One thing that I've assumed from the beginning about MF Global is that no one's ever going to find an email from Jon Corzine saying "Hey guys - can you steal a bunch of customer money to keep us afloat? Then kill the witnesses and bury their bodies in shallow graves." This faith was tested on Friday when it came out that MF Global treasurer Edith O'Brien claimed in an email to have just such instructions, though she would say that since she's currently the leading candidate for having buried all the bodies. But, false alarm: JSC did apparently say "transfer that money," but he thought it was not customer money, so no probs. For now.
When people talk about banker pay they often fall into what I think of as comp determinism, a view that what you pay for is all of and only what you get. So if bankers' pay function is "you get a fixed salary with a 10% raise each year," they will spend their time playing golf and drinking at lunch, while if it is in the form of a call option on their returns, they will spend their days maximizing the volatility of their returns and you'll end up wishing that they'd been playing golf and drinking at lunch instead. I've had some doubts about the details but there's lots of truth to it: every business, perhaps especially the financial industry, attracts people who look out for their self-interest, and so if you align their self-interest with whatever you want you're more likely to get it.
If that is your model, though, you can't limit it just to comp. Your model has to be something like "people who work in the financial industry are people, albeit unusually-lacrosse-loving people, and they want the things that people want and they do stuff at work to get those things."*
Maybe I'm unusual in this but I've always had staying out of prison very, very high on my list of life goals. And this is what puzzles me about the assumption that one day we'll find the smoking-gun email from Corzine. So one argument that DUH OBVS senior senior executives at MF Global intentionally stole money from customer segregated accounts to keep MF Global alive makes the point that "Virtually every knowing violation of the Commodities Exchange Act is a crime, but taking money from segregated customer accounts is at the top of the list." But, like, that list is public. I think most senior people at MF Global, even, probably know what's at the top of it. And when faced with the choice of (1) see their employer go bankrupt, dashing their political dreams and leaving them only with millions or hundreds of millions, as the case may be, of legally obtained net worth, or (2) stave off bankruptcy for a weekend or so by committing a crime that will certainly send them to prison - I mean, I know what I'd do.
So my narrative goes more like, customer segregated accounts were overfunded with MF Global money. Money doesn't know whether it's segregated. People screwed up. Maybe someone in ops didn't fully understand the magnitude of etc. etc. and did in fact authorize an invalid transfer thinking that more money was coming in elsewhere to replace it. But the odds that Jon Corzine told his ops people "steal the customer money, I'll risk jail to save this firm" are pretty close to zero.
Of course, people do commit crimes stupidly. Virtually every crime is the product of a flawed or absent personal cost-benefit analysis. Today, for instance, there's this guy, who is facing 11 years in jail for insider trading:
At his Fordham talk, Mr. Bauer stressed how much he'd given up in his life for no good reason. The inside information informed a fraction of many billions of dollars in trades he'd made over the years. He didn't get a thrill from it. He didn't think much about the consequences. He didn't even really need the money.
That's ... pretty sad. Maybe running a brokerage firm and/or being governor of New Jersey requires you to have a similar pathology? I dunno. Poor Mr. Bauer. But at least he was trading for his own account. If Corzine saves MF Global from bankruptcy the benefit goes mostly to customers and shareholders; the cost of prison is only on him.
If you believe in punishing the hell out of financial executives then you partly believe it (I guess?) because you think it works.** If you believe that then at some point you have to be like "it worked!" It's plausible that we're not at that point with respect to whatever went down at MF Global - like, no one has actually been imprisoned for customer seg violations anywhere else so maybe Corzine thought "ah, come on, they won't come after me about stealing customer money." But my view is no. Jeff Skilling is in jail for, basically, being shady in the vicinity of a firm that was collapsing. Raj Rajaratnam was sentenced to 11 years two weeks before MF Global's collapse. My own take is that the whole "we will lock up financial executives for decades for doing naughty things on email" push was pretty well publicized and effective. And that makes it unlikely that senior MF Global people would knowingly do things that were obvious crimes like making off with customer money to plug holes in the firm's accounts, all for the reward of keeping their jobs at MF Global.
If you buy that though you're left with a boring explanation - red flags weren't noticed, systems didn't work, everyone was a bit stupid in what sounds like a frantic last few days, and the right response is probably to fix the systems. Like: customer seg accounts are typically overfunded, meaning that withdrawing money from them can either be just fine or Horribly Criminal. Now, I am pretty naive but I would have thought that you could get a computer that tracks how much customer money is in your segregated account and, if a transaction would reduce the account below that number, the computer beeps. Loudly. That would seem to be a good starting point. People should get those computers.
One way that satisfies everyone, a little bit, though not really, is to use the threat of jail to fix the systems. So Sarbanes-Oxley basically said that if your accounting is screwed up your CEO goes to jail. (Simplifying a bit.) Similarly the "Corzine rule" would basically say "next time there's a transfer like that, intentional or not, the CEO goes to jail." That's a good way to get CEOs to focus on making sure that the systems work. It's just not as fun as throwing them all in jail.
* Related?: this paper where single CEOs take more risks in order to improve their chances of bedding attractive area singles.
** Or, no, right? Maybe you believe in it because it's fun or you just don't like them for being rich or greedy or crass or Democrats or Republicans or whatever. But probably at least in polite company you're all "pour encourager les autres" and stuff.