Opinion

Felix Salmon

Jon Corzine, rogue trader

By Felix Salmon
December 12, 2011

Dealbook has a big piece on what went wrong at MF Global today, which removes any doubt about the way in which the firm’s sudden death was entirely the fault of Jon Corzine. The idea that Jon Corzine was a “rogue trader” has been raised in the past by the likes of Bill Cohan and John Carney, just on the basis of the size and riskiness of MF Global’s $6.3 billion bet on European sovereign debt. But now it’s looking increasingly as though Corzine demonstrated virtually all of the pathologies of the rogue trader more generally.

Lots of financial firms make big bets and blow up. But what we saw at MF Global was much more than that. In fact, as Corzine detailed at great length in his prepared testimony last week, his big sovereign-debt bet didn’t actually lose money at all. But MF Global died all the same, because the bet was so large and risky that it caused a fatal cascade of downgrades and margin calls.

Now the risk of such a fatal cascade is always front of mind at any broker-dealer, and all such firms have mechanisms in place to prevent any single bet getting big enough to imperil the company as a whole. What distinguishes rogue traders from traders who simply have big losses is fourfold:

  • they develop an ability to circumvent risk-management controls;
  • they aspire to be recognized as a star trader making huge amounts of money for the firm;
  • they tend to arrive earlier and leave later than anybody else, as they jealously guard their trades;
  • and they panic when losses start appearing, doing things which are downright illegal in the process.

Corzine had much more ability to get around risk-management controls than most rogue traders, because he was the CEO. As a result, his big sovereign bet was, relative to the size of the company which made it, by far the largest rogue trade of all time. And the way that he circumvented existing controls was brazen:

Soon after joining MF Global, Mr. Corzine torpedoed an effort to build a new risk system, a much-needed overhaul…

The size of the European position was making the firm’s top risk officers, Michael Roseman and Talha Chaudhry, increasingly uncomfortable by late 2010, according to people familiar with the situation. They pushed Mr. Corzine to seek approval from the board if he wanted to expand it… Mr. Roseman eventually left the firm.

In August, some directors questioned the chief executive, asking him to reduce the size of the position. Mr. Corzine calmly assured them they had little to fear.

“If you want a smaller or different position, maybe you don’t have the right guy here,” he told them.

As CEO, of course, Corzine could and did overrule or ignore any concerns about his big trade: “One senior trader said that each time he addressed his concerns, the chief executive would nod with understanding but do nothing,” we’re told in the Dealbook piece. Only the board had the ability to rein Corzine in — but Corzine made it abundantly clear that as far as he was concerned, the board had only one job: to keep him in his job, or to fire him. If they wanted him to run the company, he was going to run it his way, with all the risks that entailed.

Of course, Corzine was happy to structure his bet in such a way as to minimize its perceived riskiness:

The firm bought its European sovereign bonds making use of an arcane transaction known as repurchase-to-maturity. Repo-to-maturity allowed the company to classify the purchase of the bonds as a sale, rather than a risky bet subject to the whims of the market.

This is absolutely the kind of thing that a rogue trader does, rather than a CEO. A CEO wants to be paranoid about all risks; a rogue trader wants to hide them. It’s clear which one Corzine was.

Corzine’s risk circumvention has been widely reported already. But other parts of Corzine’s pathology were new to me. For instance:

He fashioned new trading desks, including one just for mortgage securities and a separate unit to trade using the firm’s own capital, a business known as proprietary trading.

Not to be outdone, Mr. Corzine was the most profitable trader in that team, known as the Principal Strategies Group, according to a person briefed on the matter. Mr. Corzine traded oil, Treasury securities and currencies and earned in excess of $10 million for the firm in 2011, the person said…

His obsession with trading was apparent to MF Global insiders over his 19-month tenure. Mr. Corzine compulsively traded for the firm on his BlackBerry during meetings, sometimes dashing out to check on the markets. And unusually for a chief executive, he became a core member of the group that traded using the firm’s money. His profits and losses appeared on a separate line in documents with his initials: JSC…

At Goldman, which he joined in 1975, the young bond trader quickly gained a reputation as someone able to take big risks and generate big profits. Even after ascending to the top of the firm, he kept his own trading account to make bets with the firm’s capital.

I still can’t quite believe this, although it does seem to be true — did Corzine really have his own personal trading account while also being CEO, both at Goldman and at MF Global? At Goldman, which was still a partnership when Corzine was in charge, there would at least have been serious limits on what he could trade, and the bank was big enough to be able to withstand losses in his personal account. But at MF Global, where he was charged with turning around the entire company, the picture of the CEO trading on his Blackberry during meetings is, frankly, bonkers.

Does this happen elsewhere? Are there other brokerages where the CEO has his own personal P&L line in the trading books? Citadel, perhaps.* But this is not a good idea. You want the CEO encouraging the rest of the trading desk, not competing with them. And you want the CEO judging himself by the performance of the firm as a whole, rather than obsessing over the profits and losses he’s personally responsible for.

Certainly the fact that Corzine was working two jobs — as well as more general rogue-trader pathology — helps to explain the fact that he “impressed colleagues” with his work ethic:

He often started his day with a five-mile run, landing in the office by 6 a.m. and was regularly the last person to leave the office.

(I’ll guess, though, that he wasn’t up at 2:30 most mornings, trading the European markets from the foot of his bed.)

In the macho world of Wall Street, working incredibly long hours is generally grounds for admiration, so it’s easy to see how this didn’t raise any red flags. But it should have.

And then, at the end of the story of any rogue trader comes the spiral of panic-driven illegal activity.

MF Global filed for bankruptcy on Oct. 31. As the firm spun out of control, it improperly transferred some customer money on Oct. 21 — days sooner than previously thought, said people briefed on the matter. And investigators are now examining whether MF Global was getting away with such illicit transfers as early as August, one person said, a revelation that would point to wrongdoing even before the firm was struggling to survive…

A deal became crucial as trading partners and lenders circled the firm. LCH.Clearnet, the firm responsible for clearing the vast majority of MF Global’s European sovereign debt trades, was also demanding $200 million to maintain the positions, atop $100 million it had claimed from MF Global earlier in the week, one person briefed on the situation said.

Other people close to the investigation, led by the Commodity Futures Trading Commission’s enforcement division, have said that as the firm rushed to pay off creditors, MF Global dipped again and again into customer funds to meet the demands.

It’s quite common for rogue traders to go to jail; as one of the biggest rogue traders in history, it looks as though Corzine might well join their ranks. It would certainly be a great shame if he avoided that fate by dint of the fact that he was CEO and therefore has some kind of plausible deniability about the mechanics of the illegal transfers. Everything in this sorry story has his fingerprints all over it.

*Update: Citadel calls to say that Ken Griffin, the CEO, does not engage in trading at the company.

Comments
21 comments so far | RSS Comments RSS

“his own trading account to make bets with the firm’s capital” means his own P/L, doesn’t mean personal account.

Posted by alea | Report as abusive
 

“his own trading account to make bets with the firm’s capital” means his own P/L, doesn’t mean personal account.

Posted by alea | Report as abusive
 

Felix, great post, though we don’t think our boy will be joining Raj or Bernie anytime soon. Amazing how these guys never pay the price.

Our take on Corzine is that karma caught up with him: http://www.WeWereWallStreet.com/Corzine- what-goes-round.html

Let’s see if he keeps talking in the hearings or if he starts pleading the fifth. We bet the latter.

Posted by WeWereWallSt | Report as abusive
 

Really good write-up, Felix. Obviously it’s in Obama’s interest for this to go away quickly, so I’d look to Corzine to cut a very favorable deal within the next few months. (No jail time.)

Posted by RobSterling | Report as abusive
 

@RobSterling…
can’t you people who reflexively invoke obama just put a cork in it for a change??
this has nothing to do with obama, and despite your ingrained disdain for him, he is not a ‘socialist’ and is not some agent of corruption, nor is he anti-capitalist. at all.
the inability of you and your ilk to simply think with rationality rather than knee-jerk ill-conceived hatred is putrid.

Posted by patric627 | Report as abusive
 

Not exactly sure who came up with the criteria for distinguishing rogue traders (where is the fourth one by the way?) but if we make a very big assumption that these are actually true, I just don’t see how the presented evidence fits the criteria. Comes to the office early and leaves late, aspires to be a star trader… I mean, come on!

Posted by Tseko | Report as abusive
 

Simple answer. John Corzine was not qualified to be a CEO and the people on the board were not qualified for their position on the board. The board members should also face trial along with Corzine. Time to get the financial community on stable ground. Oh, by the way, we should also remember that we have an unqualified sitting president, and a whole batch of unqualified Republicans seeking the Office.

Posted by fred5407 | Report as abusive
 

Felix – I think the NYT was making a point the Corzine kept prop trading even when he was an executive at MF Global and Goldman. This means he used the banks funds and kept a p&l for those trades that was not combinded with the trades for the rest of the prop desk. To me this read as an ego trade because Corzine felt the need to have his trading return success visable to others at the bank.

Posted by tbuhl | Report as abusive
 

Good piece, but I disagree with the contention that the role of the CEO is to be paranoid about all risks. In fact, I think CEOs that act on that philosophy are doomed to fail. Risk assessment and mitigation fall on many shoulders, including the general counsel and the compliance officer. In my mind, a CEO needs to take a balanced approach between seeking opportunities and containing unnecessary risks.

Posted by mm11217 | Report as abusive
 

Another crook out of a seemingly endless parade of crooks. We need to pick up the pace in swapping out the pot smokers in jail in exchange for extremely harmful and real criminals like Corzine.

Posted by woodywoods | Report as abusive
 

Following a schedule like Corzine’s could turn most of us into rogue traders; especially if you combine that schedule with a strong desire for personal recognition. Recent psychological research has shown that sleep-deprived subjects tend to take bigger risks more optimistically, and tend to be hasty in seeking a big win:
http://blogs.scientificamerican.com/obse rvations/2011/03/08/short-on-sleep-the-b rain-optimistically-favors-long-odds/

Posted by matthewslyman | Report as abusive
 

don’t forget Hank Paulson had him booted out of Goldman co-CEO slot for trying singlehandedly to have that firm buy the sinking positions of John Meriweather’s hedge fund Long-Term Capital Management. All those broker trading desk guys like Meriweather and Corzine think the way to make money is to always average down.

Posted by northforkinv | Report as abusive
 

How in the world did FINRA, CFTC, and the SEC miss the idea that repo-to-maturity represents risk, instead of a “sale?” Sen. Conrad is absolutely right when he says this is a hole big enough to accomodate a Mack truck.

FINRA may be in the pockets of the big brokerage firms (one can argue about that), but where the heck was the SEC, and especially the CFTC?

Markets are “self-regulating?” Yeah, right. Even regulators are not (it seems) “self-regulating.”

Posted by RMoS | Report as abusive
 

Hi
You should all just leave Jon alone. I am sure he was trying to do his best and the market chose to turn against him.
How unfortunate for Mr Corzine.
Have some empathy and compassion.

Posted by mlknows | Report as abusive
 

This Ex Gov. is as Dirty as Gorden Gecko….stop buying his Story..cause he was the CEO…save your story for your jail friend Bernie Madoff… Bernie knows your tricks….you play us all as stupid…

Posted by moneyboy22 | Report as abusive
 

mlknows,

You’re joking, right?

Posted by Christofurio | Report as abusive
 

How do you get rich? It’s simple: you STEAL using every tool available.

Is there any hope at all that this guy will go to jail? Nah… “it was all legal” says Obama.

Posted by w.burton | Report as abusive
 

mlknows,
are you related to JSC?

Posted by cyenwong | Report as abusive
 

The attention to detail in trading will be an interesting legal issue that Corzine will need to deal with, especially with things like the lawsuit by his ex-employees.

I am sure that his typical defence will be that he was not down in the weeds in the company business, didn’t know all of the details of the company finances, can’t recall if anybody ever informed him of how his own trades were being financed, etc.

Showing a Type AAA personality focusing on many details including the details required to have successful major trading positions could be devestating to his defence, certainly opening up a gross negligence issue if he was shirking his actual required CEO duties in order to play trader.

Posted by ErnieD | Report as abusive
 

ErnieD, of course the real issue is proving he did something that is actually illegal as opposed to either stupid or reckless.

Posted by Danny_Black | Report as abusive
 

MacTM19 shared this video on another Reuters story:
http://www.youtube.com/watch?v=xm3VMrKqJ SA
Watch Joe Biden praising Jon Corzine as his mentor on economic stimulus! And just watch Jon Corzine’s body language while Biden feeds his ego! This says all the things Felix Salmon has been describing in his article…

Posted by matthewslyman | Report as abusive
 

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