Jon Corzine; The Intrepid Trader Who Pushed The Limits Of Risk

Jon Corzine has crashed and burned before; sent packing by Goldman Sachs in 1999 after a 24 year career, evading death in 2007 from a near-fatal car accident and now the $40 billion implosion of his own brokerage firm, MF Global. John Corzine made double edged risks, with the potential to drive his firm forwards, or with the potential to demolish it all. It was all but 20 months after taking over when his company filed for bankruptcy, after suffering a massive $192 million QUARTERLY loss and disclosing more than $6.3 billion in bets on European Government Bonds!!

The financial crisis should have put an end to risk takers, but it only fuelled Corzine's hunt for more and more profit. He saw the crisis as an opportunity to make money by taking on higher risks which will eventually generate greater returns. By trading with the company's own money, he exposed them immediately to trading risk, which then also required senior management and ethos changes as MF Global was new to this. Corzine took the plunge and bought half a billion dollars worth of struggling European bonds (Portugal, Italy, Greece....). The return was high as the market was unsure if the governments would pay back their debt. By using the bonds as collateral to borrow money, he transferred the risk to his firm in New York. The reason being? American accounting rules meant that he could book the profits immediately before the bonds had matured! Convenient, for him. By 2011, Corzine had borrowed $6 billion to buy European bonds, forever increasing the risk, whilst yielding higher profits. The strategy that depended on the markets perception of risk in the Eurozone was working, for now anyways!
What is the most I could lose on this investment? The question that almost every investor should ask themselves when considering very risky investments. Value at Risk is a useful tool for risk assessment, most often used by commercial and investment banks to capture the potential loss in value of their traded portfolios from adverse market movement over a specific period. It will then be compared to their available capital and cash reserves to make sure that their losses can be covered without putting the firm in danger of risk. The absence of MF Global's European bonds in its published VAR meant that the company lacked the complete picture, concealing information from the public and hiding their risk. Once the news finally did get out, it took markets a week to absorb the information as it was such a huge shock. MF Global was slashed of their credit rating by Moody's investment service to non-investment grade, 'junk bonds'. This meant that shareholders were very unlikely to receive payments and so to no surprise, MF Globals share price halved! Creditors in London were left in shock, demanding millions from the company, anxious about their European bond holdings.This inevitably left the firm with nothing else but to file for bankruptcy.

The question posed at the end of the day is that did Corzine really take that big of a risk? Or did he simply just fail to understand how risk can be seen in the post crash world?. What we have to remember is that finance is not just a mathematical game, but a social one too. 'Real risk' is not always the cause for failure, it is perception of risk that sometimes matters more. This brings me to my final question, should financial giants like MF Global be allowed to get away with this? Or should there be regulations put in place in order to prevent financial giants failing in the future?
Let me know what you think!