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Are Cozy Ties Muzzling S&P on MF Global Downgrade?

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Jon Corzine, chairman and chief executive officer of the “suddenly” beleaguered brokerage MF Global Holdings, lives in a narrow world of trusted advisors.  They may be offering support in ways that go well beyond the usual advice-giving—especially when it comes to relations with ratings agency Standard & Poor’s.

See related article: Potential Suitors Emerge for MF Global

Corzine, a former Goldman Sachs boss, landed at MF Global in March 2010 following a failed bid to win reelection as New Jersey’s governor. From the outset, Corzine made it his mission to diversify MF Global’s operations, given that it previously depended for roughly two-thirds of it revenues on the sputtering business of executing and clearing client trades.

Declared its fiscal 2010 annual report: “During the recent economic downturn, we experienced significant decreases in trading volume starting in 2008, which we believe was due primarily to our clients and other market participants decreasing risk exposure and the lack of available capital.”

Worse than lousy, the timing of Corzine’s bid to turn MF Global into a mini-Goldman of yore has proven flat-out disastrous; proprietary trading is in the doghouse from Wall Street to Washington these days. Corzine’s decision to play up of the “global” aspect of his firm’s heritage as a 2007 spin-off from London’s Man Group has been a bigger bust still.

Following his arrival, Corzine “increased the firm’s risk and used its own money to trade, including investments in European sovereign debt that have tumbled in value.”

Cyrus Sanati at Fortune put it in perspective. “In the last year the company has lost over $90 million while its market capitalization fell around 80% to around $280 million. Taking into account its $6.3 billion in European sovereign debt exposure, along with all its US government agency debt exposure, the firm has a leverage ratio of around 40 to 1, according to Egan Jones, a rating agency. That's even higher than the approximate 35 to 1 leverage ratio Lehman Brothers was sporting when it fell from grace in 2008.”

MF Global’s “sudden” troubles really began to bite this week, starting with a quarterly loss of $191 million, or $1.16 per share. That’s the largest in the history of a firm that’s lost money on an annual basis for the last three years.

As if that weren’t enough trouble, Moody’s Investors Service and Fitch came along later in the week with ratings cuts, putting the firm into the troubled land of junk bond issuers. Its shares and market value have tanked as a result.

Late Thursday MF Global tapped out two of its credit lines, according to Bloomberg. Liquidity issues beget liquidity issues in a self-fulfilling prophecy.

I have to give Corzine credit for at least one thing: taking the hit for cooking up the business plan that has brought MF Global to the brink of a forced sale or bankruptcy. “Our positions and the judgment about risk-mediation steps are my personal responsibility and a prime focus of my attention,” he conceded during a Tuesday analyst call. 

On first blush MF Global’s problems, and Corzine’s mea culpa, may look like bolts out of the blue. But those who are in the business of watching over the company should have seen storm clouds brewing long ago. Back in June 2008, MF Global was still somewhat optimistic but guarded about its business prospects. A year later, it was spelling out the double whammy it faced from low interest rates and trading volumes in its annual report.

All that, of course, was even before Corzine showed up and began turning MF Global into a glorified casino. Now that the firm has stumbled into a full-blown crisis, Corzine is likely conferring with a small group of trusted advisors to try to find a way out. One likely touch point is an accounting firm he’s used to working with– PricewaterhouseCoopers. It’s the auditor for MF Global and for Corzine’s former employer, Goldman Sachs.

PwC is also the firm that trained his chief financial officer, Henri Steenkamp. A 34 year-old accountant’s accountant, Steenkamp is a technical GAAP and Securities and Exchange Commission reporting expert. Corzine appointed him CFO in March to do double-duty, along with his position as the MF Global’s Chief Accounting Officer.

Given everything that’s been going badly inside and outside of MF Global, it sure looks like PwC could have raised doubts about the brokerage’s ability to survive the next 12 months, which is the threshold for issuing a “qualified” accounting opinion.

I asked Ed Ketz, an accounting professor at Penn State University, if he thinks PwC should have issued such a “going concern” qualification with MF Global’s annual financial statements for the year through March 30th.

Opined Ketz: “A pattern of losses had developed by 2011 and structural problems apparently could not be fixed or, at least, not fixed on a timely basis. Free cash flow was severely negative in 2009 and 2011. No turnaround was in sight. The business model was suspect and the risks were multiplying. Moreover, there is no white knight on the scene (for that matter, neither is there a white king, queen, bishop, or rook). Auditing standards don’t permit you to imagine heroes to protect the entity; in the real world, heroes often don’t show up. PwC probably should have issued a going concern qualification.”

Another key advisor to Corzine is Evercore Partners. According to several media outlets, MF Global has hired Evercore to “explore strategic options,” which is Wall Street code for scramble the jets in search of a rescuer.

Interestingly, Evercore’s co-chairman, Pedro Aspe, also happens to be a director of the only ratings agency that has not yet downgraded MF Global to junk status--Standard & Poor’s.

Among his banker buddies, one whom Corzine is probably hoping will help bail him out is J. Christopher Flowers, top dog at JC Flowers & Co. Corzine is an operating partner at Flowers’s firm. Flowers, the firm, in turn controls one of eight board seats at MF Global, thanks to a $300 million investment in 2008. Flowers is himself a Goldman alumnus and the guy who recommended Corzine for the MF Global job in the first place.

One name that hasn’t popped up in media reports about the MF Global train wreck is Richard Moore, whom Corzine dubbed managing director of MF Global Europe in April 2011. Moore previously headed up Citigroup’s fixed income operations in Europe, the Middle East and Africa. He also happens to be a non-executive director at (drum roll…) Standard & Poor’s.

Standard & Poor’s confirmed Richard Moore continues to serve as a non-executive director of the ratings agency. It did not respond to inquiries about what impact this relationship and Pedro Aspe’s may have on their decision to continue to delay a downgrade of MF Global. MF Global confirmed Moore’s position with the firm but declined comment on its relationship with Standard & Poor’s, Steenkamp, PwC. PricewaterhouseCoopers did not respond to our request  for a comment before press time.

Corzine’s small world of trusted advisors borders on incestuous. Perhaps the only fitting ending to this long-predictable waste of shareholder assets would be for the entire mess to land—profitably—in the lap of Goldman Sachs.

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