Jon Corzine & MF Global-It's Easier With Other Peoples Money

For MF Global And Jon Corzine Shows:

It’s easier to make big bets with other people’s money

                                                                                                   by: Brendan Magee

                                                                                                            11/7/11

It’s hard to imagine how a brokerage firm with a 230 year history could allow $633 million in client’s money go unaccounted for, but that is what happened at MF Global, the firm that Jon Corzine resigned as the CEO of last Friday. This is a huge story, but  if we focus solely on the investigation into criminal activities, we are going to miss the real lesson for investors. The lesson is, what was missing between MF Global and their investors that more than likely would have averted this travesty?

So how did this catastrophe get started? It got started by extremely risky investments apparently pushed for and authorized by Corzine. He not only invested in European countries that had huge debt problems, he borrowed and put up more in collateral than MF Global had  to buy the bonds of these countries. Even though there were rampant rumors that countries like Greece, Italy, and Portugal were going to default on their debt obligations, Corzine believed that the stronger countries like Germany would not allow that to happen. Thus the firm invested in and was holding $6.3 billion in European debt.

As it turned out Corzine’s crystal ball had a crack in it and the value of their bonds plunged. When the banks came a calling for their money MF Global declared bankruptcy. Corzine took the high road though, he resigned before the announcement was made public. This is the mess that investors, investigators, and 2800 employees are left to deal with.

This mess points out the need for investors to have a clear understanding of who their investment firm is, what they stand for, and what they will or will not do. How do you get to the point where you know all this? It’s by having a Core Covenant in place. This covenant needs to be agreed to and signed by the investor, the firm you’re doing business with, and investment advisor. Without it the investor has no idea who they are doing business with and how they are going to operate.

For example, a covenant could say the firm will not do anything with a client’s money that they would not want done to theirs. I cannot imagine for a second that John Corzine would mortgage his home, cars, bank accounts, etc., invest that money in extremely risky investments, and stand the very real chance of being left broke based on nothing more than a belief. Simply put, a firm agrees it won’t expose your money to risks it wouldn’t want to take with theirs.

I cannot imagine Corzine would do business with a bank who does not maintain accurate records of where his money is at all times. I can’t imagine that Corzine would do business with a firm whose CEO says that when the going gets tough, “I’m heading for the hills and leaving you to deal with the mess that I created.” Simply put we’ll watch after your money as if it were ours.

Lastly, under no circumstances will we engage in any activities that we consider to be gambling or speculative.  With that Corzine could not have taken a position based what he thought Germany, France, or Great Britain would do in terms of European debt. That would be market timing and would have been avoided.  All this, if expressed, agreed to, and lived up to in a Core Covenant and would have prevented this disaster.

 Had Corzine had a Core Covenant, we probably don’t have an ongoing FBI investigation costing tax payers a fortune. Corzine is still employed as the CEO of MF Global,  and last but certainly not the least, investors of MF Global wouldn’t be in a panic right now.

Of course, why bother with all this when it‘s not your money.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions, comments, or suggestions call 610-446-4322 or e-mail to Brendan@coachgee.com.