The 2010 publication, Leadership on Trial: A Manifesto for Leadership Developmentexamined the root causes of the 2008 financial services industry catastrophe, and advised:
We do not accept that the excesses, misjudgments and inactions of the last few years are inevitable and must somehow be repeated. But we recognize they could, and likely will be, unless concerted action is taken to learn and apply the lessons from this crisis.(p. 22).
The authors' predictions are eerily prescient. Over the past few months a series of articles written by a team of investigative reporters at the New York Times (http://dealbook.nytimes.com) has been chronicling the death spiral of the American brokerage firm MF Global. This, the largest American financial institution failure since 2008, raises the question: "What have we really learned?"
Let's briefly review the New York Times' account.
On October 31st, 2011, MF Global filed for bankruptcy. For many years prior to this, MF Global had succeeded in the business of aligning buyers and sellers of futures contracts for commodities by taking a small commission along the way. But over the last decade this core business had become endangered as near zero-percent interest rates and thin commissions led to five consecutive quarterly losses. In response, MF Global's board of directors hired a new CEO, Jon Corzine, to turn things around.
Corzine started his career at Goldman Sachs in 1975 as a bond trader, where he quickly gained a reputation as someone who took big risks and generated big profits. Corzine lead Goldman from 1994 to 1999, when he left to serve as a US Senator and subsequently as governor of New Jersey. In 2010 he suffered defeat in his bid for re-election as governor. Corzine's subsequent appointment as CEO of MF Global was controversial.
Examinations of company documents and interviews with regulators, former employees and others close to MF Global portray Corzine as a chief executive convinced that he could quickly turn the money-losing firm into a miniature Goldman Sachs. Soon after taking the helm of MF Global, Corzine oversaw a wave of job cuts and overhauled compensation to mirror the system of salary plus discretionary bonuses common in the rest of Wall Street. In replacing MF Global's old-line commodities traders and brokers, he filled its ranks with aggressive employees from Goldman Sachs, UBS, and Soros Fund Management and created a new separate trading unit which used the firm's own capital.
During his 19 month tenure Corzine pushed through a total of $6.3 billion in bets on European debt, obtaining loans to buy at a discount, the bonds of Italy, Ireland, and other troubled European nations, while simultaneously pledging these bonds as collateral to support the loans. Overriding the concerns and objections of other executives and board members, he also personally lobbied and prevailed over auditors and regulators about these company wagers, which in total were big enough to wipe out the firm five times over if they went bad. According to former employees, the board signed off on the escalating European bets multiple times.
Few employees at MF Global appeared willing to check Corzine's trading activities. One reader of the New York Times articles, identifying himself/herself as a former employee, commented that for the 6 to 12 months prior to the bankruptcy, tremendous pressure was coming down on all employees to deliver unrealistic profits and results ahead of plans, and without regard to feasibility or market conditions. Corzine wanted immediate results and he did not care how it was done. People who questioned his European debt investments were fired. The reader described a climate of fear and bullying straight from the top.
Corzine stated in June 2011, "I consider one of my most important jobs to be chief risk officer of our firm." However, he scuttled an effort to build a new risk system, a much-needed overhaul, according to former employees. As well, he had replaced its chief risk officer after he repeatedly clashed with Corzine over the firm's risky purchase of European sovereign debt - the very investments which would ultimately trigger the firm's undoing. The replacement risk officer was not allowed to weigh in on the broader implications these trades might have on the firm.
Presumably overseeing MF Global was a patchwork of 20 regulators and federal agencies with various responsibilities, as well as ratings agencies who knew about these risky investments for months but did not act until it was too late. The Financial Industry Regulatory Authority ("FINRA") eventually realized what MF Global was doing, grew concerned and told MF Global to set aside enough money to cover their losses in case these company trades went bad. The ultimate authority to force the firm to do so was in the hands of the Securities and Exchange Commission, which took several additional weeks to make a decision. In the meantime, MF Global and FINRA fought over the size of the required capital cushion. MF Global was forced to set aside $200 million in late August.
Ironically, although these European debt investments eventually became profitable, in the meantime the firm's exposure scared an anxious market into a run on MF Global that regulators suspect led the firm to fight for its life using customer money. As clients withdrew their assets, trading partners closed out trades, and others demanded more collateral, the firm spiraled out of control. Within this maelstrom MF Global failed to record all of these transactions in its books. Regulators, who are still trying to reconstruct the ledger transaction by transaction, believe that MF Global comingled customer money with company cash - in effect, transferring customer money to cover its own private trading losses - a major violation of Wall Street rules . Corzine has testified that he received assurances from staff that the firm complied with federal laws about keeping customer money separate from firm funds. His denials contrast with the sworn testimony of Terrence Duffy, chairman of the CME Group, the exchange where MF Global did business, that the firm had used customer funds to lend from one arm of the firm to another and that Corzine had been well-aware of it.
The consequences of the firm's collapse have been severe: over one thousand MF Global employees have lost their jobs; over $1.2 billion in customer money remains missing; and, thousands of clients are seeking the return of their funds. The search for the missing cash has been hampered by the bankrupt brokerage firm's sloppy record-keeping. Corzine and his former top deputies at the brokerage firm have testified that they are "stunned" to learn that client money went missing, and they do not know where it went.
At present, no one, including Corzine has been accused of, or charged with, any wrongdoing. However, the FBI has started an investigation. It is possible that there has been no wrong-doing at all. The facts of this case are still coming to light.
Nevertheless, how are we to make sense of this fresh financial services industry disaster - especially since it mirrors the many failures and follows so closely on the heels of the 2008 melt-down? Which brings us back to my opening question: "What have we really learned?"
I welcome your thoughts.