Here’s a brain-teaser for you.
Which corporate honcho bragged recently about his company’s strong resources, positive outlook and outstanding “execution” skills? Who said he was “particularly pleased” at recent developments, and predicted “competitive returns to shareholders in the quarters ahead”?
Tim Cook at Apple? Alan Mulally at Ford? Mike Duke at Wal-Mart?
None of the above. The answer is Jon Corzine, who runs MF Global Holdings Ltd. MF -16.08% He made those remarks a week ago. Yesterday the company filed for bankruptcy.
One week. No kidding.
You may be watching the news about MF Global and shrugging. You may think, “minor blowup on Wall Street, few injured.”
But you’d be wrong. What just happened at MF Global illustrates everything wrong with the U.S. economy. That’s right: It’s all here!
1. Spin, spin, spin
Jon Corzine of MF Global Holdings, speaking at a conference in June.
On Oct. 25, just days before the company collapsed, Corzine told investors that MF Global’s exposure to European government bonds was fine. These were “opportunities” to make good money, he said, and the position was “fully financed.” He added: “We remain confident that we have the resources and expertise to continue to successfully manage these exposures to what we believe will be a positive conclusion in December 2012.”
And this was in print — no mere throwaway quote on a phone call. Corzine added that over the past three months, a few things really stood out. “We were particularly pleased with the repositioning of our mortgage, credit and foreign exchange businesses; the performance of our commodities group; and the common alignment of our brand to strategy. These efforts reflect positively on our ability to execute and deliver competitive returns to shareholders in the quarters ahead.” Ah, good times!
2. Don’t think, just tick boxes
MF Global blew up because it took big risks and they didn’t pay off. But that’s okay. The company had a risk management “process,“ so everything was just peachy.
“The Company’s risk-management framework is an integral part of our control structure,” it boasted in is most recent quarterly filing. “Our risk management approach emphasizes compliance with our risk management policies and practices and each employee’s responsibility to function as a risk manager.”
MF Global recently undertook a new review of its risk management process. Given that the company blew up a few months later, you might assume that this review found flaws. Not at all. “The results of the review, together with certain aspects of our risk management framework, support our conclusion that the Company’s compensation programs do not encourage unnecessary risk-taking. Moreover, we believe that there are in effect adequate safeguards that would prevent, discourage or detect excessive risk-taking.” So that’s OK, then! They had a “framework.” And “compliance.”
Oh, and by the way: Marvel at how much jargon the company packed into those few sentences.
3. Heads they win, tails they flip again
Where does MF Global go from here?
You’ll probably hear a lot in the days and weeks ahead about how much Jon Corzine and the other honchos have just “lost” on their MF Global incentive payments, restricted stock, and options.
The options racket is grossly misunderstood by the wider public, which is, I suppose, just how the honchocracy like it.
Stock options are free chips in the casino. These guys walk into the casino and they are given armfuls of free chips. They are encouraged to gamble.
If they win, they get to keep it all. If they lose? No biggie. They can just mooch on down the Strip to the next casino, where they will be given another big pile of free chips.
This doesn’t “align” their interests with stockholders. It doesn’t encourage them to build a business. It encourages them to take big gambles.
Corzine had also invested about $3 million of his own money in the stock as well. On the other hand, he was paid $2.75 million in cash just last year, on top of the options and incentives. That included a $1.25 million bonus.
No kidding. The guy just got a bonus.
The directors were supposed to be minding the store on behalf of the stockholders.
They were given $100,000 in “stock awards” each last year. But they were also given cash fees of between $137,500 and $207,000. All they had to do was attend a handful of meetings a year — and give the company the benefit of all their wisdom and experience.
The benefit is there for all to see.
4. You lose
Up until a week ago, I’ll bet you hadn’t even heard of MF Global. And you probably still don’t understand what it is they did. But guess what? This just cost you money. The biggest investors included various Fidelity mutual funds, TIAA-CREF, and low-cost index fund manager Dimensional Fund Advisors. But pretty much any mutual fund that invests in the U.S. stock market has money in this stock.
5. The honchos don’t really know what’s going on
These days more and more power lies in the hands of a smaller and smaller elite. Many people react by taking refuge in conspiracy theories. They assume the elite knows what’s really going on.
The more frightening view is the exact opposite: That the people steering the ship haven’t got a clue.
Look at Jon Corzine, the chairman and CEO of MF Global. He has remarkable credentials. He’s the former head of Goldman Sachs, a former Senator, a former governor. And MF Global was his baby. He took over there last year, on a mission to build it into a global financial firm.
Yet it turns out the company’s blow-up took him by completely surprise. How much? Consider this: Corzine actually bought about $450,000 worth of MF Global stock with his own money over the summer. Some of it as recently as August.
6. We are all Marxists now
But no, I’m not talking about Karl Marx. I’m talking about Groucho: He’s the guy who really predicted how the modern economy would evolve.
MF Global says that it employs about 3,000 people. And these were good — meaning high-paying— jobs. According to the latest filings, the average MF Global employee earned about $46,000 last quarter — or $184,000 a year.
That’s the average. Account for the support staff and so on, and the traders and risk-takers were pocketing serious coin.
It’s pretty much the same across Wall Street. But what are they actually doing? They’re just playing poker against each other. They’re engaged in an “industry” that produces neither iPhones nor brain scans nor pizzas. There is no output. There is no wider social purpose. They just trade paper against one another. Like most of Wall Street, it’s just a zero sum game.
Hard to believe, but there are actual people — lots of people — who think that what the U.S. economy needs is more MF Globals to trade against one another. Then our employment problem would be solved!
Former Fed Chairman Alan Greenspan once told a crowd in Boston that America should pretty much leave manufacturing to China and concentrate on our “core competence” of running financial firms. Like MF Global, no doubt. Or Lehman Brothers.
Me? It just reminds me of the opening sequence of the Marx Brothers classic, “A Night At The Opera.” It was filmed in 1934, at another time when jobs were in desperately short supply.
Margaret Dumont, playing a rich, social-climbing widow, is rebuking Grouch Marx, who plays an adventurer called Otis B. Driftwood. “Mr. Driftwood,” she says severely, “Three months ago you promised to put me in ‘society.’ In all that time, you have done nothing but draw a very handsome salary!”
Grouch looks at her in astonishment. “You call that nothing?”
Let it be said of MF Global: They created nothing and added nothing. But up until today 3,000 employees drew a very handsome salary. Paging Otis B. Driftwood! Your time has arrived.