Wednesday, July 31, 2013

And Speaking of Insider Trading, Did You Hear One About The Trader Who Didn’t Let The Tipster Finish What He Was Saying?

 Last night before the close I received an instant message passing along mention of “an incredibly unusual trade” in the options of Booz Allen Hamilton, ticker BAH—better known as the home of government secrets-discloser Edward Snowden.
 Seemed that somebody had bought 7,600 worth of call options (equivalent to 760,000 shares of stock) in BAH, which normally trades fewer than 20 options on any given day.
 Specifically, the buyer bought 7,600 worth of September $20 calls (the stock closed the day at $19.32) for 85 cents.  “This name has LESS than 1,000 in total open interest,” my messenger noted—meaning the buyer had just bought 7.6-times the number of existing options of all stripes extant in BAH.
 That, as I say, was last night, not long before the market closed for trading.
 This morning, lo and behold, the Wall Street Journal is reporting the following:

 Accenture in Talks to Buy Booz & Co.

An Acquisition Would Beef Up Strategy and Operations Consulting

 Unfortunately for the massive call option buyer in BAH, “Booz & Company” is entirely different from “Booz Allen Hamilton,” having been spun out some years ago as a private company.
 Or, perhaps it’s highly fortunate that our option buyer didn’t finish listening to his (or her) tipster before hanging up the phone and placing the order.
 Because if indeed Accenture was in talks with “Booz Allen Hamilton,” Mr. 7,600 September 20 BAH Calls might be getting a call of a different kind right about now, and it would not be pleasant.
 As it is, the buyer—who, to be fair, could have had any number of reasons to make the trade (might have been a short-seller looking to hedge a position prior to the company’s earnings report this morning, for example)—can finish reading the Wall Street Journal without interruption.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at

© 2013 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Sunday, July 28, 2013

Rage Against The Machine, or, Up With Cheaters!

 We here at NotMakingThisUp have no vendetta against Holman Jenkins, Jr., despite this being our second reaction to one of his Wall Street Journal editorials in as many months.  In fact, your editor has met him in a social setting, and he seems like a thoroughly reasonable guy.
 But his knee-jerk, anything-the-government-does-is-ipso-facto-wrong mindset puts him in the repeated position of defending individuals like MF Global destroyer-in-chief Jon Corzine (here) and Rajat Gupta, former Goldman Sachs board member and convicted Raj Rajaratnam source (here), not to mention, most recently, laying into the government’s prosecution of SAC (here).
 It’s a bizarre case of a straight-laced Wall Street Journal writer whose favorite story line seems to be Up With Cheaters!
 Since the SAC case is still out there, we have nothing to say about Jenkins’ knee-jerk lambasting of the Feds’ efforts to shut the place down without seemingly having any goods on the boss of the enterprise, although the situation at SAC (five former employees cooperating with the Feds out of eight so far charged criminally on insider trading) recalls what a friend likes to say about these kinds of things: “If it looks like a duck and quacks like a duck…”
 Instead, we focus on the biggest whopper in Jenkins’ latest rage against the machine: that the “standard rhetoric” that “the public is cheated” by insider trading “is nonsense.”
 Here’s how he puts it:
 Under standard rhetoric, the public is somehow cheated by all this, but the standard rhetoric is nonsense. The public isn't damaged because another party wants to sell or buy....
 According to Jenkins’ fuzzy logic, somehow, the investors who sold 175,000 shares of Goldman Sachs to Raj Rajaratnam late in the trading day of September 23, 2008, after Rajaratnam got word from Gupta about Warren Buffett’s $5 billion investment in Goldman—a market-moving event if ever there was one—and thereby left a $900,000 profit on the table that Rajaratnam pocketed for his firm after the stock soared the next day, were not “damaged” or “somehow cheated.”
 As Zack de la Rocha would sing, “know your enemy.”  
 And in our line of business, if not in Jenkins’s, inside traders are the enemy—not the Feds.
 Good riddance to them.

Jeff Matthews
Author “Warren Buffett’s Successor: Who It Is And Why It Matters”
(eBooks on Investing, 2013)    $2.99 Kindle Version at

© 2013 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Saturday, July 20, 2013

In Defense of Fabulous Fab

 Well it looks, thus far, like the SEC is not making much of a showing in its civil prosecution of Fabrice Tourre, the now-infamous “Fabulous Fab” of Goldman Sachs fame.  For a reminder of how, to use a highly technical legal expression, lame the government's case seems to this virtual column, we thought it worth dusting off the following piece from those anxious, post-crisis days.— JM 

Monday, April 19, 2010

From BACCHUS to ABACUS: Exhibit A in Defense of Goldman Sachs

Let’s start by making one thing clear: we here at NotMakingThisUp harbor no particular good will towards Goldman Sachs.

In fact, not long ago we published in these virtual pages a column titled “Goldman 8, Public Zero…the Teachable Moment of Bare Escentuals (January 15).” It was a minor but explicit illumination of Goldman’s relationships with its clients—i.e. pretty much the same relationship a water moccasin has with a frog.

Loyal readers will recall that we described how Goldman Sachs first sold a total of 36 million shares of cosmetics maker Bare Escentuals (sic) to the public at prices ranging from $22.00 to $34.50. Then, after the wheels came off the proverbial track at Bare, Goldman’s crack research team slapped a “Sell” rating on the company’s stock…but not until after it had already collapsed to $13 a share.

Adding insult to injury, just a few weeks after that “Sell” rating—from Bare’s very own investment bank—sent the shares crashing, Bare Escentuals received a takeover bid for $18.20 a share.

But wait, as they say, there’s more!

Bare Escentuals then hired none other than Goldman Sachs to advise the cosmetics company on the $18.20 a share offer. Goldman, naturally, endorsed the price as fair—just weeks after its own research department had declared $13.00 as too rich a price for Goldman’s clients to pay—and received fees for doing so.

By our count, that amounted to eight ways Goldman Sachs made money on Bare Escentuals at the expense of anybody on the other side of the table.

And while we therefore do not have any particularly benign feelings towards Goldman Sachs, neither do we harbor ill-will towards the government institution which filed a complaint against that firm on Friday.

Indeed, the SEC Chairman who, in our view, pulled the teeth out of that animal under the previous administration and then flailed ineffectually while the world collapsed thanks in part to his blunders—i.e. Chris Cox—is gone, and good riddance to him. (For an entertaining and insightful look at that sordid story, read Andrew Ross Sorkin’s excellent account of the Lehman collapse, “Too Big to Fail.”)

Still, we’ve read the SEC’s complaint filed against Goldman Sachs Friday afternoon—headlines of which seemed so shocking they sent Goldman shares, and stock markets, crashing.

And while the complaint portrays yet another sordid story—the account of some really awful paper Goldman helped package and sell to a dumb German bank at the behest of a smart U.S. hedge fund manager—we think the government doesn’t have a leg to stand on.

The gist of the SEC’s complaint—and while we are not attorneys, we have been in this business a few decades and seen more than a few frauds in that time—appears to be, in part, that Goldman and an employee mislead IKB, the German bank in question, by not disclosing that John Paulson’s hedge fund had helped select the garbage Goldman was selling to IKB:

In sum, GS&Co arranged a transaction at Paulson’s request in which Paulson heavily influenced the selections of the portfolio to suit its economic interest, but failed to disclose to investors…Paulson’s role in the portfolio selection process or its adverse economic interests.


Let’s leave aside the obvious howler here—since when did it become a broker’s responsibility to violate the confidentiality of its clients by disclosing the seller’s identity to the buyer?—and focus on the specifics of the SEC charge, particularly the notion that IKB would not have proceeded with the transaction had Goldman not omitted Paulson’s name from the discussion, as spelled out here:

IKB would not have invested in the transaction had it known that Paulson played a significant role in the collateral selection process while intending to take a short position in ABACUS 2007-AC1.

—Paragraph 59, SEC v. GOLDMAN SACHS & Co. and FABRICCE TOURRE.

Who, exactly, is this IKB that, if we are to believe the complaint, had been led like a lamb to slaughter by Goldman Sachs at the behest of John Paulson?

Well, IKB is short for IKB Deutsche Industriebank, and it was once a sleepy German industrial lender that, during the 2000s, made the plunge into sub-prime CDOs for the same reason so many of its peers did: it seemed like a good idea at the time.

Indeed, so good an idea did it seem, that IKB boasted of its prowess in evaluating exactly the kind of garbage the SEC is now trying to claim Goldman Sachs misled it into buying.

Far from being an unwilling pawn on the financial chess-board, IKB issued press releases about its move into the exotic world of toxic mortgage structures even as John Paulson, the genius who sold the garbage to IKB, was deciding it was time to sell the same toxic mortgage structures short.

Indeed, as far back as March, 2006—a year before the tainted transaction with Goldman Sachs—IKB issued a press release announcing the closing of a deal, chest-thumpingly-named “BACCHUS” (we are not making that up) which seems to make it very clear that IKB was not only a willing buyer, but a willing distributor of the same kind of garbage as the boys in lower Manhattan.

Here begins that press release:

IKB closes first “Bacchus” deal, strengthening its position as an asset manager for corporate loan portfolios.

[Düsseldorf, Germany, 16 March 2006] IKB Deutsche Industriebank AG has successfully concluded “Bacchus 2006-1", a funded securitisation of acquisition financings. With this deal, IKB further strengthened its position as a leading asset manager for corporate loan portfolios. The € 400 million Collateralised Loan Obligation was arranged and placed by JP Morgan…

Bacchus, of course, was the Roman god who inspired the term “Bacchanalia.”

Call us old-fashioned, but for our part, if we had been a stodgy old-line German bank packaging securities for resale, we would have selected a more sober god to name our deals after—“Apollo,” perhaps (god of music and healing; ‘associated with light, truth and the sun’), or “Artemis” (goddess of the hunt).

Not the god of drunken orgies.

Having discovered that IKB appears to have been no babe in the CDO woods, we now submit the following document that we suggest may well suffice as “Exhibit A” in Goldman’s defense.

It is a presentation by Dr. Jörg Chittka, head of IKB investor relations, prepared for a Dresdner Kleinwort Day for Investor Relations on December 12, 2006—just a few months before the transaction in question—and it can be downloaded from the IKB web site.

Let’s flip quickly through Dr. Chittka’s “slide deck”:

“Slide 3: Highlights—Market Leader/Strong performance/Solid ratings…”
—IKB Dresdner Kleinwort IR Day 12.12.2006

Hmm, IKB would seem to be no country bumpkin. This slide informs us that, among other things, IKB is a “Specialist in long-term corporate finance” and a “Market leader in long-term corporate lending in Germany” with a market share of 13%.

“Slide 5: Focused market strategy—Specialisation(sic)/Lean sales system/Selective new business…”
—IKB Dresdner Kleinwort IR Day 12.12.2006

Sounds good! Dr. Chittka informs us that IKB has a “Rating-oriented product and price strategy,” and that “New business” is “strictly oriented to rating and margin spread.”

So how on earth did IKB end up owning a bunch of Goldman-packaged, Paulson-shorted garbage?

The next slide holds a clue, in the form of a timeline showing IKB’s history:

“Slide 6: Lines of Development

· 1924: Foundation
· 1930s: Pioneered long-term lending at fixed interest rates…
· Entering 2000s: CLO-transactions and investments in international loan portfolios”

—IKB Dresdner Kleinwort IR Day 12.12.2006

Ah, there we have it. IKB is getting into the CLO business, especially in international loan portfolios!

But what does this little German bank know from CLOs? Well, it turns out this little German bank claims to possess an advantage:

“Slide 9: Competitive edge

· High expertise in all fields of corporate finance, incl.
-rating advisory and
-industry research”
—IKB Dresdner Kleinwort IR Day 12.12.2006

There you have it: IKB claims to have “high expertise in all fields of corporate finance,” and that includes both “rating advisory and industry research.”

Indeed, the IKB slide deck goes on, bragging in the kind of detail you can bet Goldman Sachs’ attorneys will be happy to share about the “excellent rating IKB enjoys” thanks to its “outstanding funding base”; the “Strong and stable customer relations based on relationship banking over decades”; the “High diversity of IKB loan book”; the “High granularity” of the IKB loan portfolio; the “Improving quality of the loan book” and the bank’s “Solid capital base for business growth.”

So confident was IKB’s management of all these things that Slide 35 boasts that “IKB is going to meet the operating profit target for the financial year 2006/2007 as a whole.”

How, exactly, would IKB perform this feat?

Slide 36 informs us that one of the ways is by the “additional investments in international loan portfolios.”

International loan portfolios such as ABACUS 2007-AC1, perhaps?

There is more—60 pages in all—but from our brief review it would appear that this particular German bank took the other side of the Paulson trade not because it didn’t know Paulson was selling.

After all, at the time the deal was structured in early 2007, John Paulson was just “John Paulson, merger arbitrage hedge fund guy,”not “John Paulson, billionaire hedge fund manager who bet against the housing bubble and won.”

No, it would appear that IKB—creator of BACCHUS, self-proclaimed possessor of “high expertise in all fields of corporate finance,” and seeker of “additional investments in international loan portfolios”—simply wanted the other side of ABACUS, period.

From BACCHUS to ABACUS really wasn’t too long a journey for IKB, but it was deadly.

And while Goldman & Company may have showed IKB the way, they did not, it would seem, drag them kicking and screaming.
More like skipping and singing.
Jaded we may be, but we here at NotMakingThisUp will bet, as the saying goes, dollars to donuts that at the end of the day, the score in this case looks like this:

Goldman 1, SEC 0.

Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, July 12, 2013

Finally: Pulling Back the Curtain at Sears Holdings

 Almost since the inception of this virtual column, we’ve poked a lot of fun at Sears Holdingseven during the good times, when “SHLD” was a high-flying stock thanks to the notion that investors should forget the stores were a mess and the customer base was a dying demographic, because the real estate beneath those stores was of inestimable value—value that would somehow, someway, be realized by the mastermind of the whole thing, Eddie Lampert, who had famously created scads of shareholder value for others and himself with AutoZone.

 You can read why it was clear that Sears was no AutoZone, here, here and especially here.  (Just for fun, read some of the comments appended to each of those will refresh your memory as to the kind of dreams anxious shareholders kept clinging to, because they didn’t appreciate anyone raining on their parade one bit.)
 In any case, finally, somebody has gone behind the curtain at Sears Holdings and revealed what was behind that curtain all along.  
 That somebody who went behind the curtain is Mina Kimes of Bloomberg, and the resulting story is so well done, and so compelling, you ought to stop reading this and starting reading that, which you can do here.
 As they say, enough said.

Jeff Matthews
Author “Warren Buffett’s Successor: Who It Is And Why It Matters”
(eBooks on Investing, 2013)    $2.99 Kindle Version at

© 2013 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Thursday, July 04, 2013

Of Jon Corzine, Holman Jenkins, Jr., J.J. Gittes and King Lear

 Holman Jenkins, Jr. has written yet another column in the Wall Street Journal’s op-ed pages concerning the fate of Jon Corzine, the ex-Goldman banker who, as governor, was at the driver’s wheel when New Jersey hit the metaphorical wall, and, not long afterward, as CEO, was in the same position when MF Global filed Chapter 11.  In our business, you connect those kinds of dots.
 Anyway, Jenkins’ previous Corzine-related piece lambasted the Fed’s apparently insatiable desire to go after Corzine, declaring, “it is not yet a crime to lose money, even lots of it” and summing up his take on the Corzine affair thusly:
 It is perhaps time for the rest of us to accept that Mr. Corzine simply made a lousy CEO for a lousy, obsolescing, dial-up commodity brokerage. He was a one-trick pony who played his one trick, trying to trade MF back to short-term prosperity while he reshaped the firm.
 In today’s piece, Jenkins appears to back off that assessment, apparently, but it’s hard to say: he starts off with a sentence that is mystifying at first glance, almost a haiku, except that the more you think about it the less you understand what he’s getting at:
 If something happens, it is a truism that Jon Corzine didn't prevent it. Alas, that is as true of World War II and the invention of the wine press as it is of MF Global's misuse of customer money.
 The body of the piece, which is titled “Corzine’s ‘Chinatown’,” does not explain this haiku any more than it mentions the Chinatown thing again, so readers are left to wonder if Jenkins means a) the Jack Nicholson movie about “a private detective (J.J. Gittes)…caught up in a web of deceit, corruption and murder,” according to the IMDB, or b) the section of San Francisco between Nob Hill and North Beach.
 Either way, the final paragraph does not solve the riddle for us, because it concludes with a question that involves neither the movie nor the place:
 One big question may be answerable only when a complete picture of MF's last weeks and days is filled in. When the entire gestalt comes into focus, will it be possible to believe that Mr. Corzine didn’t know Ms. O'Brien was misusing customer money, even if he never authorized such misuse?
 Rather than try to interpret Mr. Jenkins’ latest salvo, let alone what gestalt has to do with it, we here at NotMakingThisUp provide, without comment, a sampler of quotes (courtesy of Bloomberg LLC) from various presentations Jon Corzine made in his short, unhappy life as CEO of MF Global, so readers may recall how truly bad his tenure was; how the decisions he made (and took responsibility for) regarding European sovereign bonds helped doom the thing; and how, in the hands of somebody else, MF Global may well have continued on its way as merely a “lousy, obsolescing, dial-up commodity brokerage,” in the words of Holman Jenkins, Jr., rather than as yet another cautionary tale on the uses and abuses of leverage in the thin-margin world of finance.
 It is a tale more reminiscent of King Lear than J.J. Gittes, in our view.

June 3, 2010
  “I came to MF Global because I thought it was a tremendous entrepreneurial opportunity to build a very, very strong business. We already have a good product line. We have a good global footprint. I think they are under utilized. And we are set very directly entering the steps that I think will allow us to use that platform much more successfully in the future than what has been the case in the past.
  “In fact, I have said it and I will say it again. Our performance in the last three years in the public market is unacceptable, and we are going to take those steps immediately and over the long-term to put ourselves into shareholder return profile that is sensible, and I think competitive with best-in-class in our area…
 “And regulatory reform plays into the strength of many of those that will be here today, but certainly to MF obviously centrally traded derivatives, which have large growth rates of opportunities in the future. And we have the skills and the core capacity and competency to operate in are very much going to be a centerpiece of the regulatory reform, not just in the United States, but across the globe.
  “And I also say there is another element, which ties to something that will say about our business plan. There will be a de-leveraging of so-called bulge bracket firms. I don't think there will be any less demand for risk management practices among investing clients across the globe. Somebody is going to fill that space. We intend to be one that moves solidly into providing those risk managing skills and access points as we go forward…
 “And I think not only do we need to strengthen capital by the steps that we are taking whether it is the follow-on offering, the exchange offering, but it also has to be followed by what I talked about just previously. We need to get into a position of sustained earnings and building capital internally…
 I want to stress risk management, because my predecessor did a good job of addressing historical reserve problems, but I think we have to implement the human element of risk management on top of the systems that have been put in place. This is something that I've worked on most of my life. And I think that we can bring both [sic] the operations, the system, the technology to managing risk, but we need to have the right people to take that risk and manage it day-to-day.
  “So, and I would then second lastly say that we have a strong management team, stronger than I think a lot of people appreciate…”
Jon S. Corzine, CEO and Chairman, MF Global, Sandler O’Neill Exchange & Brokerage Conference, June 3, 2010 [Courtesy of Bloomberg]

June 9, 2011
 “Thank you, everybody. Good to be back, Rich. It is actually 14 months and nine days since I started at MF Global, and loving every minute of it…
 And, quite simply, volatility is the friend of those of us who are in the risk intermediation business for clients…. Volumes are down because people are a little more risk-averse. But we think on balance, the things that are positive in the environment are good for us to build our business.
  “And so we're aggressively transforming what MF Global is. Rich spoke about it, written about it. We've spoken in each of our quarterly calls about it.
  “We’re focused on three sort of main objectives, themes of this. First of all, creating a diversified business with multiple sustainable sources of growth for profitability, and so that we can be profitable in all kinds of environments, not just one where you have a sharply upward sloping yield curve in short-term rates in America, or depending on volumes on exchanges.
  “We want capacity to be successful across different market environments. We've expanded the number of products, the placements, and the structure of how we deliver products and services to our clients, and we're integrating how we talk to clients, as opposed to one product at a time. That is expanding our client base, which is an important ingredient. That's a theme that we're working on day in and day out, lots of detail to that.
  “We're constructing a more flexible cost structure. I was the inheritor of a very fixed cost structure. Actually it wasn't fixed; it was variable. Your revenues went up, your cost structure automatically went up in proportion. We have worked, both by individual negotiation with people inside the firm and with heavy turnover of personnel, a great deal of flexibility in our compensation system. There will be even more, and it will show up in our numbers, so that we're not just dependent on growth in revenues.
  “These are the three broad strategic things I'll talk about, what we're trying to as a business strategically. But if you build those and we implement them well, we think there is - I feel very confident that this is a business with that differentiation of diversified business, expanded number of products, and a flexible cost structure, that we will be in a position to deliver double-digit returns across the business cycle for our shareholders.
  “I want to make a caveat that I've said at every quarterly call and I think I said here a year ago. I think it takes four to six quarters to get restructured, been here four quarters, a month, and nine days. We do not expect substantial adjustments, but there are things we can do. We still have some more work, for instance, in restructuring our capital structure. You have seen some of that work. It shows up in the GAAP gains. But we have an absolute commitment to deliver GAAP earnings in the second half of our fiscal year, which happens to be the December quarter and March quarter of this year.
  “On all of these fundamental elements that I've been talking about, I think we have made real progress, and I'm confident that we're on track to make sure that we deliver what we're talking about. And I think what we had said we were going to do, we have actually been very, very strongly supported by the facts of how we're doing, and I'll go over that in a second…
 “And finally, I'll just talk a little bit about the potential benefits of financial reform. I think most people sit and figure out - or think that they're all bad, but for someone like MF Global that has exchange-traded and clearing experience, is co-located very well at most of the major exchanges -better than very well at most of the exchanges across the globe, we think we can provide DMA services for our clients very effectively. We think there is an understanding of the rules of the major exchanges and how you work with the governance procedures, how you work with the CFTC versus other places.
 “The general experience we think is very positive for us….
 “And, as you heard, there will be an adjustment process that allows for firms to make the decisions, and I think there will be lots of opportunity no matter how that cuts. And so we worry a little bit less about it than some of the other folks. I'm more worried about making sure that the systemic risk doesn't sweep all institutions into a vortex of trouble at the same time, and in general, I'm a believer that the evolving regulatory structure will be good…”
 From Question & Answer Session:
 Q - Richard H. Repetto: Okay. Questions? Jon, as we get into - it seems like we've taken a little - another dip here in the economy, you know? Can't blame MF Global for that, but as we go into this what potentially - who knows what we're looking at here. Does that concern you? Because you're also in a transformation. We're four quarters into an eight-quarter turnaround plan. Do we have the safeguards built in that push it back? Are there any silver linings in some of this if we go into a softer period?
  A - Jon S. Corzine: Well, I'd much prefer an expansionary economy in the United States. But one of the nice things about being MF Global is we are global, and there are things going on outside the United States that we have access at. That is an essential diversification element that allows, I think, us to work through tougher environments. If you had a global slowdown of very substantial proportions, it would be troubling.…
  Q - Richard H. Repetto: We are a tad out of time, but I would cross the tape that you purchased stock today. So, number one, I guess you're a believer in MF Global…
  A - Jon S. Corzine: I instructed some people to buy stock today, yes.
Jon S. Corzine, CEO and Chairman, MF Global, Sandler O’Neill Exchange & Brokerage Conference, June 9, 2011 [Courtesy of Bloomberg]

September 12, 2011
 “Put it simply, preserving capital and managing uncertainty has to be the first order of the day in the world that we live in today, to do otherwise is a major mistake. Without question, this is one of the most demanding times, stress filled marketplaces, I've seen or experienced in the 30-some odd years that I've been in the business. As most of you know, I was working on State Street in Trenton in 2008, so I didn't experience the depth of the heat of the fire and some of the stresses directly, but main street, straight street in the global marketplace are still feeling the aftershocks of a lot of the elements of 2008, and it's psychology is totally intertwined with today's marketplace. And the hangover has been aggravated pretty seriously by the complications and the uncertainty that accompanies the evolution of the regulatory regime that we all work with….
 “I think you know that you have seven debt downgrades, debt ceilings, euro sovereigns, all that kind of thing, are every day fare in papers and on the newswires.
  “To say the least these are not normal times, and in fact, I don't even think they're new normal. In more certain periods, at other times, we were calling some of the instability and the volatility of friends who were trading-focus firm, but anyone that thinks hyper volatility is important to success, I think, is probably overstating and gilding it really.
  “We think assessing risk, husbanding liquidity and capital, the current environment is an imperative, and while we stay on the strategic direction, which I'll speak about in the future, we want to make sure that we're doing everything that we can in the short run to make sure that our capital's preserved and our relationships and ability to serve our clients is utmost.
  “In this context, we have been working assiduously to build our capacities in both capital and liquidity standard historically high levels for the firm, $2.6 billion in capital and $3.7 billion in liquidity, both buttress [sic], I think, many of you may know, by two longer-term debt issues, one a convertible one, a subordinated debt done in early August of $650 million.
  “But equally important, we are continually assessing risk and adjusted returns on all significant positions in conjunction with risk and stress management, in both our trading and liquidity positions. And in fact, I have to say; at this point in time this is the central focus of my day-to-day job…
 “We are seeing an enormous growth in the number of people who are signing up as clients, relationships that we're establishing, 50% quarter-over-quarter and year-to-date. This is a long run, real advantage for our firm, and we're doing business with about half of these folks today. The environment allows us also to deepen our relationships, if you're consistent in how you service clients, with existing folks, and we really think this is a business-building opportunity to be consistent in markets as we go forward….
 “This is a good teaching moment for those who joined into an organization as we reset our strategy, and we feel good about it.
  “So make no mistake, this is not a time to retreat from building our firm, but it is one where we must be always, always damped in disciplined. We look at this, circumstances of the current market environment, as good for the long term, challenging in the short term. We think it'll make us stronger, and more productive over a long period of time, very positive implications for our long-term results….
 And while we have built up our trading positions, we take a high turnover, relatively low VAR, attitude about how we approach markets. And if you look at our quarterly reports, you will see that our VAR has stayed fairly consistent throughout this period, even though we are broadening out our participation in all of these markets….
 “So that's our story. We think we're sort of in the fourth or fifth inning of this rebuild. We think a lot of the transitioning is behind us. That doesn't mean there isn't a lot of building and team building and effort that goes to make sure that what we've put in place is as productive as it should be.
  “There will be some adjustments; you don't make every choice of 800 people perfectly. Some things will have to be adjusted. Some things that we have made more commitment to, rather than less, we may judge needs to be adjusted from time to time, and we're prepared to make those decisions, be tough.
 “But as I said, at the beginning of the presentation, at the end of the day, right now, as we go through this very challenging time addressing liquidity and capital and preservation thereof, is our number one priority. We think it'll come through this, and we think we'll come out stronger and better for it over time….”
   Jon S. Corzine, CEO and Chairman, MF Global, September 12, 2011 Barclays Global Financial Services Conference. [Courtesy of Bloomberg]

October 25, 2011
 “Thank you, Jeremy and thank you all for joining on our second quarter call.
This morning Henri and I will first update you on our financial results as summarized in slide three in our packet, and then we'll post you on the implementation of our strategic plan, the status of our European sovereign exposure, and finally, I'll offer a perspective on the path forward.
 “Let me begin by acknowledging that our September's quarter's results and actions were defined by the well reported stress conditions experienced by global markets. Those conditions of hyper volatility brought on in part by sovereign risk, including for the U.S. bank capitalization concerns and non-standard central bank actions undoubtedly slowed the translation of our strategic progress into financial performance. Without question, quarter's market environment was as difficult as any of that I've experienced in my 30-plus years in finance. Accordingly, we on balance reduced our principal exposures in our proprietary and client facilitation books, which in turn resulted in limited principal transaction revenues, but it also avoided any major trading losses….

  “Now let me turn to a subject which has understandably clouded perceptions
with respect to our profits, that is our repurchase to maturity sovereign positions as noted on slide five. As we have pointed out over the past year in our disclosures and quarterly calls, we have taken advantage of the dislocations in the European sovereign debt market by buying short dated debt in European peripherals and financing those securities to their exact maturity date. Therefore, the term repoed to maturity.
  “The spread between interest earned and the financing cost of the underlying
repurchase agreement has often been attractive even as the structure of the transaction themselves essentially eliminates market and financing risk. At the inception of these positions, we made the judgment that the securities we financed to maturity would repay, given their high credit rating and short duration - that is all securities mature before 12/31/2012 - and later reinforced by the commitments of European and international institutions in supporting the solvency of the issuing countries.
 “Again, in the timeframe of our exposures, the full RTM portfolio we hold is seen on slide five. We specifically tiered the maturity of our holdings to reflect credit ratings at
the time of inception, and reassessed our risk based on the EFSF and IMF support programs, that significantly enhanced the probability and the ability of Portugal and Ireland to meet their obligations on schedule, again, within the context of their maturities, in Ireland and Portugal's case, June 2012….
 “Again, in the maturity timeframe of our holdings, 12/31/2012, we expect any of the actions proposed to give additional support to an already strong probability and ability of these nations to meet their obligations.
 “So, in short, our judgment is that our positions have relatively little underlying principle risk in the timeframe of our exposure. We continually reassess that judgment and are prepared to take offsetting actions if conditions or circumstances change. We are not adding to this portfolio and we will allow it to roll off as the staggered maturities are reached. I would also note that we carry little exposure to these countries' banking systems and no derivative exposures dependent on a country's credit worthiness.
 “In addition, consistent with prior quarters, there is no mark-to-market associated with the derivative value of these positions.
 “On a personal note, our positions and the judgment about risk mediation steps are my personal responsibility and a prime focus of my attention….
 “As we move forward, we'll also continuously look to manage our cost to the lowest possible level. We will redouble our efforts to bring compensation and non-compensation costs in line with our previously stated objectives, including by further reduction in head count and stringent expensive controls.
  “Let me close by noting that while we recognize and respect the challenges of the environment, we also believe that is one with opportunity - filled with opportunity. As I have noted previously on this stressful time, we have husbanded our capital and strengthened our liquidity, but we've also added outstanding producers and feel we have opportunity to do more of the same in the near-term. With a modicum of market normalcy, I believe we'll deliver for our shareholders in the quarters ahead. With that, I'll turn it over to Henri for the numbers….”
From Question & Answer Session:
  Q - Richard H. Repetto: “I guess, Jon, my question is on the principal trading, I understood, you're pulling back and preserving capital. I'm just trying to see, one, is there any - can you foresee any sustainable impact, like as you pull back client facilitation, could it be an issue with you not being there in the volatile period as well?”
  A - Jon S. Corzine: “Listen, Rich, I think that as I stated in my remarks, the third quarter, calendar quarter, our second quarter was probably the most volatile period I've ever experienced in the sort of 30 years of activity in markets….
 “I think we will be back on track in the way that we bad been building over the previous four quarter until we got to the hyper volatility that we saw particularly in August and September.”…
  “We've done a lot of work to put ourselves into a much more stable position with lower a cost of capital than what we had 18 months ago. We will continue to be opportunistic in that manner, but the primary means for us going forward is as I outlined: to capitalize on some of the valuable non-core assets that we think we can monetize and look to capturing the value in some of the things that we talked about in other calls, the insurance settlement and other things that will drop directly to the bottom line and building up our capital.
  “And the second observation is we were very cautious at the end of the quarter with regard to the draw. Felt to us like September 30 was more or like a yearend period in time, and so it seemed perfectly logical for us to make sure that we had all of the potential liquidity that we might need over that period of time and we repaid it very quickly. That's what the facility is for. We intend to use it in that context going forward. But, we are in a much, much stronger liquidity position as Henri outlined.”
   Jon S. Corzine, CEO and Chairman, MF Global, October 25, 2011earnings call. [Courtesy of Bloomberg]

 For the record, MF Global filed for Chapter 11 bankruptcy on October 31, 2011.

Jeff Matthews
Author “Warren Buffett’s Successor: Who It Is And Why It Matters”
(eBooks on Investing, 2013)    $2.99 Kindle Version at

© 2013 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.