Jon Corzine appears to have committed more than a few sins in the runup to the demise of MF Global, including possibly using client money to pay for the risky trades that forced his brokerage firm into bankruptcy over the weekend. But possibly his biggest sin was his steadfast belief in the power of government.
The former New Jersey governor and Goldman Sachs chief executive went wrong by assuming that a government bailout would somehow turn his firm’s bet on some of the worst investments in the world — the sovereign debt of Italy and Spain — into gold. That absurd faith has doomed many chief executives — Dick Fuld of Lehman Bros. chief among them, just a little more than three years ago.
And, more than any of the other shenanigans that may have taken place during the ill-fated firm’s final hours, it’s what did in Corzine and MF Global.
Corzine is, of course, well known for his love of government both as Goldman CEO (where he supported various left-of-center candidates) and later as a New Jersey politician best known for what he didn’t do — namely, rein in the cancerous growth of the state’s government and its public-sector unions.
I debated him on CNBC in the summer of 2008, while he was still New Jersey governor. He was humping the economic plan of his fellow Democrat, Barack Obama, as the best solution to the looming recession as the housing bust and financial crisis picked up steam.
The “solution” that Corzine so vociferously defended is the economic “plan” we have today: Massive increases in government spending, subsidies for preferred businesses (especially “green” ones) and threats of higher taxes on the wealthy to pay for it all.
My point to him then was that it’s foolhardy to even threaten higher taxes when the country’s heading toward financial crisis and recession. We need people spending money and the private sector to be unburdened by government now more than ever.
Corzine didn’t buy it, and his candidate went on to win the White House. But a year later, Corzine would be forced out as governor — one of the many victims of the disastrous policies he advocated.
Unlike most Americans thrown out of work in this recession, however, he easily landed a job as head of MF Global, a midsized brokerage — with his love of government and its power to perfect the economy intact. One of his first moves was to make a major bet on the debt issued by various European countries, mainly Italy and Spain, which after Greece were seen as some of the riskiest investment in the world.
What attracted him to such basket cases — with huge welfare states, large deficits, little if any economic growth and unproductive workforces?
Their price. They were trading relatively cheaply, thanks to fears that the euro crisis could lead both nations to default on their debt. But Corzine was sure both countries would eventually be bailed out.
The Europeans, he figured, had learned from the Americans that government can “save” the financial system and prevent banks from dying. If you can bail out a massive bank like Citigroup, with nearly $1 trillion in customer deposits, why can’t you bail out a country like Italy?
That was Corzine’s investment strategy — and, much like his strategy for growing New Jersey’s economy, it didn’t work so well. As most people are now well aware, the US bank bailouts didn’t accomplish one of their main goals, namely to repair the banking system so small business could get loans and capital. Who in their right mind would say Bank of America, the nation’s largest and most troubled bank, has put the financial crisis behind it?
Plus, bailing out banks isn’t quite like bailing out countries — as the about-to-fall-apart bailout of Greece proves.
As the latest Greek deal began collapsing, traders started looking for which firms were most exposed. Not long after that, Jon Corzine’s MF Global became the Wall Street equivalent of Greece.
Corzine isn’t saying much now that the messy details of MF Global’s final days have become front-page news. The FBI is looking into the matter. and there’s a civil inquiry into the firm’s demise, so his lawyers are keeping him out of public view.
But if I did run into him, I’d love to ask him if he has learned anything from the MF Global fiasco, especially about the limitations of government in building economic growth and market sanity. Somehow, I doubt he has.
Charles Gasparino is a Fox Business Network senior correspondent,