Holding the Key Doesn’t Lock in Success- Your Job or Your Principal


By: Jordan F.

Investors lent MF Global Holdings Ltd. $650 million over three months ago in a wager Jon Corzine, recently appointed CEO, would make the futures brokerage house into Goldman Sachs Jr. MF Global filed for bankruptcy before making its first interest payment on the debt.

The futures broker sold $325 million worth of five-year, 6.75 percent unsecured notes that included a highly unusual key-man provision. The notes would have paid an extra percentage point if Corzine, who served as both governor and Senator of New Jersey after leaving Goldman Sachs, was named to a federal post and confirmed. Because of Corzine’s rock star status, investors demanded extra contractual protection in case he left the firm. Ironically, investor’s should have been more worried about Corzine’s appetite for risk and greed while managing the firm rather than his departure. Investor confidence is a funny thing.

Corzine is now at the center of a professional disaster (perhaps criminal too, for fund mixing) that started when he bet unreservedly on European debt, and lost. As leader of MF Global, he pressed for a $6.3 billion bet on debt issued by major, but troubled, European economies, ultimately crashing the firm. MF Global’s balance sheet reached 40 times the firm’s equity or 2.5 percent equity to assets. It doesn’t take an experienced financier to say this strategy was outright stupid. MF Global fired all of its brokerage employees on Friday.

So, is one’s money actually safe in commodity futures brokerage houses?

Commodity futures funds are not backed by government insurance. MF Global informed regulators on October 31 that it was $600 million short in customer-segregated funds. Segregation is supposed to keep the firm’s capital separate from the clients – as clients’ money is not a rainy day fund whenever a company is in need of cash. The legality of firms using customer excess cash to further invest has always been a basic source of firm revenue. Traditionally, this practice was limited to treasury and state bonds. The prohibition against purchasing foreign debt, however, was eased by the Commodity Futures Trading Commission (CFTC) in 2000 with Rule 1.29. Unsurprisingly, many major banks and commodity houses lobbied for this access. On November 7, Chairman Gary Gensler of the CFTC, promised to try and tighten regulations again.

The anger over MF Global’s missing money is causing tremors in the commodity market among investors and expert traders. Without stability, people will not invest in unpredictable and highly volatile futures markets. Meaningful regulation and transparency is the key, not necessarily the man running the show. Investors are pulling their excess money out of commodity firms and many are buying insurance. Without trust, there is no marketplace. Investor confidence is a funny thing.


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Fordham Journal of Corporate & Financial Law