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In Corzine Comeback, Big Risks and Steep Falls

null|The New York Times
Wednesday, 2 Nov 2011 | 5:18 AM ET

When Jon S. Corzine joined MF Global last year it seemed like a strange choice — the firm had none of the glamour, let alone the profits or footprint of Goldman Sachs, the bank he ran during the 1990s.

An Indian stock broker looks worried as he watches the screen in Mumbai, India.
Sajjad Hussain | Getty Images
An Indian stock broker looks worried as he watches the screen in Mumbai, India.

On Wall Street, it was as if a manager of the New York Yankees was making a comeback in the minor leagues.

Mr. Corzine, 64, who not only presided over Goldman but later served in the United States Senate and then as governor of New Jersey, seemed surprised himself.

“Don’t ask me any hard questions,” he joked to a visitor who met with him just days after Mr. Corzine took over in March 2010. “I hadn’t heard of this company a week ago.”

Now, nearly everyone has.

MF Global, a commodities and derivatives brokerage house, collapsed on Monday in the biggest bankruptcy on Wall Street since the failure of Lehman Brothers. The firm imploded after a big investment in European bonds — a bet he directed and defended as not particularly risky as recently as last week — led investors, clients and ratings agencies to lose confidence in the firm.

The fall of MF Global, and the discovery that hundreds of millions of dollars were missing from the firm’s customer accounts, have now cast a dark cloud over Mr. Corzine’s legacy and reputation. Federal authorities have stepped up an inquiry into why the firm failed to keep its customers’ money separate from the company’s — a regulatory violation.

MF Global was supposed to be Mr. Corzine’s comeback vehicle after New Jersey voters turned him out in 2009. Instead, the collapse of the firm appears to be a humiliating coda to the career of a one-time titan of Wall Street.

His insistence on taking more risks, including buying the debt of European countries like Italy and Spain, along with a contract that would have provided him with an additional $12.1 million if he left the firm, paint a picture of excess.

And Mr. Corzine, with a fortune estimated at half a billion dollars at its peak, future ambitions were not confined to Wall Street. Even as he was seeking to revive his financial career, Mr. Corzine, a Democrat, had long styled himself as a financial executive moving seamlessly between Washington and Wall Street, in the mold of former Treasury secretaries like Robert E. Rubin or C. Douglas Dillon.

With MF Global’s bankruptcy, that goal seems forever out of reach. It has also taken a big toll on a man known for the kind of optimism that comes naturally to experienced traders and political leaders.

Six weeks ago, Mr. Corzine journeyed a few blocks from the firm’s Midtown Manhattan office to the Hilton Hotel for a routine presentation to money managers. Mr. Corzine’s manner was anything but routine, however.

“He looked like he had just seen a ghost,” said one participant. “He looked visibly disturbed.”

Mr. Corzine could not be reached for comment.

Friends say this is one more humiliation in a career marked by painful public ousters, whether it was from the executive suite at Goldman or from Drumthwacket, the New Jersey governor’s mansion.

“That’s part of the tragedy here,” said Robert G. Torricelli, the former Democratic senator from New Jersey whose political career was also cut short. “Jon is very proud and this must be exceedingly difficult. You can lose an election and not take it as personally because it’s a reflection on issues and trends. But this is obviously different: all eyes are on him. It’s one thing to make financial misjudgments and to pay the price yourself. But it’s another when institutions are damaged.”

Mr. Corzine’s arrival seemed like a coup for MF Global when it hired him as chief executive. MF Global has been a leading player in brokering trades in commodities and derivatives like futures contracts.

But MF Global had the potential to be more than a brokerage firm, Mr. Corzine thought. When he was at Goldman, that firm had bought a commodities trader in 1981, J. Aron & Company, which was encouraged to take more risks and became a huge success.

Mr. Corzine replaced old-line traders and brokers with more aggressive hires from Goldman Sachs, UBS and Soros Fund Management.

In May 2010, in his first investor call as chief executive of MF Global, Mr. Corzine discussed what could go wrong at the brokerage firm as it ratcheted up risk. “It will be mistaken judgments,” he said, “that go beyond limits, which I don’t intend to allow happen.”

Yet despite his confidence in risk management, Mr. Corzine’s message to traders was clear: Take more risks. “He was instrumental in pushing our firm forward with risk taking in every book, whether it was U.S. government bonds, currencies, or in repos,” said one trader. “Everything was full throttle go.”

European sovereign debt looked especially tempting. Instead of the near-zero yields on United States Treasury bonds, short to medium Italian and Spanish bonds were earning 2 to 3 percent. Simply holding those to maturity and collecting the yields would buttress profits as other businesses shrank.

And while most Wall Street firms sharply ratcheted down their use of leverage, MF Global continued to pile on large amounts of debt. On the eve of its collapse, it had about $34 of debt for each $1 of capital it held, according to data from Keefe, Bruyette & Woods. By contrast, Goldman Sachs’ leverage ratio is $13.50 for every $1.

The combination of potential losses on the European debt and the MF Global’s thin capital cushion is what spooked investors, setting off the crisis. MF Global’s demise was the eighth largest bankruptcy in the country’s history, but with $41 billion in assets it was considerably smaller than Lehman which had assets of $691 billion.

For those who have followed Mr. Corzine’s career, however, the problems at MF Global have elicited a strong sense of déjà vu.

In 1994, Mr. Corzine ascended to the top of Goldman Sachs despite hundreds of millions of dollars in trading losses at the bank’s bond unit, which he had overseen. He assumed leadership of Goldman, say his former colleagues, in part because he was one of the few partners who understood how to extricate the bank from its soured trades.

Mr. Corzine, a lifelong trader with a large appetite for risk, recently reflected on his past experiences dealing with crises in William D. Cohan’s book “Money and Power, How Goldman Sachs Came to Rule the World,” a recent history of the bank.

“Until you’ve actually traded and had to deal with one of those come-to-Jesus moments with a bad position,” he said, “and you have to make the decisions about whether to eliminate it, hold it, reduce it — those kind of existential moments involving the people you work with and your firm, those are the kinds of things that really get your attention.”

Mr. Corzine’s worldview had been forged at Goldman, where he spent 24 years. After growing up in a farm town in Illinois, where he was captain of his high school basketball team, Mr. Corzine, armed with an M.B.A. from the University of Chicago, joined Goldman Sachs in 1975 as a bond trader. Bond trading was then low on the totem pole of Goldman. But he gained notice making big bets — and generating big profits — trading government bonds. At the age of 33, he made partner.

As Goldman’s senior partner from 1994 to 1999, he led the bank through the Asian financial crisis and the collapse of the Long-Term Capital Management hedge fund. His crowning achievement was Goldman’s initial public offering in 1999, though the controversial move led to a power struggle that ultimately cost him his job.

In 1998, he also drew the ire of his Goldman partners for discussing a merger with Mellon Bank without conferring with the firm’s management committee, a misstep that also contributed to his being replaced by Henry M. Paulson Jr., who later became secretary of the Treasury under President George W. Bush.

Upon leaving Goldman, Mr. Corzine turned his attention to public service, spending a sizable chunk of his fortune — more than $100 million — to pursue political office.

After being elected to the senate as a Democrat from New Jersey in 2000, Mr. Corzine distinguished himself in Washington for his financial acumen. But he viewed himself as more of an executive than a legislator, and decided to run for governor in 2005 before completing his term.

Mr. Corzine’s one term as governor was marked by difficulties. He complicated his run for governor by divorcing his wife of more than 34 years shortly before announcing his candidacy and was dogged throughout his time in office by complaints that his romantic relationship with a leader of state employees’ union left him in an untenable conflict of interest.

His first year in office, he presided over a weeklong government shutdown when the legislature originally balked at his proposal to increase the sales tax. The next year, he was badly injured in a car accident when his speeding state vehicle crashed. Mr. Corzine, a passenger who was not wearing a seat belt, endured months of difficult rehabilitation that aides and critics said drastically affected the rest of his term.

Working at MF Global, Mr. Corzine’s life has revolved around Manhattan; he is rarely seen in Hoboken, where he keeps an apartment. Last year he married Sharon Elghanayan, the former wife of K. Thomas Elghanayan, a New York real estate developer.

National politics remained a focus of Mr. Corzine after he joined MF Global. He pitched in to help raise money for President Obama — who had campaigned for Mr. Corzine during his re-election bid for governor.

Mr. Obama’s first major re-election fund-raiser in New York was held at the Manhattan home of Mr. Corzine’s wife, with tickets going for $35,800 each. And Mr. Corzine was one of the president’s most elite bundlers, supporters who tap friends and business associates to bring in checks: He has helped Mr. Obama raise more than $500,000 this year.

When White House officials sought to broker a meeting between disgruntled Wall Street executives and Mr. Obama’s new chief of staff this year, they turned to Mr. Corzine, who organized a sit-down at the Four Seasons. Mr. Corzine was on the list. There had even been talk of his being named the next Treasury secretary.

Now, instead of a big job in Washington, Mr. Corzine faces difficult questions about what happened on his watch and whether he should have returned to Wall Street at all.

“He wanted to be back in the game,” said one old friend. “He thought he could make it work.”

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