Miles Weiss, Cristina Alesci and Matt Leising
Tuesday, November 29, 2011
Jon Corzine bet $11.5 billion on European sovereign debt in his bid to rebuild profits at MF Global Holdings Ltd., almost twice the net amount disclosed to investors, and relied on short-term hedges that left the firm exposed to larger losses if they couldn’t be rolled over.
Corzine, who was chairman and chief executive officer of the futures broker before it went bankrupt last month, overcame resistance from directors, senior traders and risk managers to accumulate the bonds, according to two people with knowledge of the situation. He used the hedges, or offsetting trades, to cut the net risk reported to shareholders to $6.4 billion, according to an Aug. 3 regulatory filing by the company.
A former New Jersey senator and governor, Corzine joined MF Global in March 2010 with a plan to remake the company into an investment bank in the image of Goldman Sachs Group Inc., where he had been co-chairman before entering politics. He repeatedly ratcheted up his wager on the debt of countries including Italy and Spain, booking gains along the way, according to filings. The short-term hedges matured before the bonds, meaning the net amount at risk could increase if investors lost confidence in either European sovereigns or MF Global and new hedges couldn’t be bought.
“If that assumption does not come to pass, their risk mushrooms,” said Matthew Pieniazek, president of Darling Consulting Group, a Newburyport, Massachusetts, firm that advises banks on managing their balance sheets. Hedges that matured along with the bonds would have been prohibitively expensive, he said.
Full story here.