On December 15, Jon Corzine (D-NJ), former CEO of the suddenly bankrupt commodities and futures brokerage firm MF Global, finished three days of testimony before the House Financial Services Oversight and Investigations Subcommittee. This followed the December 2nd decision of the House Agriculture Committee to subpoena Corzine after a request for a voluntary appearance went unanswered. Two other congressional committees subpoenaed Corzine in the next several days. To say that it is unusual for Congress to issue a subpoena to a former United States senator (and, in this case, governor) is an understatement. As an Associated Press article noted, "Congressional historians and Capitol Hill insiders can't recall another time when a former member of Congress was summoned by his former peers to testify about a matter under federal investigation."
In fact, the move was so rare that even the New York Times, Washington Post, and Politico—each of which had reported remarkably little on the eighth largest bankruptcy in our nation's history and America's biggest financial failure since Lehman Brothers—had to take notice.
The bankruptcy was caused by Corzine's decision (if I may borrow a phrase from Corzine's good friend, President Barack Obama) to fundamentally transform MF Global from a sizeable but relatively staid commodities brokerage firm into a gambling enterprise. MF, which was spun off from the British firm Man Financial in 2007, not only risked the firm's own money but then used customers' funds to plug the holes when Corzine's massive speculative purchases of European government debt went south. Fundamentally transforming something that was already working pretty well is perhaps not the best strategy for success.
In testimony before a House committee on December 15, 2011, Terry Duffy, chairman of the Chicago Mercantile Exchange—which, as MF Global's first-line regulator, is intensely focused on protecting its own reputation—said, "A CME auditor also participated in a phone call with senior MF Global employees wherein one employee indicated that Mr. Corzine knew about loans that had been made from the customer segregated accounts." Not surprisingly, Corzine denies all knowledge of these transfers.
WHY ANYONE WOULD HAVE expected a different outcome from Corzine management is a good question. Corzine, who had been a trader at Goldman Sachs, became the company's chairman and CEO in 1994. As a 2000 New York Times hagiography of Corzine noted, "While he helped build the bond trading department of Goldman Sachs into a wildly profitable arm of the company, he was admittedly careless as an administrator and was forced out of the firm because several senior partners were angered that he made major decisions without consulting them."
That is a charitable description of a man who ran a firm that had a nasty reputation (including when I was a trader on the Chicago Board Options Exchange) for "front-running" its customers' orders, most famously the collapsing positions of Long Term Capital Management (LTCM). As Roger Lowenstein described in his seminal book When Genius Failed, "translated, this meant that when…Goldman got wind of which way its customers were running, it often ran there too—and fast. This was why Goldman's previous stewards had refused to get involved in proprietary trading; the possibility of conflicts of interest was just too great."
Corzine aggressively courted Nobel laureate-founded LTCM as a client for Goldman, structuring a deal that allowed Goldman some knowledge of what LTCM was doing, and then copying LTCM's strategies for Goldman's own accounts. As LTCM was collapsing, Goldman posed as a potential white knight while trading in a frenzy for its own accounts; after all, since they had copied LTCM, that firm's losses were turning into Goldman's losses. Lowenstein quoted Corzine: "[Goldman] did things in markets that might have ended up hurting LTCM. We had to protect our own positions. That part I'm not apologetic for." Does anyone now believe Corzine's crocodile tears over protecting MF Global's positions by putting at risk roughly a billion dollars of its customers' money?
In the end, Corzine's LTCM-related activities cost Goldman about half a billion dollars. In other words, he wasn't forced out of Goldman because he didn't "consult" with other partners. It was because he was, and obviously remains, an out-of-control gambler—and I say that as a professional trader inclined to give other traders the benefit of the doubt.
IT WASN'T JUST HIS Goldman activities that should have given MF Global second thoughts before hiring Jon Corzine. His financial management of the State of New Jersey while serving as its governor from 2006 to 2010 was little short of professional misconduct.
Perhaps the best description of Corzine's mismanagement came, not surprisingly, from his successor, Chris Christie, in a February 2011 speech at the American Enterprise Institute:
When I came into office we confronted a $2.2 billion budget deficit for fiscal year '10. The one that had five months left. The one that Governor Corzine told me was just fine, cruise path into the end of the fiscal year; Governor, don't worry about it, everything is fine. $2.2 billion...Imagine that. The state that has the second highest per capita income in America had so over-spent, over-borrowed, and over-taxed—that it would not meet payroll in March of 2010. So we acted immediately to use the executive authority of the governorship to impound $2.2 billion in projected spending…without raising taxes on the people of the state who had had their taxes raised and fees 115 times in the eight years preceding my governorship. 115 tax and fee increases in eight years.
Corzine has given nearly $3 million dollars to Democrats, mostly through donations to the Democratic National Committee, as well as serving as major "bundler" for Barack Obama's presidential campaigns.
So it should come as no surprise that two of Jon Corzine's biggest supporters are Barack Obama and Vice President Joe Biden. At a Corzine campaign rally in Edison, New Jersey, in October 2009, speaking of the administration's quandary regarding how to deal with the banking turmoil in 2008, Biden made it clear why, in retrospect, the Obama administration's economic policies are so reckless and confused:
I literally picked up the phone and called Jon Corzine and said "Jon, what do you think we should do?" The reason why we called Jon is because we knew he knew about the economy, about world markets, about how we had to respond, unlike almost anyone we knew.
Biden went on to say that Corzine gave the administration the framework for a national economic recovery plan. Thus, the Obama stimulus, which wasted a trillion dollars of our children's future earnings, was inspired and perhaps designed by an inveterate reckless gambler and financial mismanager.
Maybe (soon to be) poor Jonny C is just accident-prone. After all, a 2007 SUV accident (in which Corzine was a front-seat passenger) left him with multiple broken bones, in critical condition, and breathing through a tube. The state trooper driving the vehicle was going 91 MPH (presumably with Corzine's consent) and Corzine was not wearing his seat belt. If that isn't a perfect analogy for Jon Corzine's professional career, I don't know what is. And maybe he accidentally had a two-year affair with the president of one of New Jersey's largest state employee unions, after which his ex-wife, Joanne, said that "Jon did let his family down, and he'll probably let New Jersey down, too."
Seriously, who would hire this guy?
The man who cost Goldman Sachs so much money that they had to delay their IPO, who aggressively put himself before his firm's customers and tried to profit by their failure, who cheated on his wife, and who nearly bankrupted a state was an odd choice to run a brokerage firm—except for one thing: Corzine's connections in a financial world that has at the highest levels of policy and regulation become something like an ex-Goldman mafia made the MF Global board of directors believe that Corzine could take them places nobody else could. Sadly, they were right.
THE MOST OBVIOUS TARGET for Jon "It's who I know, not what I do" Corzine was Gary Gensler. Mr. Gensler was appointed by Barack Obama in 2009 to be chairman of the Commodity Futures Trading Commission, the agency with the responsibility to regulate commodities and futures markets, including brokerage firms like MF Global.
Corzine had been Gensler's boss at Goldman and the two were long-time personal friends. Gensler is a major donor to Democratic Party organizations and candidates, giving more than $230,000 in the past decade to about thirty individual candidates and more than a dozen states' Democratic Party committees.
Chairman Gensler knows that his connections with Corzine are a problem and has recused himself from the CFTC's investigation into MF Global's collapse. Senate Republicans such as Pat Roberts (KS) have pointed out that Gensler's "actions on this matter as of late certainly don't look good."
In 2010, following passage of the Dodd-Frank Financial Reform bill, the CFTC proposed a change to its Rule 1.25 that would have prohibited the investment of "customer segregated funds" by MF Global and similar firms in foreign nations' sovereign debt. The New York Times reported that "Mr. Corzine and other members of the firm met with the commission in July to discuss the proposed changes." Would anyone like to guess how much additional weight MF's position was given due to Mr. Corzine's connection to Gensler and other high-power officials?
So, almost a year before MF Global's foreign debt-caused failure, the CFTC had proposed eliminating foreign sovereign debt as an option for MF and similar firms' portfolios because there is "too much volatility to allow this to continue as an eligible investment." But with Corzine's opposition (as well as that of other firms), the reform effort was stillborn. Throttling this sort of reform was, perhaps to their eternal regret, exactly what the MF Global board of directors hoped Corzine would be able to accomplish when they hired him.
In a perfect example of government's latest "epic fail" in regulating financial markets, on December 4, the CFTC unanimously approved the very change to Rule 1.25 that Jon Corzine stopped in its tracks on his way to destroying his company.
One has to wonder what the purpose of the CFTC is if a $200 million agency budget and more than 500 employees doesn't let them catch a firm that appears to have misappropriated, and perhaps lost, more than a billion dollars of customer funds. Apparently it doesn't even let them change a rule they know desperately needs changing. Considering the SEC's not catching Bernie Madoff or Tom Petters, recent hand-wringing about people losing faith in markets should instead focus on incompetent or (intentionally?) ineffective regulators.
It's not just that firms will always be one step ahead of regulators. It's also that many employees of the regulatory agencies hope one day to get a high-paying job in one of the firms they are paid to monitor. The incentives are simply too perverse to expect any outcome other than exactly what we're seeing now.
Those in charge of high-level federal appointments and hires should aim for, if you will pardon the use of one of the left's favorite terms, more diversity of background in senior Treasury and financial regulatory agency positions.
ANOTHER FRIEND OF Corzine's from his Goldman Sachs days is William Dudley (whose political contributions have been small, but, like Corzine and Gensler, also given to Democrats). Dudley is the president and CEO of the Federal Reserve Bank of New York—the most important and powerful bank in our Federal Reserve System—where he succeeded Tim "TurboTax" Geithner.
In February 2011, the New York Fed gave MF Global status as a "Primary Dealer," putting it into an elite club whose members "serve as trading counterparties of the New York Fed in its implementation of monetary policy" through a range of responsibilities and privileges.
Being a Primary is a big deal; as of today, only 21 firms hold that status, and a quick scan shows a list of some of the biggest names in finance, including Merrill Lynch, Goldman Sachs, JP Morgan, and Morgan Stanley. Indeed, the very large sizes of the firms on the list (with the exception of Jeffries & Company) raises the question of why MF Global would have been given such a coveted status usually reserved for the financial "A-Team," not a second-tier—even if fairly large—commodity and futures brokerage firm.
We may never know the details of how that decision was made. But given its importance it is reasonable to assume that Corzine's former colleague at Goldman, Mr. Dudley, was deeply involved. Receiving Primary Dealer status gave MF Global a level of prestige and the opportunity for profits in a U.S. Treasury market that has been extraordinarily busy in the past couple of years.
We may also never know the degree to which getting Primary Dealer status increased MF's risk-taking and thus hurt its shareholders and customers, but the N.Y. Fed decision smells of another favor done by one Goldman Sachs Democrat for another at eventual great expense to the investing public. Not only did MF apparently lose about a billion dollars of customer funds, but Corzine also incinerated another billion dollars of shareholder value during his tenure at MF, as the company's share price dropped from more than 8 dollars to under 8 cents. Thanks to Jon Corzine, MF Global stock certificates are worth more as a curiosity or wallpaper than as investment.
THE BIGGER PICTURE HERE, however, is not just Corzine-Gensler-Dudley, but rather the cozy relationship between Goldman Sachs and the Democratic Party. The "mainstream" media, Democratic Party leadership, major unions, and the Occupy Wall Street movement routinely describe the GOP as a tool of Wall Street. But the numbers say something very different, especially about the Street's most prominent investment bank.
In the aggregate, political contributions by the Security and Investment industry from 1990 until today have been split roughly 50/50 between Democrats and Republicans. But the big hitter is always Goldman Sachs. Indeed, in OpenSecrets.org's "Top All-Time Donors, 1989-2012" list, only one corporation (AT&T) has given more total money to candidates and parties than Goldman Sachs has. (In the top 20 donors, only three are companies; the rest are unions, industry associations, and political action committees.)
The year 2010 was the first since before 1990 (when the data begins) in which Goldman and its employees donated more to Republicans than to Democrats—though they clearly were uncomfortable with the change as 2010 showed the lowest political contributions by the firm since 1998. In the key 2008 race, Goldman gave more than three times as much to Democrats as to Republicans—and gave almost 60 percent more in total than the second biggest donor firm in the investment sector. To be sure, 2008 was obviously going to be a Democrat landslide and it is normal behavior by firms of all sorts to donate more to expected winners. Still, Goldman's pro-Democrat bias was unshakeable for 20 years.
Liberal media outlets make little or no mention of this nation's biggest example of crony capitalism: the revolving door between Goldman Sachs and the U.S. government. Again, it's not just Corzine, Gensler, and Dudley. Former Treasury Secretaries Henry Paulson and Robert Rubin are both ex-Goldman. Neel Kashkari, a former vice president at Goldman, was hired by Paulson into the Treasury Department in 2006 and ended up managing the government's $700 billion TARP (bank bailout) fund. Although Paulson is a registered Republican and has given more than $100,000 to Republican candidates and campaigns, his actions while Treasury Secretary seemed, as Robert Novak put it in 2007, those of "less a true Republican secretary than a transition to the next Democratic Treasury."
Paulson selected Eric Mindich, a former Goldman partner and a long-time major donor to Democratic candidates for the U.S. Senate (and who recently contributed $35,800 to the Obama Victory Fund 2012), to head a critical financial markets committee for the Bush administration. Paulson also hired Robert K. Steel, a former Goldman Sachs vice-chairman, to be undersecretary for Domestic Finance. Steel's range of political donations crosses the political spectrum, from Chuck Schumer to John McCain, from the National Republican Senatorial Committee to John Edwards. Steel also donated to, you guessed it, Jon Corzine. In other words—and this in no way makes him unique—Steel is more interested in buying influence than in funding candidates of a particular set of principles. With Goldman Sachs Republicans like Paulson and Steel, who needs Democrats?
A 2009 Mother Jones report notes that the revolving door moves influence in both directions:
Goldman Sachs, which has more than 30 ex-government officials registered to lobby on its behalf, tapped one-time House Majority Leader Richard Gephardt (D-Mo.) to lobby his former colleagues in Congress on issues related to the Treasury Department's Troubled Assets Relief Program. Goldman, which paid Gephardt's firm $70,000 in the last quarter of 2008, received $10 billion in TARP funds. (As a counterparty to AIG's disastrous credit default swaps, Goldman pocketed an additional $12.9 billion in bailout money given to the insurance firm.) Other insiders lobbying for Goldman include former SEC commissioner Richard Roberts and Faryar Shirzad, once a top economic aide to President George W. Bush.
It's no wonder that many critics of the firm call it "Government Sachs."
JON CORZINE WAS subpoenaed by the House Agriculture Committee because he had refused its invitation to testify voluntarily. It's an ignominious downfall for a man who clearly thought himself a Master of the Universe and whose net worth is estimated to have plunged from about $350 million a decade ago to about $50 million now—before whatever liabilities and costs ensue from the MF Global debacle.
The ever-less-mainstream media avoided covering the story for as long as possible. Can you imagine the air time MF Global's collapse would be receiving if Jon Corzine were a Republican? As the Media Research Center reported, in their brief initial coverage of MF's bankruptcy filing, "the morning shows of the Big Three networks omitted the party affiliation of Jon Corzine as they reported on the federal investigation into his brokerage firm, something that even the liberal New York Times gave in their coverage of the story. ABC's Good Morning America also failed to include Corzine's name during their news brief on the investigation."
Eventually, Democratic members of Congress realized that they couldn't cover for Corzine despite his close ties to Barack Obama—who, like Biden, campaigned for Corzine in 2009 prior to Corzine's becoming the first major victim of the public's ongoing revolt against Democrats. When Democrats in Congress started asking hard questions, the media decided they had clearance to cover the story. So, in December, ABC, CBS, and NPR each reported on Corzine's testimony—without mentioning the word "Democrat."
Again, the real story isn't just Jon Corzine. It's the corrupting influence of Government Sachs, especially among Democrats. The world of people who understand the operations of financial firms well enough to run or regulate them is small. It is unsurprising that there is movement between such firms and important finance-related areas of government. What is surprising and dangerous is the excessive political influence of a single firm, especially—but not only—when the political party it has financed runs the executive branch of our federal government. MF Global's collapse at the hands of Jon Corzine and his well-placed Goldman-Democrat cronies is just the latest example of the damage such influence can inflict on American taxpayers and investors.