HE DIDN’T LEARN THIS IN DAVID KINLEY HALL

11/1/11

The Jon Corzine/MF Global situation (Some quarters of the media are, predictably, referring to this misstep as a “crisis.” As I have written ad nauseam in the past, everything in our softened society is a crisis nowadays. More sober observers, like yours truly, contend that, in my lifetime, there has been only one genuine crisis, the Cuban Missile Crisis, or perhaps two, the OAPEC Oil Crisis of 1974, and I’m not even sure that either of those two constituted a genuine crisis. But our modern, enlightened society, obsessed with overestimating its rapidly declining toughness and resilience, insists on calling every inconvenience a “crisis.” But I digress.) is fraught with irony.

The first of these ironies is that Jon Corzine is, according to reports, due to get a $12 million severance check (One wonders, however, how the bankruptcy courts will handle this.) despite his destroying the MF Global investing five times his employer’s capital in European sovereign debt. Yes, this investment bankrupted the firm, but it was worse than that. In an environment in which the regulators are demanding that banks lay off risk and in which banks, even if they are able to put on additional risk in a generic sense are not eager to increase their exposure to European sovereign risk, Mr. Corzine’s actions made a purchase of the company, as part of some kind of rescue, difficult nearly to the point of impossibility. So Mr. Corzine sort of brought the company to the brink of death and then made it virtually impossible for someone to save its life. Yet he gets $12 million, if the bankruptcy courts allow such a payment. It must be nice to be in the club.

The second of these ironies is that in MF Global’s investment grade rated bond issue of early August of this year, one of the covenants stated that if Jon Corzine were to leave the firm, the coupon on the bond would have to go up to compensate bondholders for the loss of Mr. Corzine’s services.

Hmm…

The next time you make the assumption that the rating agencies or the smooth talking investment professionals asking to manage your money have the slightest clue as to what they are doing, remember the manifest wisdom of both of the aforementioned parties in the MF Global deal.

The largest of these ironies, however, is that Jon Corzine’s call on European debt was ultimately correct. Note that former governor, former senator, former Goldman co-CEO, and University of Illinois graduate Jon Corzine was certain, given his background and contacts, that he was right in his assumption that “Europe wouldn’t let these countries go down.” In the Eurodeal that the media and the aforementioned investment professionals were slobbering over last week (See my instantly seminal 10/28/11 piece, GERMANS BEARING GIFTS…AGAIN), the Germans and the French (i.e., Europe, for these intents and purposes), made it perfectly clear that no country in Europe, no matter how profligate it chose to become, would be allowed to, as Mr. Corzine put it, “go down,” except for Greece, and even Greece would be allowed to “go down” in only a limited sense. Note further that MF Global, under Mr. Corzine’s tutelage, had no direct Greek exposure; Mr. Corzine bought the paper of Italy, Spain, Portugal, Ireland, and Belgium. The whole point of the deal concocted last week was to assure everyone that those countries would not go down if “Europe” had anything to say about it.

This is not to say that Mr. Corzine made a good trade; he made an awful trade. His timing was bad, he apparently bought at prices that reflected a more sanguine view of either the beneficence of the Germans or the fiscal health of the aforementioned countries, and, with spreads between bunds and Italian 10 years at 450 basis points, most people apparently haven’t caught on to the notion that the sick men in Europe are golden as long as Uncles Wolfgang and Francois are around. Further, Mr. Corzine had no business committing an amount equaling five times MF’s capital to his trades. His execution was lousy, terrible, awful, malodorous, wretched, and maladroit, probably the result of Mr. Corzine’s not having actually traded in about twenty years. But the ultimate basis of the trade, i.e., that the German and the French political elites are sufficiently foolish (my word, not Mr. Corzine’s) to allow their European brethren to continue to party on the German and French dime, was, and is, correct.