Corzine Didn't Kill MF Global

NEW YORK ( TheStreet) -- The argument that Jon Corzine's hefty risk appetite put MF Global Holdings ( MF) on the path to bankruptcy sounds plausible, but it isn't entirely true.

Looking at the firm's financial statements, under Corzine -- the former Goldman Sachs ( GS) co-head and ex-New Jersey governor -- MF reduced its exposure to foreign government debt while it lowered its leverage, assets and debt. At the same time, MF Global built up its long-term capital and even took leverage to record lows at one point in Corzine's tenure, signaling that he actually was stabilizing the firm.

Jon Corzine

MF Global did have a large proprietary European debt holding, but a key factor to Corzine's strategy likely was extremely low interest rates that ate at a traditional revenue source. MF Global's business model fell victim to ZIRP -- more widely known as the Federal Reserve's "zero interest rate policy" -- which cut the federal funds rate to nearly zero in an effort by the U.S. central bank to spur risk-taking.

So Corzine's failure isn't that he destroyed MF Global -- it's that his strategy simply couldn't save the firm.

MF Global filed for Chapter 11 bankruptcy, listing $39.7 billion in liabilities and $41 billion in assets -- making it the eighth-largest bankruptcy in U.S. history, according to Bankruptcydata.com. Finacial markets tanked, but so far, the bankruptcy hasn't precipitated a Lehman moment.

In the company's filing, MF also listed as many as 50,000 burned creditors with JPMorgan Chase ( JPM) and Deutsche Bank ( DB) being the largest. The narrative about the company's demise so far today is as follows: MF Global hired Corzine in March 2010. He then tried to turn the commodity broker firm to an investment bank and took up a giant position in European sovereign debt out of ambition and the recklessness of a bond trader with a fancy for speeding, which brought the firm to its knees and culminated in Monday's bankruptcy filing.

MF Global's problems worsened last week when the New York-based commodities brokerage disclosed it had lost more than $190 million in its most recent quarter and that its exposure to European sovereign debt was $6.3 billion, a larger risk position to the creditworthiness of European governments than better capitalized firms like Morgan Stanley ( MS).

On the news of the loss, the company's credit ratings were cut to junk by Moody's ( MCO) and Fitch and its future was jeopardized. The company's stock fell nearly 70% in a week's time, and sale rumors of last-ditch saviors like Interactive Brokers ( IBKR), Goldman Sachs, State Street ( STT) and Australia-based Macquarie circulated.

Those rumors weren't realized, and after trading suspensions at the Federal Reserve, and in clearinghouses and exchanges like ICE Trust ( ICE) and the CME ( CME), the company had no alternative but to file for bankruptcy.

For Corzine, who lost a legendary runoff against Hank Paulson for the control of Goldman Sachs a decade or so ago and sustained an equally bruising defeat by Chris Christie in the 2009 New Jersey gubernatorial election, the bankruptcy may be his worst professional moment -- and one that's catapulted him atop the list of anti-heroes since the financial crisis began. It just isn't entirely deserved.

When Jon Corzine took the reins of MF Global in March 2010, the firm hadn't had a profitable year since 2007, it was about to report its largest annual loss as a public company and its shares were down 70% since its IPO three years prior. MF's financial leverage ratio at the time was 45.8, according to Bloomberg data, it had assets of over $50 billion and an exposure to foreign government debt of over $9 billion. That was all before Standard & Poor's downgraded Greece's sovereign debt ratings in April 2010, and the country and eurozone began spiraling into a sovereign debt crisis that has gotten progressively worse.

In Corzine's first year at the helm, he actually dialed back the leverage, risk and debt at MF Global.

By March 2011, the firm had cut its repo position of foreign government debt by almost half to $4.8 billion from $9.2 billion, its financial leverage had fallen by more than 25% to 33.6 and its debt was reduced by nearly 30% to $26.7 billion. Short-term investments (think the company's trading account) fell from $46.1 billion to $36.1 billion in Corzine's first year. In September 2009, MF Global had a leverage ratio of 52.1 and investments of $54.9 billion signaling how unstable the firm was prior to Corzine's arrival.

Reports of Corzine's outsized risk apetite and a less stable business simply aren't the case if you look at MF Global's financial statements.

Meanwhile, Corzine improved the company's liquidity -- doubling its long-term financing from when he took over the firm until its bankruptcy Monday, while he cut its reliance on short-term financing -- making the company's trading operations more liquid and sustainable overall.

Through bond issues in the most recent quarter ended in September, Corzine took MF's long term debt from under $500 million to nearly $900 million, while he cut its short term debt by over $11 billion during his tenure. In his earnings call with analysts last week, Corzine said of the program, "We've substantially improved our capital and liquidity positions, while reducing our weighted average cost of capitaland lengthened its tenure."

What Corzine seems to be at blame for is his growing use of the firms trading activity and its exposure to Europe to drive profits -- and more recently, losses.

But in Corzine's defense, it wasn't an unprovoked decision.

As one of the world's largest commodities brokers, MF made its money on trade commissions and on the interest income it received in its execution business. Historically, with high short-term interest rates, that interest income could drive overall revenue and profitability.

In the second quarter of 2007, during its best year as a public company, MF Global earned $1.26 billion in interest income. At that time the federal funds interest rate, which was the key benchmark for the income was 5.25%. It's been 0.25% since the fall of 2008, as the Fed cut short-term rates to try to boost investor risk appetite.

For MF, the cut was a blow to its business model. In its most recent quarter, MF Global earned just $113.1 million in interest income.

To replace that revenue in June, MF Global announced a new plan, earning revenue by entering repurchase agreements to sell U.S. and European sovereign debt. On the June earnings call, CFO Henri J. Steenkamp said of the plan, "This enables us to capture arbitrage opportunities in these markets, and we continue to believe market risks to these trades is minimal as these are held to maturity."

With fear of eurozone government indebtedness rampant, a new buyer and seller of bonds could earn a trading margin as others cut out. By not holding the debt for more than a year, the strategy didn't seem risky.

"While we retain exposure to the underlying credit throughout the maturity period, the duration of trade is short term in nature," added Steenkamp during the call.

Just a few months ago after a profitable quarter, the plan to replace watered down interest income with European debt seemed to be working. In the quarter ended in June, MF Global earned $116 million in trading profit and had revenue of $160 million on European exposure, both at or near the highest levels the company had ever reported.

Of the results, Corzine said, "This perspective reinforces our strategic view that diversifying into client dealing and principal trading works to reduce dependence on a single line of business and allowed us to grow revenues even in a difficult environment."

This quarter, the proposal seemed loss-making as even healthy sovereigns like Italy and France came into the crosshairs of markets, had ratings cut and saw borrowing costs soar.

In a recent auction, Italy borrowed at its highest ever rate since the formation of the European single currency. For MF Global, the developments were crippling. The company reported it had $6.3 billion in European debt exposure, of which $3.2 billion was tied to Italy -- a previously safe sovereign that had come under increasing market pressure. Of the other half, most was tied to Spain, Portugal and Belgium -- and all exposure had a maturity of just over a year at a maximum. While MF was betting that the eurozone crisis wouldn't get worse in a year, the market reaction signals a different view.

When the disclosure was announced last week, investors freaked and sent MF shares down more than 47% on Oct. 25 -- and down nearly 70% for the week. Meanwhile, Fitch cut the company's debt to junk, stating that its "increased risk taking activities have resulted in sizeable concentrated positions relative to the firm's capital base, leaving MF vulnerable to potential credit deterioration and/or significant margin calls."

It's also the case that MF Global under Corzine and prior to his tenure was an unstable company. With equity of under $1.5 billion and assets of $41 billion, it wouldn't take much of a writedown to make the firm insolvent.

On the call last week announcing earnings, Corzine said, "Without question, the quarter's market environment was as difficult as any of that I've experienced in my 30-plus years in finance."

While Monday's bankruptcy is definitively his worst result in finance, it's just unclear that anyone else would have yielded a different outcome.

-- Written by Antoine Gara in New York

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