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 Amazon.com

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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.

5 comments:

Anonymous said...

For what it's worth, "Chinatown" was about Los Angeles, not San Francisco.

Jeff Matthews said...

Yes, but the headline citing "Chinatown" doesn't relate to anything in the story...and it could have meant any Chinatown in any city in America, which was my point, clumsily made.

JM

Jeff Matthews said...

Yes, but the headline citing "Chinatown" doesn't relate to anything in the story...and it could have meant any Chinatown in any city in America, which was my point, clumsily made.

JM

Anonymous said...

October 25, 2011 to October 31, 2011. 6 daze. Wow, that can be a loooong time in leveraged finance. Especially if you're losing. Corzine, the Joe Biden of finance.

CrocodileChuck said...

Joe Biden of finance?

Naaaah

The Joe Btfsplk of finance!

http://en.wikipedia.org/wiki/Joe_Btfsplk