Don't let the beard fool you

By William D. Cohan

In the end, Jon Corzine was little more than an unsupervised rogue trader. His disproportionately reckless $6.3 billion bet on the credit of a few European nations bankrupted MF Global over the course of three dramatic days, after the short-term credit markets quickly lost confidence in him and his firm. His gamble will cost shareholders and creditors billions and, virtually overnight, jeopardize the careers of almost 3,000 employees.

MF Global now has the distinction of being one of the largest corporate bankruptcies in American history, with almost $40 billion in liabilities. There is also the matter of the hundreds of millions in customers' money that regulators have reported missing.

In any case, it's incredible how little Corzine and his associates learned from the collapses of Bear Stearns, Merrill Lynch, Lehman Bros., and AIG. And it's very hard to believe that just a few months ago, Corzine was considered the front-runner to be the next treasury secretary.

It didn't have to be this way. The tragedy is that Monday's bankruptcy filing could have been avoided if Corzine's ego and ambition had been held in check by someone - anyone - willing to stand up to the former New Jersey governor, senator, and senior Goldman Sachs partner.

Where, for example, was J. Christopher Flowers? According to MF Global's most recent proxy statement, Flowers' firm owned 6.8 percent of MF. But then, Flowers had reasons for blind faith in Corzine: He recruited him to MF in 2010 and made him a partner in his private-equity fund.

Where were MF Global's other institutional shareholders, such as Fidelity, Guardian Life, and TIAA-CREF? Were they too dazzled by Corzine's resumé to take a serious look at his plan to transform a backwater into a major Wall Street player? Where was its auditor, PricewaterhouseCoopers, which pocketed almost $25 million in fees over the past two years?

And where, for heaven's sake, was MF Global's board of directors, who had the fiduciary responsibility to make sure Corzine wasn't taking irresponsible risks? In granting Corzine a three-year extension of his contract this year, the board's compensation committee noted that his "performance has been exemplary" and that he accomplished "significant improvements in the reputation of the firm."

For the fences

The collapse of MF Global points once again to the need for a substantive, teeth-bearing regulatory regime for this kind of gambling with other people's money. More than three years after the onset of the financial crisis, we don't have anything close to that.

There is little question that from the outset of his tenure at MF Global, Corzine was swinging for the fences. He told me he saw MF as sleepy and risk-averse; he was determined to exponentially ratchet up the risk it took. Corzine himself had only a tiny fraction of his fortune invested in MF Global. His option-oriented compensation package encouraged him to take outsize risks to move its stock price.

One also suspects Corzine was looking for redemption after the coup he suffered at the hands of his fellow Goldman partners. MF Global was his return ticket to the land of the Wall Street giants.

Golden boy

Corzine has always been somewhat precocious and underestimated. In 1980, at 33, he became a Goldman Sachs partner after just 4½ years at the firm. In 1986, he turned a wrong-way bet on the direction of interest rates and Treasury securities - a bet that looked like it was going to cost the firm $150 million - into a $10 million gain after he personally took charge of the trade and worked it out. Many of his partners saw him as a bit of a hero afterward, and his career trajectory angled dramatically upward. In 1993, his future leadership of the firm was virtually assured after his trading group racked up impressive gains on the direction of various currencies against the dollar.

Corzine was the firm's golden boy. But in 1994, the trading environment turned decidedly sour. The firm started losing almost $150 million a month, and Corzine refused to give up on his trades - another wrongheaded bet on interest rates. The firm barely broke even that year, and some 40 partners left the company. Somehow, Corzine wasn't held accountable.

In September 1994, despite the huge trading losses for which his fixed-income group was responsible, Corzine's partners selected him to be the firm's new senior partner. In 1995, he exhorted his partners to try to make $10 billion in pretax income in the next five years. After snickering at this goal, his partners accomplished it - and more - making the firm's 1999 initial public offering a huge success.

By then, though, Corzine's unilateral efforts to merge Goldman with a variety of other Wall Street titans had so alienated his partners that they colluded to oust him. He said he never saw it coming.

While the denouement of MF Global is still being written, one thing is crystalline: Behind Jon Corzine's bearded, avuncular facade lies the soul of a stubborn, ambitious, aggressive, risk-taking trader who drove the firm into the financial abyss. If only someone had the guts to stop him.