Quite a few interesting stories out there about former New Jersey governor Jon Corzine and the bankruptcy of MF Global, the niche hedge fund that he took over in 2010. J. Christopher Flowers, known around Japan as the billionaire involved with Shinsei Bank (the failed Long Term Credit Bank), put Corzine in there to work his magic. They knew each other from the days when both were at Goldman Sachs.
What is coming out of MF is that the firm was undercapitalized, and its accountants were incompetent or did not have enough authority to have the right controls in place. Basically, Lehman and the host of other New York firms where the regulatory environment went to sh*t in the 1990’s and 2000’s.
This is the environment that Corzine made his career in: making big, big bets in a very loose environment where multi-millions were won or lost.
It looks like last week, his firm decided to bet against a resolution to the Greek debt woes. Instead of Europe falling apart, though, some sort of agreement was announced. This put MF on the wrong side of the trade, and in a big enough way that it lost all its capital. (It went bankrupt.)
Remember what is going on here: a hedge fund is taking borrowed money, maybe where it’s $9 borrowed for every $1 of firm capital. They agree to pay the borrowed money back at low interest. They are going to use this money to take positions in different kinds of stock and bond investments. If the trades work, great! $10 goes to $11, they give back the $9 and keep $2. If the trade goes wrong, there goes that $1 they started with.
The presence of these type firms is bad, and not just because bankruptcies are unsettling. It’s because people end up worrying about whether the $9–the borrowed money–is going to come back! If it becomes a full scale financial crisis like September 2008, none of the banks want to lend to other banks because they don’t know who is solid, who still has their capital, and who doesn’t. Has anyone forgotten Lehman and all that yet? Was the second Bush Administration that long ago?
This is what Wall Street has been for the last 20 years: a dolled up casino. Except there, it was called proprietary trading. You see a lot of banks exiting proprietary trading, and it seems to me safe to say that companies exit it one way or another nowadays.
Where were the accountants? Reports are, that what did the firm in was the fact that no one could account for $700 million of customer money that had been managed by MF Global. Seven hundred million! How can you lose track of an eight-figure dollar sum?? The accounting profession is still undergoing its own crisis of integrity, and I think it’s made worse by the bad job situation. Accountants in these lucrative roles tend to forget about professional ethics (integrity, objectivity, independence in an audit). Who would trust an MF Global accountant, when the headlines read “MF couldn’t find $700 million”? Again, no white knight firm would bail them out, because no one had a handle on the numbers. Later reports said that the $700 million was with something called a correspondent broker. That’s fine. I worked in brokerage, so I know. But I also know that if you work in the firm, you know that the assets are with your correspondent! It’s not a “gee whiz, we don’t know” type thing.
Accounting is going to shit. Sarbanes-Oxley didn’t fix it, and the financial crisis didn’t shake it up, either. It’s all double entry, and has been for 500 years. The $700 million was a collection of entries, somewhere–and computerized.
What a coincidence that MF Global blows up right at the time when the Occupy group in Oakland, emboldened by the assault and battery on an ex-Marine by Oakland police, decided to ramp up the demonstration. Oakland had its first general strike since 1946. Reuters said about 5,000 people participated, but it was enough to encourage some businesses to close, and to slow down the operation of the Port of Oakland. Occupy is not going away, that is for sure. I think the people controlling the financial system have got to dialogue a lot more with the rest of us (the “99%”) about what has been going wrong, and what they intend to do to fix it. Many people have connected the dots, and they want a response.
On my own little Occupy wish list, is that someone would take up the banner of the student borrowers. Someone more than the Project on Student Debt, which alternates between advocacy and research. Someone big on the issue needs to start a “Move Your Student Loan” program, to get all student debt with the Department of Education. As I was blogging about it the other day, I pointed out that a number of these federally-backed (FFEL) loans pay BIG interest to some investor who is taking very little risk. (Greater return only with greater risk, right?) I figured, if everyone with an FFEL consolidated their loan with the Education Department, an additional $18 billion would go to the Treasury, that right now goes to private investors. I know the private investors pay tax if they aren’t a nonprofit, so some of that $18 billion goes to Treasury anyway, but I’d rather see the whole $18 billion.
I like to blog about heavy stuff, and maybe it’s hard to get activists interested in a lot of numbers. But it’s the same principle as Move Your Money. You take the asset out of the hands of wealthy people in the shadows, and you move it to a place that is more accessible and has more accountability.
I guess I’ll just have to keep trying . . .
[Update: Mother Jones explains the Greek situation.]