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Jon Corzine Was The Mark Zuckerberg Of MF Global, But In A Bad Way

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I'm not the only person who noticed that Mark Zuckerberg is going to have more than the usual amount of control over Facebook (FacebookFacebookFacebook), both unto his grave and beyond. As a conceptual matter I'm kind of down with that though I'm not going to, like, buy shares in the IPO or anything.* But my basic take is that, if you're going to buy stock in in a poking machine that makes about a penny per user per day, you should be willing to trust Mark Zuckerberg. Because if you were the inventor of Facebook, you would have invented Facebook, or something.

The alternative to giving a hoodied 27-year-old complete control over all aspects of a multibillion dollar business is to have a team of professional managers being all professional and managing by committee and checking each others' work. It is not clear what is better. I suspect Facebook would not be a $100 billion asset today if it had sold to Yahoo in 2006 though, also, no one has ever accused Yahoo of being professionally managed. But the point is that those are two distinct styles and there are arguments for both. Professionalism has much to recommend it but so does complete domination by one visionary; for instance, founder dominated firms outperform the market.

On the other hand there is a downside to dominant visionaries, as some (non-Zynga-based) hog farmers now know all too well:

Michael Roseman, MF Global’s chief risk officer until early 2011, and his successor, Michael Stockman, testified that they warned the firm’s top executives and directors about the danger of the European bets months before the firm’s downfall. Mr. Stockman took the reins of controlling risk after Mr. Roseman exited amid repeated clashes with the firm’s top executives.

“We did our job during this period,” a defiant Mr. Stockman told the oversight panel of the House Financial Services Committee. “In my view, the board and senior management were highly sophisticated; they knew and understood how the” European debt bets worked.

Lawmakers were dubious. While the positions were the brainchild of Jon S. Corzine, the firm’s chief executive and the former governor of New Jersey, lawmakers noted that it was up to the risk chiefs to control their boss’ risk taking.

“You were not a lowly clerk,” Representative Bill Posey, a Republican from Florida, told Mr. Stockman. ...

In November, when the positions grew to nearly $5 billion, Mr. Roseman outlined the risks to the board, saying the bets hinged on the European countries not defaulting.

“The risk scenarios I presented were challenged as being implausible,” Mr. Roseman told lawmakers.

The board sided with Mr. Corzine. And about the same time, MF Global began a search to replace Mr. Roseman.

Not having been there you could think a lot of things about this, like:
(1) if the risk scenarios that Roseman presented consisted of Italy, Spain, Belgium, Ireland or Portugale defaulting on their short-dated (~1-year) bonds before they matured,
(2) that hasn't happened,
(3) yet,
(4) so maybe it was implausible?

But that's not really true - worrying about European peripheral bonds would not exactly put you outside the mainstream of financially aware humans, particularly those who by nature or circumstance ended up in the slow-paced field of risk management. On the other hand, while you'd certainly want risk managers to be able to keep an eye on what the traders are up to, you do ultimately have to have a hierarchy, where the board is the boss of the CEO and the CEO is the boss of the risk officer. And if the CEO is a gung-ho trader and the board is okay with that, then a chief risk officer who constantly says "I'm afraid I can't let you do that Dave" is eventually going to be out. That doesn't make him a lowly clerk - it just makes him not the last word on trading decisions.

It's easy to forget when Jon Corzine is remembered mainly as the guy who prevented hog farmers from buying feed (or, in some circles, as the second-most-motivated seller on Dealbreaker Homes & Estates), but there was a time lo these six months ago when he was viewed as essential to MF Global's business plan, so much so that they were going to pay bondholders more if he left, which in hindsight maybe they should have paid bondholders more when Roseman left. And he was not viewed as essential for his calm and steady hand - S&P downgraded MF Global exactly because of Corzine's plans to transform it into a higher risk investment bank.

That's exactly what the board was looking for: a higher-risk, higher-reward transformation from a boring broker into a sexy investment bank. And they were aware they had to take the bad with the good. Roseman and Stockman both presented the risks to the board and the board - was pretty uncomfortable with them! And told Corzine that! And he told them, though not in so many words, that they could take their pick of Eurozone bonds and Corzine, or no bonds and no Corzine. And they went with Corzine. And his bonds. And now look at them.

You can have all sorts of worries about governance at MF Global but my basic sense is that a lot of people got what they paid for. MF Global's directors wanted to be a new Goldman Sachs, and so they hired a guy who was as close as they were going to get to a Goldman Sachs CEO. They couldn't hire, like, Lloyd, because let's face it, they were MF Global, so they hired a Goldman Sachs executive with some warts - specifically the kind of warts that made him an inveterate gambler. This upped their risk tolerance notably, and they stuck to that decision, to the extent that they went along with Corzine's gambles and fired the risk manager who objected. Shareholders were not specifically aware of the details, but from MF's disclosure, press, analyst reports, S&P downgrades, etc., it was pretty clear that they were buying into a riskier enterprise than MF once was, and one that was based mostly on Corzine's fevered imagination. That leaves the hog farmers, who are out of luck, only partly through their own fault. In the future the CME will help them sleep ever so slightly better at night, but for now I'm sure they wish MF Global's risk guys didn't have quite such a lowly role at the firm.

MF Global’s Former Risk Officers Defend Their Tenures

* Actually I guess I should try, right? I have semi-legit private-client-ish accounts at two of the underwriters and am going to look into this.