Capital Irony: Jon Corzine Goes to Washington

by Kurt Schulzke

Ready for more on MF Global?  Jon Corzine’s written testimony on the MF Global collapse suggests that the House Agriculture Committee’s hearing this morning (start time 9:30 a.m.) may be an interesting one.  MF Global is undoubtedly a complicated case which — judging from Corzine’s submission — appears to have been grossly oversimplified by the press. Financial scandals usually are for two reasons.  First, the stories are often technically complicated and beyond the intellectual reach of most journalists.  Second, the facts necessary to understand what really occurred are locked up the minds, cell phones, and hard drives of the participants.

Unfortunately for Corzine, he’s unlikely to receive sympathetic treatment by the Committee in part because, as a U.S. Senator representing New York, Corzine played a major role in writing and passing the much-vaunted Sarbanes-Oxley Act of 2002 a.k.a. “SOX.”  SOX was supposed to save investors from MF Global-like losses.  This from The Daily Beast:

He [Corzine] wrote much of the Sarbanes-Oxley Act of 2002, and was accorded the honor of sitting in the presiding chair for the vote on this bill establishing new protections for investors in the wake of Enron.

Corzine’s written remarks barely mention his service in the Senate and say nothing of his SOX co-authorship. Undoubtedly, it will figure in questions from the Committee which Corzine’s submission says he will answer.  We’ll see.

One of the most interesting aspects of the story is the impact (or not) of investments in European sovereign debt on MF Global.  The risks associated with these investments have been touted by journalists as a significant cause of the company’s downfall.  Yet, as Corzine observes in his remarks:

As of today, none of the foreign debt securities that MF Global used in the RTM trades has defaulted or been restructured. All of those securities that reached maturity while they were part of the RTM position paid in full.

Indeed.  In financial markets, appearance is everything.  Somehow, MF Global got on the wrong side of market perception, not unlike Enron roughly one decade ago.  MF Global and Enron share important characteristics.  Both were trading concerns heavily invested in derivatives markets.  Both tumbled in the midst of market turmoil primarily as a result of a run on the bank.  Both featured headstrong executives with unusually high risk tolerance and usually close relationships with the current President of the United States.  Perhaps the hearing will provide a window on additional parallels.

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