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November 25
Paul Sullivan, in his Wealth Matters column, looks at the implications for investors of the bankruptcy of the commodity brokerage firm MF Global.
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Rich Schultz/Associated PressJon S. Corzine, the former chief executive of MF Global.
A Congressional panel has asked Jon S. Corzine to testify about the downfall of MF Global, and the hundreds of millions of dollars in customer money that went missing in the brokerage firm’s final days.
The hearing, scheduled for Dec. 15, will be a role reversal for Mr. Corzine, who spent five years on Capitol Hill as a Democratic senator from New Jersey. As a Congressional witness, Mr. Corzine is expected to come under fire for presiding over MF Global as it caused the futures industry’s first major breach of customer money. A spokesman for Mr. Corzine declined to comment on Tuesday.
The hearing, organized by the oversight unit of the House Financial Services Committee, could present the first public grilling of Mr. Corzine about his risky bets on European sovereign debt, wagers that ultimately doomed the firm.
Lawmakers are also planning to question Bradley Abelow, the firm’s chief operating officer and Mr. Corzine’s chief of staff when he was governor of New Jersey.
It is unclear whether Mr. Abelow and Mr. Corzine, who resigned as MF Global’s chief executive earlier this month, will accept the request that they testify, though the subcommittee could subpoena the executives if they balk. Mr. Abelow received the request on Tuesday and plans to respond soon to lawmakers, said a person close to the company who was not authorized to speak publicly.
The hearing will overlap with an intensifying federal investigation into MF Global. The Commodity Futures Trading Commission is leading the search for the missing money while the Federal Bureau of Investigation and federal prosecutors in New York and Chicago are examining potential criminal wrongdoing.
Neither the firm nor Mr. Corzine have been accused of wrongdoing.
Investigators now believe that much of the unaccounted-for customer money left the firm as the company was beginning a tailspin late last month, said people briefed on the matter who requested anonymity because the investigation was still under way. Regulators suspect that MF Global used some of the money to meet its own financial obligations, which could mean that those funds are gone forever.
The exact amount of missing money is undetermined, and it changes by the day. On Monday, the trustee overseeing the dismantling of MF Global’s brokerage unit pegged the number at around $1.2 billion, twice the previous estimate. Forensic accountants from Deloitte and Ernst Young working for the trustee, James Giddens, came to the much larger estimate after they spent roughly three weeks reconstructing the firm’s books.
Regulators were taken aback by the announcement, signaling the first hiccup in an otherwise smooth investigation, according to people briefed on the matter. The trustee’s office gave regulators little more than 20 minutes’ notice before it publicly released the finding, according to the people.
Now, some regulators are questioning the $1.2 billion figure, suspecting that the trustee double-counted $220 million that had been transferred between units of MF Global, according to one of the people briefed on the matter. Over the last day, the C.F.T.C. has tried to independently check the numbers.
The CME Group, the exchange where MF Global did most of its business, disputed the larger figure on Tuesday. In a statement, the exchange said it was “confident reports of significantly larger shortfalls are incorrect.”
Kent Jarrell, a spokesman for the trustee, stood by the larger estimate, while noting that it was preliminary.
Mr. Giddens is charged with returning money to MF Global’s customers. Customers — including farmers in Iowa and hedge funds in New York — have slowly received a portion of their accounts. The trustee has distributed at least $1.5 billion over the last three or more weeks, though that remains a fraction of what customers are owed.
In bankruptcy court in Lower Manhattan on Tuesday, Judge Martin Glenn approved a proposed claims process for the trustee to dispense additional funds. Mr. Jarrell said that electronic application forms would be posted to the trustee’s Web site and that claims would be evaluated soon.
Also on Tuesday, the trustee started receiving a flow of some $1.3 billion in MF Global customer funds that were stored at Harris Bank.
The funds, made up of foreign currencies, securities and cash, will give the trustee additional money to return to the MF Global customers, though it does not reduce the overall shortfall in funds.
“It’s the last big pot of money held in U.S. depositories,” Mr. Jarrell said.
The CME Group also increased a guarantee it had offered the trustee in case there was a shortfall as customers received their money. The exchange will now provide, in essence, a $550 million insurance policy to the trustee’s office, up from $250 million.
Lawmakers are also questioning the sluggish progress in returning money to customers. At the MF Global hearing next month, the House subcommittee plans to scrutinize the lingering woes that the firm’s customers face.
Lawmakers hope to interview top regulators about their oversight of the firm. They plan to call on Robert Cook, head of the Securities and Exchange Commission’s office of trading and markets, and William C. Dudley, the president of the Federal Reserve Bank of New York.
Gary Gensler, chairman of the C.F.T.C., will also be asked to testify, though Mr. Gensler has recused himself from the case after fearing that his past ties to Mr. Corzine would distract from the investigation.
Mr. Gensler, who once worked for Mr. Corzine at Goldman Sachs, is unlikely to testify, a person with knowledge of the matter said.
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David Goldman for The New York TimesJon S. Corzine on the trading floor of MF Global last year.
12:55 p.m. | Updated
The court-appointed trustee overseeing the liquidation of MF Global’s brokerage now estimates that the shortfall in the firm’s customer funds could be more than $1.2 billion, double previous estimates.
Regulators currently suspect that MF Global improperly used customer money for its own purposes in the days before filing for Chapter 11 protection, according to people briefed on the matter.
The decision to release the updated figure on Monday came after authorities concluded that much of the customer money had left the firm, these people said.
By MF Global’s estimates to regulators, roughly $600 million in customer money was missing. But as forensic accountants pored over MF Global’s books in recent weeks, they began to question those estimates.
By Sunday, the accountants from Deloitte and Ernst Young had discovered an even larger gap in customer funds.
The trustee, James W. Giddens, held a four-hour conference call on Sunday evening with staffers in New York City and Chicago before deciding to publicly reveal the new number, according to a spokesman, Kent Jarrell. Officials from the Commodity Futures Trading Commission and the CME Group, MF Global’s primary exchange, were consulted on Sunday night.
It is unclear what is behind MF Global’s prior, substantially lower estimates. The matter is being investigated by Mr. Giddens and a collection of federal authorities, including the Justice Department.
Authorities are still searching for the money, and are considering two possibilities. One is that MF Global used the money to meet trading partners’ demands for extra cash, which could come back. The other is that it was used to cover trading losses, which would be unrecoverable.
A spokeswoman for MF Global declined to comment.
Separately, Mr. Giddens’s office said it had already distributed about $1.5 billion in customer funds meant to support trading positions, and that $520 million in additional cash would soon be paid out.
The trustee’s office still controls about $1.6 billion in customer funds, most of which could be distributed early next month.
Beyond the shortfall in customer accounts, Mr. Giddens’s office said it did not have access to money that was held in foreign subsidiaries of MF Global, which are under the control of bankruptcy trustees in those countries.
“While the trustee will pursue them vigorously, it has been his experience that recovery of these foreign assets may take more time,” the office said.
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David Goldman for The New York TimesJon S. Corzine on the trading floor of MF Global last year.
The court-appointed trustee overseeing the liquidation of MF Global’s brokerage now estimates that the shortfall in the firm’s customer funds could be more than $1.2 billion, double previous estimates.
The trustee, James W. Giddens, said in a statement on Monday that his office was continuing to search for the missing funds, in conjunction with regulators and the Justice Department. He added that the numbers were preliminary and could change.
Mr. Giddens’s office did not elaborate on what might have happened to the money, though investigators have been focusing on the possibility that MF Global improperly used customer money to cover trading losses in the days before its bankruptcy filing.
Separately, Mr. Giddens’s office said it had already distributed about $1.5 billion in customer funds meant to support trading positions, and that $520 million in additional cash would soon be paid out.
The trustee’s office still controls about $1.6 billion in customer funds, most of which could be distributed early next month.
Beyond the shortfall in customer accounts, Mr. Giddens’s office said it did not have access to money that was held in foreign subsidiaries of MF Global, which are under the control of bankruptcy trustees in those countries.
“While the trustee will pursue them vigorously, it has been his experience that recovery of these foreign assets may take more time,” the office said.
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MF Global improperly diverted customers’ cash for its own use in the days before its bankruptcy, an act that regulators believe may help explain why $600 million of customer funds remains missing, people briefed on the investigation say.
Investigators have now zeroed in on hundreds of millions of dollars in suspect borrowing at the commodities and derivatives brokerage firm, which at the time of its collapse was run by Jon S. Corzine, the former Democratic governor of New Jersey. At least some of that money was used to cover trading losses at MF Global, regulators suspect, meaning the money may no longer be simply missing. It may be gone.
MF Global, like other brokers, can use customer cash if it puts up sufficient collateral. But the firm did not provide enough backing in late October, essentially taking free loans, said the people briefed on the investigation, who spoke on the condition of anonymity because the inquiry was continuing.
As customers rushed to withdraw money while the firm was teetering on the brink of bankruptcy, that questionable borrowing worsened a liquidity crisis at the firm.
It is unclear what MF Global did with all of the money or whether it can be recovered. The firm may have used some of the cash to keep its own lenders at bay, which means the money could be sitting in an account at another firm.
And some of the $600 million may yet materialize. As a patchwork of federal agencies and the trustee overseeing the firm’s liquidation reconstruct MF Global’s books, they expect to find that in the chaotic last days the firm failed to record when some customers received their money.
But a big chunk will most likely be much harder to recover, the people say, because it was used to pay off losses, rather than back trades.
The search for the missing money has touched the breadth of the commodities futures business, from Wall Street hedge funds to Midwest farmers. As hundreds of examiners pore over records around the clock, comb through 38,000 customer accounts and interview former employees, brief moments of hope have emerged only to later be proved false.
An MF Global spokesman declined to comment. Neither the firm nor Mr. Corzine have been accused of wrongdoing.
A lawyer for MF Global, Marc E. Kasowitz, said the company and its employees were cooperating with regulators as well as the trustee.
“Any characterization at this point of what occurred at MF Global is premature and inappropriate,” Mr. Kasowitz said in a statement.
The failure of the brokerage firm set off a wave of panic among its tens of thousands of customers. Many of them are farmers and small-business owners, who use these markets to protect themselves from swings in the prices of crops and metals.
In a federal bankruptcy court hearing in Lower Manhattan on Thursday morning, a federal judge approved the transfer of about 60 percent of the cash-only accounts sitting at MF Global to its 23,000 rightful owners, totaling about $520 million. The trustee, James W. Giddens, plans to begin dispersing the money before Thanksgiving.
The missing money strikes at the very heart of the futures industry. Brokerage houses and traders have long depended on the promise that customer cash will be kept separate from the firm’s money. This ensured that even if the firm were on the cusp of collapse, customers could safely access their money.
To unravel the mystery, the federal government has dispatched an assortment of regulators and criminal investigators. The Commodity Futures Trading Commission is leading the search for the missing money.
Investigators believe that money was transferred from the futures business to its securities brokerage division, according to people with knowledge of the inquiry. The Securities and Exchange Commission is helping to trace where that money went. The Federal Bureau of Investigation, meanwhile, is examining potential criminal wrongdoing, and the United States attorney’s offices in Chicago and Manhattan have issued subpoenas in the matter.
Of interest to authorities are these two main businesses run by MF Global. The futures side of the operation traded contracts for wheat, corn and metals. That is where the customer money went missing. The other side, which focused on securities, was where the firm placed a $6.3 billion bet on the sovereign debt of five European countries. Those wagers alarmed investors when they were disclosed, prompting a crisis of confidence that led to the firm’s demise.
On Oct. 24, Moody’s Investors Service lowered its credit rating on MF Global, citing concerns about its European debt exposure. Trading partners began demanding more collateral.
MF Global held a fire sale that week, reducing its assets to $23 billion from $55 billion, according to a person with knowledge of the matter. But the flood of requests kept coming from both customers and trading partners, and MF Global began to shift money to its securities division.
Like many futures shops, MF Global routinely borrowed money from customers and replaced it with assets like United States Treasury securities. Firms often keep a cushion of cash to protect customer funds, which they are allowed to tap with certain restrictions.
But according to the people briefed on the investigation, MF Global depleted this buffer and then dipped into the customer accounts to the tune of hundreds of millions of dollars. And in the days before the collapse, the firm stopped backing the loans it took from customers.
It is unclear whether MF Global officials knowingly used customer money or if they believed the buffer was intact. If investigators determine that MF Global intentionally tapped the customer funds, they could file both civil and criminal charges.
MF Global’s customers who acted fast got their money back. The rest now must wait in line, and may never fully recover their funds. Bankruptcy experts doubt the trustee will be able to claw back money secured by clients who rushed out the door.
The process will almost certainly be painful. The trustee has transferred some money backing open trades from MF Global to other brokers. And soon, the trustee will begin the transfer of 60 percent of cash accounts back to its owners.
But as proof of how complex and messy these affairs can be, customers with cash as well as open trades do not yet qualify to get any of their cash back.
Jason Skole, an investor in Boca Raton, Fla., had about $200,000 trapped at MF Global when the firm filed for bankruptcy, a fraction in open trades and the majority in cash.
“You don’t worry about any insurance in this industry because your money is protected, but it’s not,” Mr. Skole said. “It’s a terrible situation. It’s doesn’t make for a good Thanksgiving or Christmas.”
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Andrew Harrer/Bloomberg NewsJill Sommers will lead the Commodity Futures Trading Commission’s inquiry of MF Global.
8:01 p.m. | Updated
Federal regulators have ordered an audit of every American futures trading firm to verify that customer money is protected, a move that comes after roughly $600 million in client funds were discovered to be missing from MF Global, the bankrupt brokerage firm once run by Jon S. Corzine.
The Commodity Futures Trading Commission, the federal regulator searching for the missing money at MF Global, will audit many of the nation’s largest futures commission merchants, according to a person briefed on the decision. Exchanges like the CME Group will examine smaller firms to ensure they are keeping customer money separate from company money, a fundamental rule on Wall Street.
The futures commission also announced on Thursday that it had formally opened an investigation into MF Global, a largely symbolic move that indicated the seriousness of the case. The agency has already issued subpoenas to MF Global and its auditor, PricewaterhouseCoopers, but the commission had to vote before announcing a full-scale investigation.
“The commission has determined it is in the public interest to confirm the existence of this particular investigation,” the agency said in a statement.
Gary Gensler, the commission’s chairman, abstained from voting after recusing himself from the investigation because of questions about his past association with Mr. Corzine. While the two were not close in recent years, Mr. Gensler worked for Mr. Corzine at Goldman Sachs in the 1990s. And Mr. Gensler supported Mr. Corzine’s campaign as a Democratic candidate for governor of New Jersey, with a $10,000 check.
With Mr. Gensler out, a Republican member of the agency, Jill E. Sommers, will serve as the senior commissioner on the case, the agency said in the statement.
“Segregation of customer funds is at the core of customer protection in the commodity futures and options markets and must be maintained at all times,” Ms. Sommers said in the statement. “I have complete confidence in the dedicated men and women in enforcement to carry out the necessary investigation to get to the bottom of what happened.”
The commission and other federal regulators are continuing to search for the $600 million missing from MF Global. The Federal Bureau of Investigation is also examining the case.
Mr. Corzine and MF Global have not been accused of any wrongdoing.
The futures industry has boomed in recent years, growing to more than 100 futures commission merchants in the United States. Most of the largest Wall Street banks, including Goldman Sachs and JPMorgan Chase, have a futures business, as do many boutique banks and brokerage firms.
The regulator’s decision to audit every futures firm is aimed at restoring calm to an anxious industry, and perhaps some faith. MF Global’s downfall, and the revelation of missing customer money, has raised questions about the safety of the futures business.
MF Global’s customers, including farmers and traders, were frozen out of trading by the CME Group on the day MF Global filed for Chapter 11. The IntercontinentalExchange, in a letter on Thursday to the federal bankruptcy judge overseeing the case, asked that it be allowed to release some customer money that it still holds. Still, many customers are angry at CME, the exchange where MF Global did most of its business, for not detecting the missing money sooner.
The last large-scale audit that the CME Group conducted at MF Global was in January. It also did a “spot audit” on Oct. 26 to verify that customer money was in the right accounts at outside banks, said a person close to CME who spoke on condition of anonymity because the investigation was continuing. MF Global filed for bankruptcy on Oct. 31.
On Nov. 2, the exchange said MF Global might have transferred client money “in a manner that may have been designed to avoid detection,” a serious violation of Wall Street regulations.
Michael J. de la Merced contributed reporting.
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Stocks were lower in Europe and on Wall Street on Friday, slipping as the political uncertainty in Greece continued and a monthly jobs report in the United States showed mediocre growth.
Prime Minister George A. Papandreou of Greece faced a confidence vote after calling off a referendum on Greece’s new rescue deal with its international creditors. The euro zone debt crisis has unsettled global financial markets for more than a year.
Also Friday, the Department of Labor reported that employers in the United States added 80,000 jobs in October, slightly below economists’ forecasts, compared with 158,000 jobs in September.
European stocks were lower even ahead of the release of the data in the United States. In late trading the Euro Stoxx 50 index, a barometer of euro zone blue chips, was down 2.4 percent. That decline came after a strong close on Thursday, when it was up 2.5 percent.
The German DAX was down 2.8 percent and the CAC 40 in Paris was down 2 percent. The FTSE 100 index in London was 0.8 percent lower.
On Wall Street, the Standard Poor’s 500-stock index was down 1.5 percent and the Dow Jones industrial average was 1.3 percent lower, as was the Nasdaq composite index.
If the declines are sustained through the end of the trading session, the markets will be approaching a cumulative five-day loss of at least 2 percent.
The United States benchmark 10-year bond yield was 2.044 percent, compared with 2.074 percent on Thursday.
Financial stocks were down 1.79 percent in the first hour of trading in the United States, the worst performing sector on the broader market.
Following the bankruptcy filing this week of MF Global in the United States, “investors are watching their backs for other troubled financials,” said Guy LeBas, the chief fixed income strategist for Janney Montgomery Scott.
Also this week, borrowing costs in Europe for the most troubled economies have been pushing up again to worrying levels.
Italian bonds, for example, have hit yield levels that mark the most expensive 10-year money the country has borrowed since joining the euro, making it even more difficult for struggling European countries to reduce their debt load.
On Friday, the yield on 10-year bonds in Italy climbed again to 6.373 percent, up from 6.181 percent.
Mr. LeBas said that it could be a combination of factors causing bond prices to decline, including the “dragging on” of the uncertainty in Greece and the inability of the Group of 20 leaders to agree on how to deploy funds for the European bailout.
“Looking ahead, while Greece is front and center now, the core problem for the euro zone is how to mitigate contagion to Italy,” said currency strategists from Brown Brothers Harriman in a research note.
The euro was $1.3740 on Friday, down from $1.3823 on Thursday.
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The top regulator tasked with overseeing the bankrupt brokerage firm MF Global said Thursday that the search continued for more than $630 million in missing customer money, warning that the protection of client assets is essential to doing business on Wall Street.
Gary Gensler, chairman of the Commodity Futures Trading Commission, said his agency was investigating the firm, a powerhouse commodities brokerage run by a former New Jersey governor, Jon S. Corzine.
“The most troubling aspect about the MF Global situation is the shortfall of customer money at the firm. Segregation of customer funds is the core foundation of customer protection in the commodity futures and swaps markets,” he said in prepared testimony. “Segregation must be maintained at all times. Simply put, that’s every moment of every day, down to the nanosecond.”
Mr. Gensler added that taxpayers aren’t on the hook for MF Global’s bankruptcy.
Joshua Roberts/Bloomberg NewsThe Commodity Futures Trading Commission, led by Gary Gensler, is said to have become concerned in late October.
“This was an example of a financial institution having the freedom to fail,” he said in response to questioning from Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations. “I don’t think there’s any taxpayer money behind this.”
A basic tenet of the brokerage business requires that money handed to the firm by one customer is not mixed with the firm’s own money. MF Global filed for bankruptcy on Monday after weeks of anxiety weighed on the firms stock and liquidity. Investors were spooked by the revelation of an outsize bet Mr. Corzine had placed on European sovereign debt, a risky trade given the uncertainty clouding the Continent.
The exposure prompted regulators to force MF Global to set aside more cash as a cushion in the event of losses, and helped persuade Moody’s rating agency to downgrade the firm. That set in motion a week of panic, where it drew down its credit line and lenders demanded extra cash to protect themselves. MF Global had hoped to orchestrate an 11th-hour deal to sell a piece of itself, but those hopes were dashed when the money came up missing. It is unclear where the money went.
Mr. Gensler first spotted a potential shortfall late last week, calling MF Global’s lawyer to alert the firm. But it was not until around 2 a.m. Monday that the firm fully recognized the magnitude of the missing money. The disclosure sent bidders fleeing and the firm had no choice but to file for bankruptcy.
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4:09 p.m. | Updated
Trading in the Jefferies Group was temporarily halted on Thursday morning after its stock briefly plunged on sovereign debt fears.
Shares of Jefferies dropped about 20 percent, to $9.79, prompting the exchange to halt trading. After trading resumed, the stock recovered to close at $12.01, down 2.1 percent for the day.
The sharp initial drop came after the Egan-Jones Ratings Company cut its rating on Jefferies.
Egan-Jones flagged a handful of issues that investors should be concerned about, including the company’s leverage ratio and its exposure to European sovereign debt, which it estimated at $2.7 billion.
Since the bankruptcy of MF Global on Monday, Jefferies has been fighting heightened fears about its exposure to debt problems on the Continent. On Tuesday, Jefferies said it had “no meaningful exposure to the sovereign debt of the nations of Portugal, Italy, Ireland, Greece and Spain.” It said it took positions in the debt of these countries from time to time but that those positions tended to “short-term in nature.”
Reacting to the volatility in its stock price on Thursday, Jefferies issued a statement clarifying its position, saying it had “no meaningful net exposure to European sovereign debt.”
“Recent reports and calculations appear to have been focusing only on long inventory of $2.684 billion but not taking into account the fact that there were offsetting short positions in such sovereign debt of $2.545 billion as well as offsetting positions in futures instruments,” the firm said.
Jefferies added later that it “has no credit-default swaps hedging its sovereign debt positions, which as previously indicated are short-term trading positions that turn over approximately three to four times per week. ”
In an interview on Thursday, Sean Egan, the rating firm’s president, said his firm’s main concern “is the significant change in the operating environment for midsize broker dealers, post-Lehman and MF Global.”
Jefferies’s leverage ratio, or the amount of borrowed money used against its capital, is roughly 13 to 1, in line with bigger firms like Goldman Sachs and Morgan Stanley. Mr. Egan said that it would be “foolish” to put Jefferies in the league of those banks and that the firm should be operating with a lower leverage ratio.
But Mr. Egan said his main concern is the changed environment Jefferies is operating in. “No company is an island,” he said. “The operating environment for broker dealers has changed and the old ways of doing business won’t do.”
Leucadia National, a public investment vehicle that owns nearly 30 percent of Jefferies, has been caught in the downdraft. Leucadia stock fell more than 7 percent in morning trading on Thursday, but later recovered most their losses.
Eric Owles contributed reporting.
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David Goldman for The New York TimesJon Corzine on MF Global’s trading floor last year. He thought the firm had potential for growth.
When Jon S. Corzine joined MF Global last year it seemed like a strange choice — the firm had none of the glamour, let alone the profits or footprint of Goldman Sachs, the bank he ran during the 1990s.
On Wall Street, it was as if a manager of the New York Yankees was making a comeback in the minor leagues.
Mr. Corzine, 64, who not only presided over Goldman but later served in the United States Senate and then as governor of New Jersey, seemed surprised himself.
“Don’t ask me any hard questions,” he joked to a visitor who met with him just days after Mr. Corzine took over in March 2010. “I hadn’t heard of this company a week ago.”
Now, nearly everyone has.
MF Global, a commodities and derivatives brokerage house, collapsed on Monday in the biggest bankruptcy on Wall Street since the failure of Lehman Brothers. The firm imploded after a big investment in European bonds — a bet he directed and defended as not particularly risky as recently as last week — led investors, clients and ratings agencies to lose confidence in the firm.
The fall of MF Global, and the discovery that hundreds of millions of dollars were missing from the firm’s customer accounts, have now cast a dark cloud over Mr. Corzine’s legacy and reputation. Federal authorities have stepped up an inquiry into why the firm failed to keep its customers’ money separate from the company’s — a regulatory violation.
MF Global was supposed to be Mr. Corzine’s comeback vehicle after New Jersey voters turned him out in 2009. Instead, the collapse of the firm appears to be a humiliating coda to the career of a one-time titan of Wall Street.
His insistence on taking more risks, including buying the debt of European countries like Italy and Spain, along with a contract that would have provided him with an additional $12.1 million if he left the firm, paint a picture of excess.
And Mr. Corzine, with a fortune estimated at half a billion dollars at its peak, future ambitions were not confined to Wall Street. Even as he was seeking to revive his financial career, Mr. Corzine, a Democrat, had long styled himself as a financial executive moving seamlessly between Washington and Wall Street, in the mold of former Treasury secretaries like Robert E. Rubin or C. Douglas Dillon.
With MF Global’s bankruptcy, that goal seems forever out of reach. It has also taken a big toll on a man known for the kind of optimism that comes naturally to experienced traders and political leaders.
Six weeks ago, Mr. Corzine journeyed a few blocks from the firm’s Midtown Manhattan office to the Hilton Hotel for a routine presentation to money managers. Mr. Corzine’s manner was anything but routine, however.
“He looked like he had just seen a ghost,” said one participant. “He looked visibly disturbed.”
Mr. Corzine could not be reached for comment.
Friends say this is one more humiliation in a career marked by painful public ousters, whether it was from the executive suite at Goldman or from Drumthwacket, the New Jersey governor’s mansion.
“That’s part of the tragedy here,” said Robert G. Torricelli, the former Democratic senator from New Jersey whose political career was also cut short. “Jon is very proud and this must be exceedingly difficult. You can lose an election and not take it as personally because it’s a reflection on issues and trends. But this is obviously different: all eyes are on him. It’s one thing to make financial misjudgments and to pay the price yourself. But it’s another when institutions are damaged.”
Mr. Corzine’s arrival seemed like a coup for MF Global when it hired him as chief executive. MF Global has been a leading player in brokering trades in commodities and derivatives like futures contracts.
But MF Global had the potential to be more than a brokerage firm, Mr. Corzine thought. When he was at Goldman, that firm had bought a commodities trader in 1981, J. Aron Company, which was encouraged to take more risks and became a huge success.
Mr. Corzine replaced old-line traders and brokers with more aggressive hires from Goldman Sachs, UBS and Soros Fund Management.
In May 2010, in his first investor call as chief executive of MF Global, Mr. Corzine discussed what could go wrong at the brokerage firm as it ratcheted up risk. “It will be mistaken judgments,” he said, “that go beyond limits, which I don’t intend to allow happen.”
Yet despite his confidence in risk management, Mr. Corzine’s message to traders was clear: Take more risks. “He was instrumental in pushing our firm forward with risk taking in every book, whether it was U.S. government bonds, currencies, or in repos,” said one trader. “Everything was full throttle go.”
European sovereign debt looked especially tempting. Instead of the near-zero yields on United States Treasury bonds, short to medium Italian and Spanish bonds were earning 2 to 3 percent. Simply holding those to maturity and collecting the yields would buttress profits as other businesses shrank.
And while most Wall Street firms sharply ratcheted down their use of leverage, MF Global continued to pile on large amounts of debt. On the eve of its collapse, it had about $34 of debt for each $1 of capital it held, according to data from Keefe, Bruyette Woods. By contrast, Goldman Sachs’ leverage ratio is $13.50 for every $1.
The combination of potential losses on the European debt and the MF Global’s thin capital cushion is what spooked investors, setting off the crisis. MF Global’s demise was the eighth largest bankruptcy in the country’s history, but with $41 billion in assets it was considerably smaller than Lehman which had assets of $691 billion.
For those who have followed Mr. Corzine’s career, however, the problems at MF Global have elicited a strong sense of déjà vu.
In 1994, Mr. Corzine ascended to the top of Goldman Sachs despite hundreds of millions of dollars in trading losses at the bank’s bond unit, which he had overseen. He assumed leadership of Goldman, say his former colleagues, in part because he was one of the few partners who understood how to extricate the bank from its soured trades.
Mr. Corzine, a lifelong trader with a large appetite for risk, recently reflected on his past experiences dealing with crises in William D. Cohan’s book “Money and Power, How Goldman Sachs Came to Rule the World,” a recent history of the bank.
“Until you’ve actually traded and had to deal with one of those come-to-Jesus moments with a bad position,” he said, “and you have to make the decisions about whether to eliminate it, hold it, reduce it — those kind of existential moments involving the people you work with and your firm, those are the kinds of things that really get your attention.”
Mr. Corzine’s worldview had been forged at Goldman, where he spent 24 years. After growing up in a farm town in Illinois, where he was captain of his high school basketball team, Mr. Corzine, armed with an M.B.A. from the University of Chicago, joined Goldman Sachs in 1975 as a bond trader. Bond trading was then low on the totem pole of Goldman. But he gained notice making big bets — and generating big profits — trading government bonds. At the age of 33, he made partner.
As Goldman’s senior partner from 1994 to 1999, he led the bank through the Asian financial crisis and the collapse of the Long-Term Capital Management hedge fund. His crowning achievement was Goldman’s initial public offering in 1999, though the controversial move led to a power struggle that ultimately cost him his job.
In 1998, he also drew the ire of his Goldman partners for discussing a merger with Mellon Bank without conferring with the firm’s management committee, a misstep that also contributed to his being replaced by Henry M. Paulson Jr., who later became secretary of the Treasury under President George W. Bush.
Upon leaving Goldman, Mr. Corzine turned his attention to public service, spending a sizable chunk of his fortune — more than $100 million — to pursue political office.
After being elected to the senate as a Democrat from New Jersey in 2000, Mr. Corzine distinguished himself in Washington for his financial acumen. But he viewed himself as more of an executive than a legislator, and decided to run for governor in 2005 before completing his term.
Mr. Corzine’s one term as governor was marked by difficulties. He complicated his run for governor by divorcing his wife of more than 34 years shortly before announcing his candidacy and was dogged throughout his time in office by complaints that his romantic relationship with a leader of state employees’ union left him in an untenable conflict of interest.
His first year in office, he presided over a weeklong government shutdown when the legislature originally balked at his proposal to increase the sales tax. The next year, he was badly injured in a car accident when his speeding state vehicle crashed. Mr. Corzine, a passenger who was not wearing a seat belt, endured months of difficult rehabilitation that aides and critics said drastically affected the rest of his term.
Working at MF Global, Mr. Corzine’s life has revolved around Manhattan; he is rarely seen in Hoboken, where he keeps an apartment. Last year he married Sharon Elghanayan, the former wife of K. Thomas Elghanayan, a New York real estate developer.
National politics remained a focus of Mr. Corzine after he joined MF Global. He pitched in to help raise money for President Obama — who had campaigned for Mr. Corzine during his re-election bid for governor.
Mr. Obama’s first major re-election fund-raiser in New York was held at the Manhattan home of Mr. Corzine’s wife, with tickets going for $35,800 each. And Mr. Corzine was one of the president’s most elite bundlers, supporters who tap friends and business associates to bring in checks: He has helped Mr. Obama raise more than $500,000 this year.
When White House officials sought to broker a meeting between disgruntled Wall Street executives and Mr. Obama’s new chief of staff this year, they turned to Mr. Corzine, who organized a sit-down at the Four Seasons. Mr. Corzine was on the list. There had even been talk of his being named the next Treasury secretary.
Now, instead of a big job in Washington, Mr. Corzine faces difficult questions about what happened on his watch and whether he should have returned to Wall Street at all.
“He wanted to be back in the game,” said one old friend. “He thought he could make it work.”
Reporting was contributed by David Chen, Nicolas Confessore, David Kocieniewski, Ben Protess, Susanne Craig, Andrew Ross Sorkin and Eric Dash.
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