The collapse and bankruptcy of MF Global, led by former New Jersey Gov. Jon Corzine, demonstrates the vulnerability of the U.S. financial system and economic recovery to the Euro crisis. Ironically, Corzine is also a former U.S. senator who gave speeches against irresponsible financial speculation while in office.
Corzine’s company heavily invested client funds in Eurozone bonds – Greek, Italian, Spanish, German and French. He was confident that the EU leadership in the strongest countries, especially Germany and France, would find a way through the crisis and prevent defaults.
MF Global also invested in credit default swaps – insurance policies – they thought would protect them just in case their confidence in EU bankers and leaders were slightly misplaced. How could they lose?
Then came the economic “oops.” Month after month the EU leaders demand more and more austerity from the indebted countries. No investment, no aid was offered. Their message was: lay off more workers, cut more wages, cut pensions, cut education and raise taxes (for working people – another income cut).
MF Global investors begin to get nervous. While exact figures have not been made public, estimates of MF Global obligations and exposure exceed $1.5 billion.
Corzine’s whiz kid reputation from his days as chairman of Goldman-Sachs, and his liberal connections as a big fund-raiser for Democrats, were of no avail as one austerity measure after another did nothing to halt the slow-motion depression train-wreck in Southern Europe.
Then, as the Gospel says, the cock crowed for the third time: Bloomberg.com reported, “The European Union’s agreement with banks for voluntary 50 percent write-down on their Greek bond holdings means $3.7 billion of debt-insurance contracts [credit default swaps] won’t be triggered, according to the International Swaps and Derivatives Association.”
The SEC has begun a federal investigation into $650 million allegedly missing from MF Global accounts. Corzine resigned. Over 1,000 outraged MF Global employees were summarily fired. Wall Street was shocked, especially given the tough regulations advocated by Corzine in his political career.
The decision by the EU to not honor credit default swaps on Greek sovereign debt holdings shows both the extent to which EU leaders are now willing to go to stabilize the system, and how far they have to go. Saving the banking system is less than half the task. Corzine probably never learned that at Goldman-Sachs.