Thursday, December 15, 2011

Jon Corzine and the Romance with Risk

By now, I’ve read dozens of articles about Jon Corzine and the fall of MF Global. But I think this piece in Dealbook is a best all-around explainer about Jon Corzine and his appetite for risk:
[Jon Corzine] pushed through a $6.3 billion bet on European debt — a wager big enough to wipe out the firm five times over if it went bad — despite concerns from other executives and board members. And it is now clear that he personally lobbied regulators and auditors about the strategy.
His obsession with trading was apparent to MF Global insiders over his 19-month tenure. Mr. Corzine compulsively traded for the firm on his BlackBerry during meetings, sometimes dashing out to check on the markets. And unusually for a chief executive, he became a core member of the group that traded using the firm’s money. His profits and losses appeared on a separate line in documents with his initials: JSC.
This seems like a surprise, however:
He was a popular manager, former employees say. An avuncular presence with a beard and sweater vest, he had a knack for remembering names. Even in the firm’s final hours, they recall that Mr. Corzine never lost his temper. His work ethic also impressed colleagues. He often started his day with a five-mile run, landing in the office by 6 a.m. and was regularly the last person to leave the office.
But the most mind-boggling revelation is that MF Global, through Jon Corzine’s insistence, shied away from implementing a rigorous risk management system at the firm:
Yet soon after joining MF Global, Mr. Corzine torpedoed an effort to build a new risk system, a much-needed overhaul, according to former employees. (A person familiar with Mr. Corzine’s thinking said that he saw the need to upgrade, but that the system being proposed was “unduly expensive” and was focused in part on things the firm didn’t trade.)
Risk management is perhaps the most important function for a bank/financial firm. There is no too steep a price to pay for having a system of checks and balances that would have caught MF Global’s downward spiral and perhaps have done something about it. I need not even mention the lost customer deposits that is now at the core of the investigation following MF Global’s bankruptcy.

Is Jon Corzine “Too Big To Be Indicted”?

The ongoing saga to determine what may have happened at the critical points of demise within MF Global continues again today.

I once again encourage you to grab both a large popcorn and a barf bag while witnessing the House Financial Services Committee Hearing re: MF Global.

Will the committee members have the balls to drill down and address the critical questions as to who knew what and did what to violate the sanctity of segregated customer funds totaling a cool $1.2 billion at MF Global?

Will we be fed a line of questioning by committee members which fails to put Jon Corzine on the spot?
Might we witness a day not often seen in modern American history in which a once mighty financial and political titan is compelled to provide the truth? Will Jon Corzine be forced to confront the testimony provided earlier this week by Terrence Duffy, CEO of the CME.

Let’s help the committee members out and provide a line of questioning which they should pursue if they have any sense of rectitude and dignity. To this end, I welcome referencing BankThink’s Francine McKenna’s fabulous commentary, Hard Questions Lawmakers Should Ask at MF Global Hearing.
McKenna provides questions which the best prosecutors in the country would appreciate. She also provides a frame of reference for her questioning which can only be defined as enlightening.
Let’s navigate as Mckenna writes,
So if I were one of the lawmakers on the House panel, I’d ask the following questions on Thursday:
To Corzine and Abelow:
Did you pledge customer assets to obtain a last-minute line of credit from a private investor intended to hold the firm over until a sale was completed over the weekend?
Were those customer assets liquidated when MF Global filed for bankruptcy on Oct. 31? If so, which firm or individual lent money to MF Global using customer assets as collateral? Who authorized the movement of customer assets to a house account for this purpose?
Was the account inside or outside the U.S.? Which custodian enabled this illegal transfer of assets? Who in MF Global arranged this financing with the intention of repaying the loan and replacing the assets when a sale of the firm was completed?
Such an arrangement is not beyond the imagination. MF Global could have gotten the idea from firms it has done business with.
In August of 2007, the SEC used an emergency temporary restraining order to stop Illinois-based managed futures advisor Sentinel Management Group from continuing to loot customer accounts after declaring bankruptcy. Sentinel claimed to have $1.2 billion in assets under management prior to filing for Chapter 11 protection. Sentinel defrauded its clients by improperly commingling, misappropriating and leveraging those clients’ securities without their knowledge, the SEC said.
Sentinel transferred at least $460 million in securities from client investment accounts to a “house” account, the agency said. Sentinel also used securities from client accounts as collateral to obtain a $321 million line of credit as well as additional leveraged financing.
MF Global was a customer of Sentinel. According to the most recent annual report, Sentinel’s bankruptcy trustee sued MF Global to claw back a late withdrawal from Sentinel.
The Sentinel trustee also sued Bank of New York for enabling the commingling of customer assets with firm assets. MF Global also has a relationship with Bank of New York. The firm transferred UK customer assets to BNY in August. It did so after FINRA pushed MF Global to increase capital in its U.S. brokerage unit as a result of a $6.3 billion repo-to-maturity transaction backed by European sovereign debt. Taking the assets off MF Global’s U.S. brokerage firm books reduced regulatory capital requirements.
Did MF Global have sufficient internal controls over financial reporting given the breach of segregated funds that occurred subsequent to the Sarbanes-Oxley certifications signed for the fiscal year ended March 31 and the quarters ended June 30 and Sept. 30?
Were you and MF Global CFO Steenkamp being truthful with your auditor, PricewaterhouseCoopers, when you signed the Sarbanes-Oxley certifications and assured investors and regulators of the adequacy of internal controls over financial reporting?
To MF Global auditor PricewaterhouseCoopers:
Your firm certified that, “in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2011.” Why did PwC allow MF Global financial statements to be issued (and used to back MF Global’s August bond issue) with a clean audit opinion?
No deficiencies in internal control over financial reporting or in controls over segregated assets were noted even though, given the breach of customer segregated funds and the reports of accounting and systems disarray, there were obviously serious ones present.
Why didn’t PwC issue a “going concern” qualification to the March 31 annual financial statements?
Given everything that’s been going badly inside and outside of MF Global, it sure looks like PwC could have raised doubts about the brokerage’s ability to survive the next 12 months, which is the threshold for issuing a “qualified” accounting opinion.
MF Global had lost money since its IPO in 2007. Structural problems – a low interest rate environment and lower trading volumes – apparently could not be fixed or, at least, not fixed on a timely basis to restore profitability under the primary business model. Free cash flow was severely negative in 2009 and 2011. The firm had embarked on a highly risky proprietary trading strategy to quickly restore profitability that added significant market and concentration risk.
To the CFTC, SEC, and FINRA:
Why did the agencies allow Corzine to serve as CEO and Chairman of MF Global and simultaneously a partner at Flowers’ firm J.C. Flowers?
Corzine’s loyalty seems to have been biased, in my opinion, towards recouping Flowers’ investment rather than protecting shareholders.
Did PwC identify any material inadequacies in MF Global’s controls over safeguarding customer assets in any of the required reports submitted to your agencies under the Commodity Exchange Act? Did your agencies follow up on those reports?
MF Global recently settled five class actions brought on behalf of purchasers of MF Global stock between the 2007 IPO and Feb. 28, 2008 regarding alleged misrepresentations and omissions related to risk management and monitoring practices and procedures.
PwC must review the procedures for safeguarding customer and firm assets in accordance with the Commodity Exchange Act on an annual basis. The annual audit, completed most recently for the fiscal year ended March 31, must include a review of a firm’s practices and procedures for computing the amounts that, by law, have to be set aside in clients’ accounts each day. MF Global also had to send regulators an annual supplemental report from PwC. The report would describe any material inadequacies existing since the date of the previous audit and any corrective action taken or proposed.
To James Kobak, Chief Counsel to James Giddens, bankruptcy trustee for MF Global Inc.:
Can you and Giddens continue to serve as bankruptcy trustee and counsel in light of the significant conflicts your law firm, Hughes Hubbard & Reed, has from your work with JP Morgan (NYSE:JPM) and PwC?
PwC is MF Global’s auditor and a creditor of MF Global. The audit firm is the auditor of HHR, Giddens’ law firm, and it is a client of the law firm. PwC is also auditor of JPMorgan Chase (NYSE:JPM), MF Global’s largest creditor. JPMorgan (NYSE:JPM) has also been a client of HHR. PwC in particular could have been tempted to use its significant knowledge of MF Global, its flaws and its sins, to help its viable clients, HHR and JP Morgan (NYSE:JPM), rather than MF Global shareholders.
Can we quickly get Francine McKenna appointed to the House Financial Services Committee or at the very least on the committee staff. I have more confidence in her than any sitting committee member.
I ask now for the sixth time, “Is Jon Corzine Too Big to Be Indicted”? (NYSE:V)]

What do you think?
Larry Doyle
Isn’t it time to  subscribe to all my work via e-mail, RSS feed, on Twitter or Facebook? Do your friends, family, and colleagues a favor and get them to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

By Larry Doyle

Ohio Landlord Fights 'White Only' Pool Sign Ruling

CINCINNATI (AP) — A landlord found to have discriminated against a Black girl by posting a "White Only" sign at a swimming pool wants a state civil rights commission to reconsider its decision.

The Ohio Civil Rights Commission found on Sept. 29 that Jamie Hein, who's White, violated the Ohio Civil Rights Act by posting the sign at a pool at the duplex where the teenage girl was visiting her parents. The parents filed a discrimination charge with the commission and moved out of the duplex in the racially diverse city to "avoid subjecting their family to further humiliating treatment," the commission said in a release announcing its finding.

An investigation revealed that Hein in May posted on the gated entrance to the pool an iron sign that stated "Public Swimming Pool, White Only," the commission statement said.
Several witnesses confirmed that the sign was posted, and the landlord indicated that she posted it because the girl used in her hair chemicals that would make the pool "cloudy," according to the commission.
Hein, of Cincinnati, hung up when The Associated Press called her for comment Tuesday. A message was left at her lawyer's office.

The commission's statement said that its investigation concluded that the posting of such a sign "restricts the social interaction between Caucasians and African-Americans and reinforces discriminatory actions aimed at oppressing people of color."

Commissioners were scheduled to hear Hein's request for reconsideration at a meeting Thursday in Columbus, commission spokeswoman Brandi Martin said.

If the commissioners uphold their original finding, the case would be referred to the Ohio attorney general's office, which would represent the commission's findings before an administrative law judge, Martin said.
Penalties in the case could include a cease-and-desist order and even punitive damages, but the administrative law judge would determine any penalties, Martin said.

It still would be possible for the parties to reach a settlement before resorting to legal action, she said.
Any decision by the administrative judge could be appealed to Hamilton County Common Pleas Court in Cincinnati, Martin said.

by Lisa Cornwell

Teen Who Was Spanked In Video For Being In Gang Found Dead

A teen who was videotaped being spanked by his uncle for boasting about gang ties on his Facebook page was found shot to death last week nearby his New Orleans home.

Michael Taylor, 16, was found shot to death shortly after 8:30 p.m. on Wednesday, Dec. 7. In a video uploaded in January, Taylor’s uncle spanked the teen after finding out about his gang ties.

In the YouTube video, posted in January, Taylor’s uncle ordered him to disavow any ties to gangs, announced that the family “don’t come from that sh–,” and then proceeded to take off his belt and spank Taylor in full view of the laptop camera. The original video sparked tons of reaction, from people who applauded the uncle’s actions, calling it an overdue return to old-school parenting and discipline, to those who speculated the public humiliation might drive the teenager deeper into a gang’s circle because the youth had been humiliated.

EACTIONS ON TWITTER: Public Enemy’s Chuck D tweeted, “Remember the uncle who gave his nephew a whipping on Youtube because of his gang ties, disturbing news for many critics.”

The LA Clippers acquire All-Star Chris Paul

New teammates Chris Paul and Blake Griffin
The Los Angeles Clippers acquired All-Star point guard Chris Paul from the New Orleans Hornets Wednesday night. The league office approved the deal that sent Chris Paul and two future second round picks. In exchange the Hornets receive G Eric Gordon, F Al-Farouq Aminu, C Chris Kaman and a first round pick in the deal.

This deal comes after two failed trades that would have sent Paul to LA, one with the Lakers and the other with the Clippers. The Lakers deal was vetoed by David Stern, which stirred up a lot of controversy. Even prompting Paul to seek legal action against the league if he was not traded. Now the Clippers have been successful in their second attempt to acquire Paul, after walking away from talks earlier this week.  Chris Paul is going to exercise his player option which will keep him in LA until the 2012-13 season.

Now this deal will not make the Clippers into a title contender right away. This team will automatically become one of the most entertaining team in the league. Blake Griffin said best when he was told out side the Clippers facilities: “It’s going to be Lob City”. If the organization can surround Blake Griffin and Chris Paul with some great role players, to fill out their bench. They would have to do it fast because the Clippers could have Paul and Griffin walk in 2013.

It will be interesting to see if one of the leagues most dysfunctional franchises can get it together and keep this two amazing talents.

New Documentary Shows Unseen Footage of Martin Luther King’s Murder

by Jorge Rivas
On Wednesday the Smithsonian Channel announced it will air “MLK: The Assassination Tapes,” a new documentary that includes footage culled primarily from local news in Memphis, Tenn., where the civil rights leader was murdered on April 4, 1968. Most of the footage hasn’t been seen on television since it originally aired.

The documentary includes interviews with locals, including Vince Hughes, who was a 20-year-old Memphis police dispatcher on his second day of work when King was killed. Hughes kept audiotapes of police calls on that day and crime scene photos from where King was shot.

“MLK: The Assassination Tapes captures the frantic manhunt for MLK’s assassin, the riots that erupted across the country, and the desperate pleas for peace from President Lyndon Johnson and presidential candidate Robert F. Kennedy,” reads the Smithsonian Channel’s press release. The documentary is said to include footage of Coretta Scott King and her children marching in Memphis just days after King’s death, in support of the striking workers.

The film is also supposed to include a perspective from black community members on the days after his murder. According to Tom Jennings, who produced “MLK: The Assassination Tapes,” the filmmakers went to radio station WDIA to collect interviews from black Memphis residents at the time because the white owned networks didn’t have such interviews.

The documentary will air on the Smithsonian Channel on Feb. 12.

Russia’s Protests: Higher Volatility, New Opportunities Await Multinationals

(Image from Euronews)
The popular protests following the latest Duma elections revealed a fundamental shift in Russian popular opinion which has been forming for over a year now: as Russians realize that the economic prosperity of the pre-crisis 2000s is slowly but surely turning into long-term stagnation, they are no longer ready to pay for it with their political freedom and sense of personal dignity. Russians feel humiliated by a state they see as increasingly captive to interest groups and corrupt officials. This is bad news for Russia’s political elite, but good news for multinationals.

We are not seeing an Arab Spring in Russia, and neither is any opposition group or personality powerful enough to galvanize the disenchanted voters. Barring a major Black Swan event, Putin will return to the presidency in March for a six-year term. However, the legitimacy of his power has been undermined and will continue to be, making him a weaker leader. As Russians increasingly demand change, he may be able to last through his six-year term, but he is unlikely to be elected for another one. Meanwhile, the power groups that stand behind him may decide an unpopular Putin is a liability they don’t want to bother with. A post-Putin Russia is much more likely to be ruled by a political leader unofficially promoted to national prominence by the established elite, than by an opposition leader who will be an outsider to Russia’s power circles.

For multinationals, this means that the overarching political environment in the country will remain unaffected in the short term, but there will likely be some reshuffles and instability within Russia’s elite, including among high-level state officials. To respond to demands for change, Putin will introduce some new faces to the government after the March elections, and MNCs should be positioned to engage with them through a more nuanced government relations strategy.

The perception of increased political risk will continue to drive capital outflows from Russia, putting downward pressure on the ruble and contributing to rising inflation. Capital markets, already highly sensitive to risk in Emerging Europe as a result of the eurozone crisis, will be cautious at best on Russia, making financing more costly to Russian companies. As a result, MNCs should expect high volatility on the Russian market at least until the outcome of and reactions to the presidential elections in March are clear.

And while MNCs will likely see some of their Russian partners struggle with tighter lending and a weaker ruble, this period will create opportunities as well. We expect high government spending through the March elections as Putin seeks to appease the population. The weaker ruble and higher volatility also make this an opportune time for MNCs interested in pursuing M&A. Even major Russian companies are increasingly struggling to raise money on the global capital markets, creating opportunities for strategic acquisitions by MNCs with a long-term vision for the Russian market.

By Martina Bozadzhieva 

French convict former leader Chirac of corruption

French convict former leader Chirac of corruption

PARIS (AP) — As French president, Jacques Chirac was called all sorts of names, not the least for his vociferous opposition to the U.S.-led war in Iraq. Now, he has a moniker that will stick: Convicted criminal.
The avuncular 79-year-old on Thursday became France’s first former leader to be convicted since Marshal Philippe Petain, who headed the Nazi collaborationist regime during World War II, in 1945. Chirac will not go to prison, but received a two-year suspended sentence for corruption linked to his 18-year term as the mayor of Paris.

The verdict was an uncomfortable coda to Chirac’s four-decade career as a fixture of French politics, and could aid efforts by critics to rid the political system of its cushy cronyism. It also tarnishes the lofty image that French presidents often enjoy at home just as the country gears up for another presidential race.
Chirac was found guilty in two related cases involving 19 totally or partially fake jobs created for his benefit at the RPR party, which he led as Paris mayor from 1977 to 1995. He was convicted of embezzling public funds, abuse of trust, and illegal conflict of interest.

Critics of the conservative Chirac — many on the political left — hailed the decision as measured and courageous, saying the court showed how political elites and average citizens were equal under the law. Anti-corruption crusaders, long frustrated by dirty dealings in the French political machine, rejoiced.
“I see it as a historic and very important decision for the future of French democracy,” said Jerome Karsenti, a lawyer for the anti-corruption group Anticor, which had argued against Chirac as a civil party to the case.

“This is a strong message from the court — a message to all politicians of responsibility. It’s also proof of a mature and transparent democracy that is today able to make a distinction and try a former president,” Karsenti added.

Allies, however, expressed personal sadness for Chirac, praising him as a defender of French values on the world stage who was now embarrassed by what some characterized as a scandal of little consequence.
“This is a decision that I don’t believe will alter the personal relationship between the French people and Jacques Chirac,” said Prime Minister Francois Fillon, a fellow conservative.

“This conviction is severe — it’s both criminal and moral,” said Francois Hollande, the Socialist Party presidential candidate, who recently appeared in public with Chirac. “It strikes at the man, so I have a thought for him.”

Because Chirac has suffered from ill health and memory lapses recently, he was spared from appearing in court for a trial sought for years by investigating judges. The trial, which started in March, only became possible after he left office and lost his presidential immunity in 2007.

The three-judge panel juggled an array of considerations as they handed down their 120-page ruling: Chirac’s age and fading memory; the state prosecutor’s call for the case to be thrown out for a lack of evidence; a recent reimbursement deal between Chirac, his allies and Paris City Hall.

In the end, the court faulted Chirac for criminal exploitation of political tools — even if he never benefited financially — that cemented his march to higher office.

“His guilt results from perennial and repeated practices attributed to him, and whose development was greatly favored by a perfect understanding of the wheels of the city machinery,” the court said in its ruling.
The court said it took into account his age, health and status as a former head of state when determining the light sentence — Chirac could have been jailed for up to 10 years and fined euro150,000 ($ 210,000).
The other nine defendants on trial included members of France’s political elite. Two were acquitted and seven convicted, including former French leader Charles de Gaulle’s grandson, the brother of the Constitutional Court president, and former Chirac aides.

A Chirac lawyer said they were analyzing the ruling before announcing whether he would appeal. Chirac has repeatedly denied wrongdoing.

In a brief statement, President Nicolas Sarkozy said “it is not his place to comment” on the verdict but commented anyway.

“These circumstances mustn’t make us forget Jacques Chirac’s constant commitment to serving France, which won and continues to win him the affection of the French,” said Sarkozy, whose conservative UMP party is the successor to Chirac’s RPR party.

In another recent scandal, two longtime Sarkozy allies have been targeted in a case of suspected kickbacks in a 1990s French defense deal with Pakistan. Sarkozy served as budget minister at the time, but his office and allies insist he was not involved.

Chirac’s adopted daughter fought back tears after the ruling.

“The justice system has been very severe, but this is a fair and independent justice system. For the family, it’s a great pain we have to accept,” said Anh Dao Traxel, her voice cracking with emotion outside the courtroom.

A career politician, Chirac was a debonair master of the workings of public office. He modeled himself after de Gaulle, and was nicknamed “Le Bulldozer” early in his career for his determination and ambition.
France’s last leader with memories of World War II, Chirac was the first to acknowledge the nation’s responsibility for the deportation of Jews during the Holocaust. But he struggled to achieve reforms to the regulated economy and failed to defuse tensions between police and minority youth that exploded into riots in 2005.

Now focusing on charitable work now, he is one of France’s most popular public figures.
Chirac made his reputation internationally for refusing to join U.S. President George W. Bush’s drive to the war that toppled Saddam Hussein as leader of Iraq in 2003 — fomenting some anti-French feeling in the United States.

A Las Vegas radio station once used an armored vehicle to crush photographs of Chirac, photocopies of the French flag, a Paris travel guide, bottles of wine and French bread. French fries in Congress were renamed “freedom fries,” and some critics called the French “cheese-eating surrender monkeys” — a barb pulled from “The Simpsons” TV cartoon show.

Jamey Keaten in Paris contributed to this report.