who MF Global is

In mid-2007 the glow of a multi-year bull market had not yet begun to fade.  That’s when the Man Group, the London listed hedge fund group, divested itself of its brokerage arm, which was renamed MF Global.

Looking back, this seems to me to be a standard move of a firm that is in both a fast-growing business (hedge funds) and a slow-growing one (brokerage):  split them apart to create two pure stock market plays.  That allows the strength of the fast-growing business to be seen more clearly, and hopefully gets that stock a higher PE multiple as a result.

As for the mature business, who knows.  There may be investors who want to hold it.  And in any event, the timing of the split-up seems to have gotten MF Global an initial valuation that was relatively high.

Sometimes these splits work out well for the apparent ugly duckling.  Coach, for example, was a spinoff from cakes and tee shirt maker Sara Lee, where it was starved of capital.  Free of a bureaucratic parent, that company has been a rocket ship ride for a decade.

Not the case here, however.  (For anyone who knows the Man Group well (not me), it might be interesting to go back and see how the management talent was apportioned between Man and MF Global.  My hunch would be that, if anything, MF Global was stocked with lesser lights.)

spreading its wings

MF Global appears to have intended from the outset to reinvent itself as an investment bank.  An early trading stumble highlighted management control deficiencies and brought in private equity firm, J C Flowers, as a shareholder.

So far, while things could have worked out better for MF, nothing so out of the ordinary.

the strange stuff

1.  the Corzine hire

In early 2010, MF installed a new CEO.  The new guy had built a reputation as a very aggressive and successful bond trader during the 1980s.  He’d been booted out of his two previous management jobs, reportedly for being unable to get along with others.  The most memorable moment of his public service career was when he survived a 90 mph crash in his New Jersey state car, which he habitually rode in without using a seat belt.

Tidbits of gossip aside, Mr. Corzine had been an individual star in a young man’s business.  But he’d been out of the industry for over a decade.  And whether he possessed any management talent was at least open to question, though New Jersey voters rendered their verdict forcefully in 2009.

Picking him, it seems to me, is like selecting a 60-something ex-athlete to be the star player on your team, not the manager.  The broad of MF seems to have had no problem with this.  Mr. Corzine himself appears to have been blissfully unaware that it might take some time to shake the rust off talents he hadn’t employed in the current century;  he appears to me to have committed the cardinal sin of underestimating the other side of the trade.

According to Reuters, MF paid Mr. Corzine $14 million + to drive the company into bankruptcy in under two years.

2.  the “Goldman” recipe

Robert Rubin, former Goldman partner, advised Citigroup to dive into proprietary trading when he joined the company board.  Disastrous results.

John Thain, former Goldman partner, expanded Merrill Lynch’s proprietary trading when he took over as CEO.  Disastrous results.

Jon Corzine, former Goldman partner,…     Sense a pattern here?

3.  where were the compliance people, or the CEO for that matter?

Press reports, including this FT post, indicate that a last-minute deal to save MF Global by merging it into another financial firm foundered when MF couldn’t account for large amounts of customer money.  As I’m writing this on Thursday morning, it sounds like someone in MF diverted $633 million out of customers’ accounts and into its own last week in order to cover trading shortfalls.

It’s hard to believe this is true.  Things like this might happen in Madoff- or Enron-land but they simply don’t occur in reputable firms.  Nevertheless, this is what the CME Group, MF’s regulatory supervisor is accusing MF of.

I also find it hard to believe, although I guess it’s possible, that Mr. Corzine didn’t have a detailed daily (if not real-time) report of MF’s overall trading positions.  It seems to me that the “magic” appearance of over half a billion dollars in the company’s accounts should have been evident to MF management almost immediately.

 

I don’t think the entire story has been disclosed yet.  The Wall Street Journal, for example, is pointing out the mismatch between Wall Street analysts’ research and Mr. Corzine’s public statements vs. what we now see as the underlying reality.  Stay tuned.