Who's Responsible for the MF Global Mess? Take Your Pick

Here we are in week three of the MF Global (OTC: MFGLQ) meltdown, and at least $1.2 billion in customer funds remains missing. Who's at fault? Take your pick. It looks like there's more than enough blame to go around, whether we're talking about executives, board members, outside investors, or regulators. Here's a closer look at a handful of the key players.

John Corzine, chief executive officer of MF Global and operating partner at J.C. Flowers & Co.
As the star of the MF Global horror show, Corzine has been all over the news for weeks. Not that his was an unknown name previously. For those in the financial world, Corzine has been a known commodity for years. Besides heading up MF Global, Corzine was the co-CEO of Goldman Sachs (NYSE: GS  ) alongside former Treasury Secretary Hank Paulson.

At Goldman, Corzine helped bring the private partnership public and assisted in bailing out hedge fund Long-Term Capital Management. In fact, he teamed up with Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) and AIG to make a buyout offer for LTCM.

Yet you needn't be a finance wonk to know who Corzine was. After being ousted from Goldman -- scuttlebutt suggests his work on the IPO and LTCM bailout didn't win him many supporters -- he served as a U.S. senator from New Jersey before being elected the state's governor.

In early 2010, Corzine was simultaneously named the CEO and chairman of MF Global and an operating partner at the private equity fund J.C. Flowers & Co., which had a sizable stake in MF Global. Founder Chris Flowers and Corzine had been friends going back to Corzine's Goldman days.

Speaking of...

J. Christopher Flowers, founder and executive chairman of J.C. Flowers & Co.
With a slight frame, eggish head, and academic glasses, this chess-playing member of the New York Philharmonic board of directors may as well be a caricature of the quintessential nerd. And if his reputation holds even a shred of truth, his intellect delivers on the legend. Flowers is a serious brand on Wall Street, regarded as a razor-sharp financial investor, piloting a highly regarded private equity fund that he launched after 20 years at Goldman.

But there are some cracks in the facade of this Wall Street superstar. He launched his private-equity career with a tremendously successful deal involving Japan's Shinsei Bank, but then lost a bunch of investor money by doubling down on the bet before the stock took a dive. He apparently also took a bath on a bet on bailed-out German lender Hypo Real Estate. And then, of course, there's MF Global. Reports say Flowers' firm could lose close to $48 million in the bankruptcy.

David Schamis, board member at MF Global and partner and managing director of J.C. Flowers & Co.
Hand-picked to be Flowers' representative on the MF Global board in 2008, Schamis displays all the signs of an executive primping to build his own firm at some point. He's a savvy, well-connected millionaire managing director at Flowers' firm, which he's served since 2000. He's married with three young children. He's a fan of his hometown New York sports teams.

In almost every way, Schamis was living the American dream -- right up until about three weeks ago, when reports say he woke his boss, Flowers, at 3 a.m. to break the news of MF Global's insolvency. But that was the easy part. Schamis could see legal scrutiny for his roles on the audit committee and risk and compensation committee of the board. In each case, Schamis would have had oversight of MF Global's growing risk appetite as well as Corzine's unusual employment agreement, in which Corzine was permitted to continue as an operating partner at J.C. Flowers & Co. at the same time as he served as MF Global's CEO. Talk about a sweet deal -- for Corzine as well as Flowers and Schamis.

Michael Stockman, chief risk officer of MF Global
Given the spectacular way in which MF Global failed, readers may be surprised to learn the firm even had a chief risk officer. And yet, at first blush, Stockman's pedigree appears impeccable for a CRO. He had years of experience as a trader at Morgan Stanley, Salomon Brothers, and -- surprise, surprise -- Goldman Sachs. He spent more than a decade at UBS (NYSE: UBS  ) , serving as its CRO for the Americas and as managing director of the fixed income division. After UBS, he started a risk-advisory business, co-authored a white paper on the 2008 financial crisis, and helped develop a course on "credit crisis analysis and risk management" for Dartmouth's Tuck School of Business.

But at MF Global, it appears he didn't behave like a CRO who had learned from the last crisis. Then again, maybe it's not so surprising. Stockman's tenure at UBS included disastrous years that led the firm to become one of the worst-hit European banks during the subprime meltdown.

Henri Steenkamp, chief financial officer of MF Global
Call him the rookie. In March of 2011, Steenkamp, still in his early 30s, replaced a much more seasoned CFO. His predecessor was Randy MacDonald, who had served as MF Global's CFO for three years after holding the CFO and chief operating officer posts at TD AMERITRADE (Nasdaq: AMTD  ) . Prior to that, MacDonald was CFO of Investment Technology Group (NYSE: ITG  ) .

Steenkamp, by contrast, was promoted to CFO after four years as chief accounting officer and controller. He had spent eight years with PricewaterhouseCoopers before joining Man Financial's accounting department in 2006.

What makes the switch intriguing is that MacDonald wasn't leaving the company. Instead, he was named head of MF Global's retail business. Coincidence? Oddity? You don't need a tinfoil chapeau to wonder why this relatively inexperienced executive was put in place over a much more experienced one. Nor is it stretching to wonder whether this C-level shake-up had something to do with MF Global's failure just seven months hence.

Gary Gensler, chairman of the Commodity Futures Trading Commission
Another veteran of the Goldman Club -- he made partner at 30 and spent 18 years at the firm -- Gensler has thus far avoided much criticism, but that may not last. It was Gensler, after all, who was appointed by President Barack Obama to lead the Commodities Futures Trading Commission in May 2009. He served as assistant and undersecretary of the Treasury in the decade prior.

Pedigree isn't Gensler's problem. What is? His agency has been uncomfortably silent on why a securities regulator -- the Securities Investor Protection Corp., in this case -- was allowed to select a trustee for unlocking billions in frozen customer assets when only a few hundred MF Global accounts were securities-related. (Versus roughly 140,000 commodities and futures accounts.)

Gensler is nevertheless saying all the right things. He's recused himself from investigating MF Global because of his relationship with Corzine. He also publicly supports rules that prescribe segregating client funds at futures clearing firms, all things you'd expect from someone who helped develop the Sarbanes-Oxley legislation that was born out of the Enron scandal. Yet actions speak louder than words, and Gensler's CFTC failed to take an active role in making customers whole as soon the agency's regulators learned funds were missing.

Brad Abelow, chief operating officer of MF Global
For somebody with an impressive resume -- a former Goldman Sachs partner, treasurer of the state of New Jersey, chief of staff to the New Jersey governor, and founder of a private equity fund -- there's not a whole lot of color readily available about Abelow. But understanding how he fits into the MF Global picture comes down to understanding his relationship to Corzine.

Abelow's career at Goldman overlapped with Corzine's, and he was named a partner while Corzine was co-CEO. Abelow was named New Jersey treasurer by then-Gov. Corzine and was the chief of staff for -- you guessed it -- Corzine. And, finally, it was Corzine who hired Abelow to take over as COO at MF Global.

James Giddens, partner at Hughes Hubbard & Reed and appointed trustee for unwinding MF Global assets
A partner at the New York law firm Hughes Hubbard & Reed, Giddens is the trustee responsible for unwinding MF Global, appointed at the behest of the SIPC, which he's been involved with since 1970. He's also the man responsible for leading the effort to unwind Lehman Brothers. Giddens has been involved in at least seven major liquidations of securities broker-dealers. What hasn't he done? Liquidate a futures commission merchant like MF Global. It's because of Giddens' inexperience in this particular segment of the financial markets that has sources we've spoken with expressing concern that it'll take longer to unwind MF Global than optimists would like to believe.

Our team here at The Motley Fool is continuing to dig deep into the MF Global mess. If you'd like to share any information, you can email us at tips@fool.com or call our tip line at 703-254-1546.

Also, if you want to stay up to date on the emerging story at MF Global and participate in efforts to reform Wall Street, shoot a blank email to imoscovitz@fool.com.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Berkshire Hathaway at the time of publication. Fool contributor Matt Koppenheffer also owned shares of Berkshire at the time of publication.

The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (24) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 25, 2011, at 1:49 PM, ProfEmeritus wrote:

    I don't understand your comment :

    "Gensler's CFTC failed to take an active role in making customers whole as soon the agency's regulators learned funds were missing."

    Under what legal authority and source of funds would the CFTC act in "making customers whole"?

    If your complaint is that Giddens did not move promptly to explain clearly that making segregated account customers whole was the highest priority (ahead of bondholders or other creditors) I agree with you.

  • Report this Comment On November 25, 2011, at 3:31 PM, TMFMileHigh wrote:

    @ProfEmeritus,

    Fair enough. And we're certainly not trying to superimpose statutory authority on CFTC that it doesn't possess.

    Nevertheless, we find it remarkable that CFTC never specifically advocated for the rights of commodities and futures customers in the hours after it became clear MF Global would file bankruptcy.

    Thanks for writing and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On November 25, 2011, at 4:09 PM, Merton123 wrote:

    Was MF Global audited by an independent Accounting firm? If Yes - why didn't they uncoverer the comingling of funds. Or did this all occur after the last financial audit?

  • Report this Comment On November 25, 2011, at 4:25 PM, TMFMileHigh wrote:

    @Merton123,

    It appears to have occurred following the last audit, but Francine McKenna at re: The Auditors makes a good case for why PwC should have seen trouble brewing:

    http://www.forbes.com/sites/francinemckenna/2011/10/31/mf-gl...

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On November 25, 2011, at 4:28 PM, Merton123 wrote:

    Thanks Tim

  • Report this Comment On November 25, 2011, at 4:33 PM, Merton123 wrote:

    Can the bankruptcy trustee go to the vendors that MF Global paid with the stolen cash and ask that the payments be returned? The end consequence would be that the MF Global customers loss would be transferred to the vendors.

  • Report this Comment On November 25, 2011, at 4:56 PM, Incred wrote:

    Thank you for your keen observations in the last two articles on this topic.

    Let's also not forget the MF Global Board of Directors who signed Corzine's employment contract allowing him to not only trade, but also report only to them and not through the usual risk channels to which all other traders are subject.

    In my opinion the Board must also suffer the consequences of its failure to supervise Mr. Corzine's trades and the risk they posed to the company.

    It seems to me that a CEO position and a trader's position in any company are each full time consumations. If one person is trying to perform the functions of one position, he/she surely must be ignoring the responsibilities of the other. I am incredulous that the Board (or others inside or outside the company who had access to the employment contract and who should have known its terms), were not apparently aware of the operational risk it posed.

    Mr. Corzine's daily performance distraction from his responsibilities as a CEO as well as his apparent exclusion from the normal risk evaluation (by people whose primary responsibility is to do just that), should have been a huge red flag to all.

  • Report this Comment On November 25, 2011, at 5:35 PM, jaketen2001 wrote:

    The legal jiu-jitsu that Corzine will dance behind will be so interesting to play out. A criminal plain and simple. There can be no official sympathy for MF or Corzine, no bail-out. And PWC's ability to certify financial should go away, and with it their ability to conduct business.

  • Report this Comment On November 25, 2011, at 8:22 PM, PSUPETE84 wrote:

    How can all the right-wing conservatives continually complain about too much regulation in light of this blatant, criminal activity. Where we're the regulators.

  • Report this Comment On November 25, 2011, at 10:55 PM, Gyre07 wrote:

    I think the real point of this should be that, thus far, President Obama has ignored every chance to have the Attorney General's office prosecute anybody suspected of large scale financial fraud. The point being, that if there are no public criminal prosecutions then there is no real deterrent to stealing massively. In fact, it's looking more and more attractive these days. Civil settlements or judgements can hurt, but it's nothing, I mean nothing like being sent to a federal penitentiary. And every potential financial fraudster in America will pay attention if Mr. Corzine, or somebody like him, is actually forced to do a perp walk with cameras rolling.

  • Report this Comment On November 25, 2011, at 11:33 PM, TMFKopp wrote:

    @Gyre07

    Can you please provide some examples of large-scale financial fraud that haven't been prosecuted?

    Matt

  • Report this Comment On November 26, 2011, at 7:09 PM, Kauaicat wrote:

    PSUPETE84, the laws would be effective if the SEC was capable. However, we are talking about an agency that admits 25% of its employees are incompetent, and that may not include the ones who were found to be porn-surfing instead of working. Also, the SEC investigated Bernie Madoff no less than 6 times, the last time with a letter written by one of Madoff's competitors and detailing his scheme, and they still couldn't find anything amiss.

    Face it, government on all levels is utterly incompetent, and attracts the losers looking for a free ride.

  • Report this Comment On November 27, 2011, at 8:38 AM, jargonific wrote:

    MF Global is only the beginning. Global financial institutions and highly wealthy investors want to get their profits out. These may be absurd profits based on pure speculation. Thus it has become a race. Each year we will see that race escalate until we have a crumbling market. That's very obvious now. Only the start of a global race to get out capital. Who wins? Who loses... can anybody really predict that when national leaders are terrified that they too and their people will be on the losing end?

  • Report this Comment On November 27, 2011, at 1:25 PM, jimmy4040 wrote:

    test

  • Report this Comment On November 27, 2011, at 3:19 PM, TMFKopp wrote:

    @jargonific

    "Only the start of a global race to get out capital."

    But the next question, then, is where do they put all of that capital that they're pulling out? Under their mattresses? In a hole in the backyard?

    Matt

  • Report this Comment On November 27, 2011, at 4:34 PM, Merton123 wrote:

    Incred points out that there were poor internal controls by not seperating the job of being CEO and also being a trader. By not seperating the two jobs the temptation was created to raid the customers accounts to cover MF Global positions that had gone sour.

    Jargonific points out that there is panic in the markets. This is not anything new - the market goes through period of euphoria and panic. The market panics creates problems for investors who use debt to increase their returns. The brokers start making margin calls and the investor/speculators has to come up with the extra cash. Unfortunately it is very difficult to predict when these panics will occur so most investors are already 80% or more invested when the market goes south. They will have some investing opportunities for the cash that isn't invested. Otherwise they also must just grin and bear it.

    There are alternatives to the market for people who don't like the volatility. The dividend reinvestment program (DRIP) is a way that investors can invest in companies directly with small amounts. Also investors who want to dedicated more time to their passive investments can get into real estate market. Probably the best investment of all is paying off the credit card and living within ones means

  • Report this Comment On November 27, 2011, at 8:04 PM, ibuildthings wrote:

    "How can all the right-wing conservatives continually complain about too much regulation in light of this blatant, criminal activity. Where we're the regulators."

    =================

    Corzine is a well known Democrat. As were the leadership of Fannie Mae and Freddie Mac back in the day. As were the half of Goldman Sachs who have never been blamed for the same financial antics that the republican half was. Democrats don't trouble other democrats. They find ways to blame Republicans, just like you did.

    This is a link to a NY Times story, dated September 2003. George Bush is trying to get Congress to add an oversight / regulatory agency for Fannie and Freddie because he believes they are cooking their books.

    http://www.nytimes.com/2003/09/11/business/new-agency-propos...

    Being a NY Times story, the Democrats got the last word, defending Fannie and Freddie's financial integrity.

  • Report this Comment On November 27, 2011, at 8:07 PM, ibuildthings wrote:

    Where are the prosecutions of the financial criminals? Even George Bush prosecuted the Enron crowd, yet Bush is still blamed for Enron's crimes that mostly happened before Bush took office.

    Go see opensecrets.org. See who the lawyers and financial industry were contributing to, and you will see why there are no prosecutions.

  • Report this Comment On November 27, 2011, at 8:42 PM, rfromNJ wrote:

    Ultimately, more than the actual people, there is one underlying cause for the debacle.

    Its called CRONYISM in its unadulterated form!

  • Report this Comment On November 27, 2011, at 10:06 PM, Nalakensho wrote:

    When I invest in stocks, I realize there are risks: past performance does not guarantee future performance, or I may pick stocks poorly, or the economy tanks. I can deal with these realities...such is life.

    But now we have the added risk of criminal behavior of leaders of financial institutions (yes, I consider losing 1.2 billion dollars criminal). The immoral conduct seems widespread at the top of these institutions (Or maybe there are only a few criminals and the rest are just too incompetent to catch on to the game).

    I don't put my money under my mattress because criminals will break in and steal my money (a real possibility in my neighborhood). Banks were a safer. I live within my means. I want my hard earned savings to grow. I'm willing to take some risks for that growth.

    My humble foolish question is not who is responsible, but who can we trust?

  • Report this Comment On November 28, 2011, at 12:10 AM, dstb wrote:

    Corzine needs to be removed from society the hard way. This guy has been reaping untold damage on this country for far too long.

  • Report this Comment On November 28, 2011, at 7:13 AM, XMFAlaska wrote:

    Great job, guys. Thanks for clearly laying out the players and how they're involved.

  • Report this Comment On December 05, 2011, at 6:10 PM, rovobo wrote:

    Hard Time, that's the answer. These finacial charlatans and their lackeys need to spend hard time in real jails not the country club settings they are sent to. These places were created by our legislators to cover their butts incase they get caught,they can't stand the thought of having to do time like like common criminals, after all they are better than us and they have their stolen money to prove it fines and weak sentences are not a detriment

    OWS ROCK ON !!!! RON VON

  • Report this Comment On December 15, 2011, at 4:29 PM, thidmark wrote:

    What the hell is a "right wing conservative?" Is there any other kind???

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