Did Investors Think MF Global Was Too Connected to Fail?

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One of the wonders of MF Global’s sudden failure is how recently investors were willing to buy billions of dollars of MF Global bonds — and how much importance they placed on Jon Corzine’s leadership.

In August of this year, MF Global issued $325 million of five-year bonds that included a covenant saying the interest rate would increase by 1 percent if Corzine left to take a post in the federal government.

At the time, it was widely reported as evidence that Corzine was very important to MF Global. But few people asked exactly what made Corzine so important.

He hadn’t worked in finance for around a decade when he took over. So unlike, say, Jamie Dimon of JPMorgan Chase, he did not have a long track record of recent outperformance as a chief executive. His time at Goldman Sachs was extremely profitable for him but marked by mixed results and internal turmoil.

So why did bond investors want so badly to make sure Corzine stayed put?

One of my Wall Street sources, a senior executive at one of the biggest firms, put forth two hypotheses. Both are versions of a theory he calls “Too Connected To Fail.” The general idea is that the former U.S. senator and governor from New Jersey, and big donor and fund raiser for the Democratic party was simply too connected to the government to stumble.

In the first version, investors might have been convinced that MF Global would be able to call on government support if it got into trouble. The bonds would pay off because the government would protect a firm led by such a highly connected guy. Believe it or not, this is the more innocent story.

In the second version, investors might have been convinced that Corzine’s connections to government would give him an “inside track” or an “edge” that would allow the firm to profit even in difficult times.

I told my source that this was all too cynical. Many investors probably just believed the hype that Corzine was a star.

“After all this time, Carney, you still believe innocent explanations for things on Wall Street? If you had any money, you’d be the perfect mark,” he replied.

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