubled debtor states to default, so MF Global made a $6.3-billion bet on the bonds of Belgium, Italy, Spain, Portugal and Ireland. But this was quite risky, especially given the bet's size in relation to the firm's capital. Maybe that's why MF Global used some clever accounting to get this huge exposure off its balance sheet. Doing so made the firm look better to investors. When the firm, apparently under pressure from regulators, recently disclosed its big bet on European debt, things unraveled fast.
And a mystery emerged: What ever happened to $600 million of the customers' money? Incredibly, the answer still isn't clear. Corzine, who is said to be worth several hundred million dollars personally, has since resigned, hired a criminal defense attorney, and magnanimously declined $12 million in severance pay from the firm he ran into the ground.
It's important to note that no charges have been brought, and nobody is guilty of anything -- aside from the usual greed, hubris and incompetence -- unless convicted. At the very least, though, it's clear our regulatory system remains too fragmented to properly oversee firms such as MF Global, which like many brokerages is subject to several different agencies and industry groups. It's also clear that Wall Street remains too influential for its own good, and everyone else's.
