Halloween Horror! Jackass Investing “Poor-folio” Award to Jon Corzine, as he transforms MF Global from Powerhouse to Poorhouse

MF Global, the brokerage firm headed by ex-Goldman Sachs head honcho and ex-New Jersey Governor, Jon Corzine, filed for chapter 11 bankruptcy protection today. It took Mr. Corzine less than two years to transform MF Global from a futures brokerage powerhouse into a disgraceful poorhouse (read: http://cnnmon.ie/tYDuEi).

The story is both familiar and disturbing, and includes reckless gambling, incompetent credit rating agencies (again!) and unfortunate employees. It started shortly after Mr. Corzine’s appointment as MF Global’s CEO in early 2010 (following his unsuccessful bid for re-election as New Jersey’s Governor). In an interview with Dan Collins of Futures Magazine in December 2010 Mr. Corzine announced,

“I expect that we are on track to move from a broker to a broker/dealer, to an investment bank, and from being a significant participant in futures and options markets and commodities markets to being a full-fledged, quality player in all of the activities that we choose to be involved – including those that historically involve foreign exchange, equities, currencies, advisory and money management over time.” (read: http://bit.ly/sEE7Pk).

Unfortunately, in his attempt at turning Mf Global into a global investment bank on the scale of Goldman Sachs, Mr. Corzine personally steered MF Global into making a $6 billion bet on the sovereign debt of Portugal, Italy, Ireland, Belgium and Spain (every one of the “PIIGS” with the exception of Greece). The old adage, “bulls and bears make money, but pigs get slaughtered,” played out here precisely on cue. A slaughter is what occurred. But I would venture to guess that it affected Mr. Corzine’s reputation more than his pocketbook. I doubt he’s personally in the poorhouse as a result of his reckless gambling. The same can’t be said for many of the hardworking employees of MF Global, who had accumulated stock and stock options acquired through years of hard work (I personally know many of them).

But Mr. Corzine was not alone in bringing down MF Global and destroying the wealth of its investors. The credit rating agencies were also active participants. Less than three months ago Mr. Corzine orchestrated a $325 million bond offering for MF Global that received an investment-grade rating from the ‘big three’ agencies; Moody’s Investors Service, Standard & Poor’s, and Fitch’s. And while Moody’s and Fitch’s did downgrade the debt last week, Standard & Poor’s maintained its investment grade rating until after today’s bankruptcy filing. At least S&P understands the meaning of default! (Do people really pay for this ‘advice’?). For my view on the uselessness of credit ratings agencies and other ‘experts,’ read this complimentary link to my chapter “Myth #13: It’s Best to Follow Expert Advice“.

Taking unnecessary risks is the definition of “Jackass Investing.” The result of Jackass Investing is to turn a “portfolio” into a “Poor-folio.” Because of the precision with which Mr. Corzine followed the script of Jackass Investing that I lay out in my book, I am awarding him this Jackass Investing “Poor-folio” Award. Once again, I’d also award one to each of the credit ratings agencies if I hadn’t already done so. But it’s certainly impressive at how consistently incompetent they continue to be.

UPDATE 11/4/2011
Since I wrote the initial part of this post above, the situation at MF Global has gone from bad to worse. With the disclosure that customer segregated funds were misused, executives of the firm are now likely facing civil, and potentially criminal, charges. In my 30 years of trading I have never seen such a misuse of customer funds, which indicates panic among its top executives, as well as such a bungled process for transferring customer funds. A “Poor-folio” award is too good for these people.

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Rewarding Failure: Jackass Investing “Poor-folio” award for Hewlett-Packard

Small business owners understand the need for hard work, integrity and perseverance. If they don’t, they don’t survive, let alone thrive. When I started my investment firm, Brandywine Asset Management, 30 years ago, there were no guarantees. I spent the vast majority of my waking hours researching trading strategies and the legal issues surrounding setting up and marketing a commodity fund, preparing marketing materials, establishing brokerage relationships… the list was almost endless. Fortunately, so was my energy at that time. But one ingredient that wasn’t endless was my bank account. When, after the first year, the business wasn’t yet paying the bills, I borrowed the money off my credit cards (Why and how I got the cards in the first place is another story). Fortunately credit card companies considered me a good credit risk and continued to extend credit as long as I paid their monthly bills on time. In time, with more than 100k owed to the card companies it became clear that I only had one way out, I had to make the business succeed. That was the only way to pay back the debt. (I know, another alternative would have been to renege on my commitment to the card companies, but I never considered that to be an option. I got myself into the situation. It wasn’t the card companies’ responsibility to get me out. It was mine alone).

Fortunately, with continued perseverance, I was able to grow the business and repay my debts. Brandywine thrived and became a highly successful managed futures trading firms. But believe me, I struggled to reach that outcome. I had many opportunities to fail along the way. Over the years I’ve come to recognize that millions of other small business owners can relate to this story. My story is their story.

But that’s not the story in “corporate” America. Unfortunately, corporate America rewards failure. How else can you explain the obscene severance packages doled out to failed executives by huge companies such as Home Depot, KB Homes, Merrill Lynch and most recently, Hewlett-Packard. Many of these companies’ CEOs damaged their companies financially or reputationally (or in the case of Merrill Lynch, actually took their companies to the brink of collapse), and then got paid tens of millions of dollars to go away. In the case of HP, Leo Apotheker mismanaged the company for just eleven months before the Board of Directors (incompetent boards is a topic for another post) showed him the door. But heh, while you’re on your way out, here’s $30 million as a reward for your failure. Huh!?

Apotheker was just the last in a string of HP executives who were rewarded for being fired (er, “resigned”). Just last year then-CEO Mark Hurd left after being accused of a variety of violations of HP’s Standards of Business Conduct, including “misuse of company assets” that was related to his “close personal relationship” with an HP contractor. An investigation uncovered that the contractor was paid yet there was a question about whether her services were actually provided (this behavior is illegal in all states except Nevada). Oops! And how did all this get past the HP Board of Directors the whole time? Oh right, Mr. Hurd was Chairman of the Board. Despite the damage his behavior caused HP, Mr. Hurd was paid $12 million to leave and was also entitled to an additional $53 million that he negotiated away in exchange for being able to take a leadership role at Larry Ellison’s Oracle.

Prior to Mr. Hurd there was Carly Fiorina, who received over $40 million in severance and stock grants for “resigning” in 2005. Look, I generally liked these CEOs (at least Hurd and Fiorina). They were dynamic and assertive. They should have been paid well. But they should have been paid well for the quality of their work and the value they brought to their shareholders, not for the quantity of the messes they left behind.

As a result…

Because of its continued legacy of rewarding failure in both the executive suite and boardroom, I am awarding HP the most recent Jackass Investing “Poor-folio” award.

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