How Corzine Steered Regulators To Protect MF Global Strategy

May 22, 2012
by Jason M. Breslow Digital Editor

When Jon Corzine took the reins of MF Global in 2010, the Wall Street brokerage was a deeply troubled firm. Revenues weren’t covering expenses, money was being lost, and rating agencies were threatening a downgrade.

Reversing the tailspin would not be easy, but if anyone was up to the task, it seemed to be Corzine. At age 47, the former U.S. Marine became the youngest CEO in Goldman Sachs history. In 2000, New Jersey voters elected him to the Senate and six years later, they elected him governor. When Barack Obama won the White House in 2008, Corzine was rumored to be on the shortlist for Treasury secretary.

At MF Global, his strategy was simple: “We are transforming from sort of an old-like brokerage firm into an investment bank,” Corzine told CNBC’s Maria Bartiromo. Key to his plan was a massive bet on European government bonds – a bet that would swell to more than $6 billion, and ultimately lead to MF Global’s collapse.

At the same time, Corzine was using a finance strategy known as “internal repo.”* In essence, MF Global was borrowing money from the firm’s own accounts and using it to fund trading in another part of the firm. During the summer of 2011, however, just months before MF Global filed for bankruptcy, internal repo was a strategy regulators were hoping to do away with.

As shown in the above excerpt from tonight’s film Six Billion Dollar Bet, internal repo transactions were so important to Corzine that he met with officials at the Commodities Future Trading Commission (CFTC) on three occasions to lobby for their preservation. As CFTC Commissioner Bart Chilton told FRONTLINE:

Sen. Corzine was one of the more prominent individuals who came in and told us what a drastic mistake it would be to curtail the use of these internal repurchasing agreements … And when he told me that we were making a big mistake, it certainly put some doubt into my mind for a little bit there as whether or not we were going down the right course.  But certainly somebody that had his stature … added respect, in my view.

Six Billion Dollar Bet airs tonight on most PBS stations (check your local listings here) or you can watch it online, starting at 10 pm EST.

* An earlier version of this story contained the sentence: “Corzine’s bet could not have occurred without a finance strategy known as ‘internal repo.'” There is no clear evidence that MF Global relied on this strategy to make those bets possible. The title and body of this post have been updated to reflect this change.

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