- - Sunday, November 20, 2011

ANALYSIS/OPINION:

MF Global issued $325 million of 6.250 percent, 5-year senior notes in August 2011. The deal was led by Jefferies, a global investment banking group, and co-managed by investment banks BofA Merrill Lynch, BMO Capital Markets, Commerzbank, Natixis, Lebenthal & Co. LLC, Sandler O’Neill and Partners L.P., and U.S. Bancorp. I provide this backdrop because you have to see that once again those who have a fiduciary responsibility to protect investors failed.

The banks on this deal are underwriters of securities who are obligated to perform due diligence on the issuer (MF Global) to protect investors. I have no doubt that the bankers performed their due diligence on the objective facts about the company; e.g. financial statements, management background, market share, customers, etc. But did the bankers adequately assess the character of MF Global’s management? Is it possible for a banker to protect investors from managers with impeccable credentials who are willing to take reckless risks with other people’s money?

Rating agencies, rating agencies, rating agencies — sounds familiar, huh?

Moody’s Investors Service, Fitch Ratings and Standard and Poor’s once again did not meet their fiduciary responsibility to investors. How can a bond deal be executed in August and the company files for bankruptcy shortly thereafter. Like the bankers, the rating agencies surely did their analysis on the objective data. However can they warn investors about reckless management?

The facts are that on Oct. 25, Jon Corzine, a former New Jersey governor, stated he was confident that MF Global would successfully manage its $6.3 billion exposure to European debt (Spain, Portugal, Belgium and Italy). Yet a week after a failed attempt to sell the company, MF Global filed for Chapter 11 bankruptcy on Oct. 31.

Now let’s discuss the failure of management at MF Global. Mr. Corzine who is considered by many one of the smartest fixed-income minds in the business took immeasurable risk with the capital of his firm. It was revealed that the company was leveraged 40-1. In summary, the company only had 2.5 percent equity invested against risk positions. Note: Even in the height of the subprime crisis a 40-1 leverage would have been considered extremely risky, where small movements in underlying positions could represent deleterious outcomes for investors.

Did the great Jon Corzine not learn from the greatest financial meltdown seen in the U.S. economy? The answer is simple, here is another example to the entrusted “gambling with other people’s money.” The irony of this is that in the August 2011 bond deal there is a key clause that states if Mr. Corzine departs as MF Global’s full-time chief executive officer prior to July 1, 2013, because of an appointment to a federal position by the president and confirmation of that appointment by the U.S. Senate, investors would get an additional 1 percent coupon on their existing 6.250 percent bonds. I beg to differ in that the “clause” should have said if Mr. Corzine decides to increase the risk-taking at MF Global similar to previous risk positions at Goldman Sachs, investors should be redeemed their money at 100 cents on the dollar. We will find out more but another concern, there is approximately $600 million of unaccounted for customer funds.

Again the public trust has been breached by those who are entrusted to protect other people’s money. What is the difference between Mr. Corzine and Bernie Madoff? Mr. Corzine lost other people’s money by taking unnecessary and unapproved risks. Madoff stole other people’s money in a Ponzi scheme. What Mr. Corzine did may be technically legal but he certainly did not have approval from his shareholders to take “bet your company” risks. Where were the regulatory and supervisory agencies?

I am beginning to think we may have to pad our mattresses again with money, at least then you know where it resides and if any is missing the house pet can provide better answers than what we hear from the Wall Street experts.

• Armstrong Williams, author of the 2010 book, “Reawakening Virtues,” is on Sirius Power 128, 7 to 8 p.m. and 4 to 5 a.m., Monday through Friday. Become a fan on Facebook at www.facebook.com/arightside, and follow him on Twitter at www.twitter.com/arightside. Read his content on RightSideWire.com.