There's a lot to read in the bankruptcy trustee's report on MF Global's collapse, which weighs in at 124 pages, plus another 50 or so in the appendixes.
Louis Freeh, the former head of the Federal Bureau of Investigation who is now the bankruptcy trustee for MF Global, certainly knows how to tell a good story. For a government report, it is pretty compelling stuff ... and very harsh on Jon Corzine. The report concludes that Corzine and his team engaged in "negligent conduct" that brought down the firm.
One detail that caught my eye early in the report is the way Corzine described how he was going to push the firm to do much more proprietary trading. Before Corzine joined the firm, MF Global was mostly an agency shop, executing trades for clients, but not doing very much in the way of prop trading. Corzine, who was a Goldman-trained trader, thought that this was basically leaving money on the table. He wanted MF Global to do prop trading in every financial asset it touched.
One thing you'll notice in his explanation of this transformation on a May 20, 2010, earnings call is that he never uses the words "proprietary trading." In fact, he only uses the word "trading" once, and then as an adjective modifying the word "profits."
Lastly, a natural extension of our existing approach to client services, which has traditionally been organized around an agency brokerage model, over the near term we will extend our client facilitation efforts to include principal risk taking across most product lines. Our Fixed Income and US Treasury businesses already incorporate this approach. It's clear to me that we can expand revenues meaningfully by this extension. We'll provide our clients with better market execution which in time will facilitate growth of client balances, derivative commissions and trading profits. As we grow these activities we will be mindful of the necessity to enhance and reconfirm our operational and control functions and to secure the talent necessary to manage [attendant] market risks. I want to be clear. I don't anticipate increasing our current risk appetite in the near term but we will encourage facilitation desks to operate more aggressively within our existing limits. Again, this intensity requires another element of cultural shift because we have often thought of simply agency business as the way we approach our clients.
Got that? Prop trading is just an extension of "our client facilitation efforts." It's a way to provide "our clients with better market execution."
Now where on earth could Corzine have learned to speak like that? Well, Goldman, of course. As I've pointed out a number of times, Goldman has banished the word trading from its vocabulary—although it certainly hasn't banished trading from its actual business. Now, however, it's all client facilitation.
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