Chasing Goldman's fallen star

Former Goldman Sachs chief and MF Global boss Jon Corzine could pay a hefty price as anti-banker sentiment extends around the world. Meanwhile in Australia, if the Christmas slogan “make Grinch banks pay” takes off, it could lead to a banking super tax.

The global community's distrust and dislike of both conventional and investment bankers is one of the most dangerous forces facing banks. In Australia, the banks have only themselves to blame. Yesterday I was on radio defending their interest rate stance in light of what was happening to Europe, which provides 40 per cent of their funding.

In a strange way I was doing their job, but I also explained my comment in yesterday’s Business Spectator that the seed of a banking super-profits tax has now been planted (Gillard’s super-sized bank slug, December 7). If bank CEOs don’t start moving on the front foot they will find their profits mauled via a super-profits tax and the tax will lift Julia Gillard’s ratings in the polls.

In light of my super tax comment, our man in the US, Alex Liddington-Cox, points out that the anti-banking sentiment can quickly be turned against particular organisations and particular people. In the US, Goldman Sachs is loathed but that loathing has now become concentrated on a former Goldman Sachs chief, Jon Corzine, who left Goldman Sachs in 1999 to become a strong advocate for re-regulation of banking. But then Corzine was tempted back to the dark side and, with enormous backing from institutions, started MF Global as his ticket back to Wall Street stardom. But MF Global punted on both European securities and agricultural commodities and collapsed.

Failure is much better accepted by Americans than by Australians. But in the case of Corzine, the former Goldman chief finds his failure has got caught up in banker unpopularity. He may pay a big price. In Australia, that banker unpopularity may manifest itself in a different way – a banking super-profits tax. Today’s front page of the Herald Sun brings to life community outrage against banks.


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Tonight (Australian time), Corzine will appear before the US House Agriculture Committee which was forced to take out a subpoena to get his company.

Liddington-Cox explains that in the US, the Agriculture Committee is very powerful and its influence is one reason why the US is prepared to cop global flak for its agriculture subsidies. Many American farmers rely on the futures markets that MF Global operated in to manage their position and smooth the big price fluctuations.

Corzine will face bigger fireworks at his scheduled appearance in front of the Financial Services Committee next week – the waters where the big fish from both political parties tend to swim – where the unpopularity of bankers as personified by Corzine will be even more apparent.

But the Agriculture Committee hearing will probe whether MF Global used clients’ funds to back its trading positions – something that is yet to be proved. If Corzine pleads the fifth, it will set the tone for a multiplication of banker unpopularity as politicians of both sides of the isle hurl abuse at Corzine on a range of matters that he will be unable to comment on. In other words, an unrestrained bank-bashing party.

However, Corzine won't be subjected to the same levels of shocked disbelief that then Treasury Secretary Henry Paulson – Corzine's Goldman successor – faced when he asked for $US700 billion to bail out the financial services industry with no strings attached. Nor will he face the same loathing that current Goldman Sachs boss Lloyd Blankfein has copped as the poster-boy for Wall Street greed, thanks largely to the blood-sucking vampire squid analogy from Rolling Stone and his, "I’m doing God’s work” gaffe.

Corzine’s place in history as a hated former Goldman Sachs boss is subtler, but it’s arguably much worse than his successor’s.

When Corzine left Goldman Sachs in 1999, he handed over the controls to Paulson – who he reportedly didn’t get along with – and went on to win a US Senate seat for New Jersey as a Democrat during George W Bush’s infamous 2000 victory. In 2005, he successfully ran for Governor of New Jersey.

During his 10-year political career, Corzine became a particularly astute spokesperson for the Democrats on financial regulation. Once the global financial crisis hit, Corzine became a leading campaigner for strong regulation against Wall Street lobbying, particularly on the subject of leverage in the wake of the Lehman Brothers collapse.

Fast-forward to March 2010 and Corzine has lost his governor position to popular moderate Republican Chris Christie and taken the reigns at MF Global. Nineteen months later, MF Global filed for bankruptcy with a leverage ratio of 40:1. Lehman Brothers, that Corzine had been all too happy to cast as over-leveraged while he was a politician, had a leverage ratio of about 30:1 when it fell over.

MF Global's leverage looks appalling in hindsight, particularly when it gambled on European debt. But capitalism relies as much upon the losers as it does the winners, so as long as Corzine didn't do anything illegal or try to undermine the regulatory process, there's nothing explicitly wrong with what happened at MF Global. In bankers’ eyes it was just some bad bets – they happen every day.

But four months prior to MF Global’s collapse, the Financial Industry Regulatory Authority, a self-regulatory organisation for Wall Street, informed the company that it was concerned about its debt levels and its European bets. According to The New York Times, Corzine, frustrated by the pestering, lobbied the Securities and Exchange Commission to get Finra off his back. Additionally, The Wall Street Journal is reporting that Corzine received warnings from MF Global’s chief risk officer Michael Roseman about increasing the company’s European debt positions.

Ultimately, Corzine was compelled by the SEC to decrease the company’s leverage, but the board appears to have been seduced by his super-stardom and trusted the former Goldman Sachs boss on his European odyssey. There are no stars among bankers these days.