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MF Global: Tone Deaf at the Top, and Then Disaster

Matt Kelly | April 8, 2013

I had expected to spend this weekend digesting the latest report on the demise of MF Global, a 174-page post-mortem published last week by the trustee in charge of investigating how MF Global managed to lose $1.2 billion of customer money before it went bankrupt in October 2011. For better or worse, however, compliance and risk professionals can read all they need to know about MF Global's collapse in three deplorable sentences on Page 74:

“Before [MF Global] went public, it acquired several disparate companies it never properly integrated. As one subordinate wrote in April 2010, ‘There is little business or dispositional integration between the many offices and branches. There is, in short, no house culture.' The unwieldy corporate structure lacked cohesion both in its culture and in its operating structure.”

The rest is window dressing, really. Risk and compliance officers in the financial sector might want to read the entire report for lessons learned and tales of palace intrigue, but those of you outside the banking world might have your eyes glaze over with all the details about liquidity metrics, European debt purchases, and derivatives trading gone awry. None of that is important to the core of a compliance officer's quest—which is, as always, how to create a strong ethical culture. And those three sentences above say it all about MF Global's failures.

The report, published by former FBI director Louis Freeh, who is the bankruptcy trustee charged with trying to recoup that missing $1.2 billion for former MF Global customers, lays most of the blame on former MF Global CEO John Corzine. (Yes, that John Corzine, former head of Goldman Sachs and former senator and governor of New Jersey.) The blame is well-placed.

John CorzineDo I expect Corzine to be a master of risk analysis and financial acumen, able to see the risks hidden among all that data and lightning-speed trading? Of course not. Nobody can expect that, including MF Global's aggrieved customers, because no single person could ever do it. But that was never Corzine's job in the first place; his job was to create a culture where everybody else tried to pay attention to risks and customer assets as best they could—and that's where his leadership failed.

For example, MF Global originally had planned to upgrade its IT systems in 2011 so the risk department could get a better view of the firm's global liquidity risk; Corzine canceled the project because he believed it too expensive. The firm also had plans to hire a global head of liquidity and capital risk—a position created after a MF Global employee executed an unauthorized trade in 2008 that cost the firm more than $200 million when the bet went sour—that Corzine and his lieutenants never bothered to fill. The lone heroic character in the report, former chief risk officer Michael Roseman, Corzine first demoted and then ousted. 

What Corzine did do was trade. He began his own trading almost immediately after arriving in March 2010, and traded so often (once right in the middle of a meeting of senior staff, the report says) that others wondered whether it distracted him from his duties running the firm. He hired a wave of traders he knew from his previous career, and had them report to him. He spearheaded the strategy to invest in distressed European sovereign debt, and when those first investments seemed to get shaky as the debt crisis worsened in 2011, he convinced MF Global's board to increase the debt exposure the firm had.

I do feel a tinge of sympathy for the man. Remember that MF Global originally started as a futures commission merchant, a type of financial firm that thrives by exploiting spreads in interest rates—but once the Fed pushed interest rates to zero, MF Global's old means of making money evaporated. Corzine ostensibly was hired to salvage a dying firm, and he had to try something. Converting MF Global into a broker-dealer like Goldman Sachs was as good an idea as any other.

Still, that doesn't excuse what Corzine ultimately allowed MF Global to become. He (and to be fair, the chief executives who preceded him, too) created a place where not caring about corporate culture was the culture. MF Global had a whole collection of corporate cultures, really, scattered among the various business units that the firm acquired or established over the year. Everyone was obsessed with making transactions and lining the company coffers.

I've written before about how MF Global demonstrates all the worst ways that senior management can let tone at the top go wrong. And nobody working in corporate compliance should kid themselves: confronting senior management, telling them that they are the problem, is one of the hardest things a compliance officer might ever have to do. It risks your job (see Roseman, above) and possibly your career—and, sadly, too often it results in nothing more than that, as MF Global proves.

But if you ever wanted an example to show your board or CEO how they can be their own worst enemy, how tone at the top isn't just a trite phrase, and how a bad tone really can ruin a business, you couldn't find a better example than John Corzine.