ANALYSIS:WHEN GOLDMAN Sachs went public on May 4th, 1999, Jon Corzine, who was then the firm's chief executive, held a stake that was suddenly valued at $305 million.
So, perhaps, it’s uncharitable to complain about the piddling $12 million (€8.8 million) severance he was poised to gain if he had managed to sell his current firm, MF Global Holdings, over the weekend.
But I’m going to complain anyway. The idea that Corzine, who single-handedly destroyed MF Global Holdings, was in a position to command so much as a penny in severance is horrifying. It suggests two things. The first is the extent to which “heads I win tails you lose” remains the operative concept for Wall Street pay.
The second is that one’s politics don’t much matter when it comes to lining one’s pockets. Corzine, an avowed liberal who has decried income inequality and Wall Street pay, right to the end had his hand out for millions he didn’t deserve.
To read a recounting of his tenure at MF Global Holdings is to wonder how he missed the 2008 financial crisis. Oh, yes! That’s right: he was the governor of New Jersey, a job he secured in 2005 after one term in the US Senate. Still, you would think that as a former Wall Street titan, he would have noticed that taking giant bets on shaky, long-term bonds while financing your operations with overnight loans that can be pulled at any second is not exactly a recipe for success.
But that’s exactly what Corzine did. After taking over the firm in March 2010 – just months after losing his re-election bid to Chris Christie – he decided to transform the derivatives broker into something sexier, something akin to his old firm, Goldman Sachs. In particular, he wanted it to risk its own capital, trading for its own account, just like Goldman had successfully done when he was running it.
Stunningly, the risky bets he took at MF Global were on European sovereign debt. “Europe wouldn’t let these countries go down,” he reportedly told another Wall Street executive, according to the Wall Street Journal. The firm’s position in European bonds grew to $6.3 billion – and its leverage ratio to 40 to 1, according to Egan Jones, a ratings agency. That is $40 of debt to every $1 of equity, remarkably 2008-ish.
After a poor fiscal second quarter was announced last week, its stock collapsed and Moody’s downgraded its debt. Its trading partners became skittish and its access to overnight lending started to disappear. It was the classic modern Wall Street run on the bank – just like Lehman Brothers. Corzine’s only hope was to sell the firm. When that effort failed, a bankruptcy filing was inevitable. Just like Lehman.
When I read MF Global Finance’s second-quarter results, though, what stood out was its compensation expenses: 64 per cent of revenues went to compensation. In any industry but Wall Street, that would be obscene. Indeed, in a talk he gave at Princeton last year, Corzine said that he’d been “arguing about compensation sins of Wall Street” for decades. Not enough to do anything about it, though, once he was back in charge.
Then there is his compensation. He negotiated a salary of $1.5 million, also received a signing bonus of $1.5 million and $11 million in stock options.
But here’s the kicker: Like many executives – on Wall Street and off – Corzine’s deal also covered his eventual departure. If he left MF Global because, say, it was sold, his $11 million in stock options would immediately vest, and he would get a $12.1 million golden parachute. Of course, the MF Global proxy statement doesn’t call it a golden parachute. It calls the payment “severance”.
There is nothing in the proxy about what would happen if Corzine destroyed the firm with bad trading bets. There is nothing that links his payout to, you know, performance. No matter what, he would be owed the $12.1 million.
All he had to do was sell the firm.
So that’s what he tried to do. I’m not saying the payout was his only motive or even his primary motive. But, in less than two years, he took a $7-a-share stock and turned it into a $1.20 stock. Had he succeeded in selling MF Global, the price would surely have been less than $1.
It seems almost criminal that Corzine was still entitled to $12.1 million after destroying so much value. Yet that would have been the result. And you wonder why people are angry?
Instead, the deal he had been negotiating failed and so did his severance. Now he is just another unsecured creditor. Nowadays, I guess that counts as progress. – (New York Times service)