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

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.