Who's Responsible for the MF Global Mess? Take Your Pick

Here we are in week three of the MF Global (OTC: MFGLQ.PK) meltdown, and at least $1.2 billion in customer funds remains missing. Who's at fault? Take your pick. It looks like there's more than enough blame to go around, whether we're talking about executives, board members, outside investors, or regulators. Here's a closer look at a handful of the key players.

John Corzine, chief executive officer of MF Global and operating partner at J.C. Flowers & Co.
As the star of the MF Global horror show, Corzine has been all over the news for weeks. Not that his was an unknown name previously. For those in the financial world, Corzine has been a known commodity for years. Besides heading up MF Global, Corzine was the co-CEO of Goldman Sachs (NYS: GS) alongside former Treasury Secretary Hank Paulson.

At Goldman, Corzine helped bring the private partnership public and assisted in bailing out hedge fund Long-Term Capital Management. In fact, he teamed up with Warren Buffett's Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) and AIG to make a buyout offer for LTCM.

Yet you needn't be a finance wonk to know who Corzine was. After being ousted from Goldman -- scuttlebutt suggests his work on the IPO and LTCM bailout didn't win him many supporters -- he served as a U.S. senator from New Jersey before being elected the state's governor.

In early 2010, Corzine was simultaneously named the CEO and chairman of MF Global and an operating partner at the private equity fund J.C. Flowers & Co., which had a sizable stake in MF Global. Founder Chris Flowers and Corzine had been friends going back to Corzine's Goldman days.

Speaking of...

J. Christopher Flowers, founder and executive chairman of J.C. Flowers & Co.
With a slight frame, eggish head, and academic glasses, this chess-playing member of the New York Philharmonic board of directors may as well be a caricature of the quintessential nerd. And if his reputation holds even a shred of truth, his intellect delivers on the legend. Flowers is a serious brand on Wall Street, regarded as a razor-sharp financial investor, piloting a highly regarded private equity fund that he launched after 20 years at Goldman.

But there are some cracks in the facade of this Wall Street superstar. He launched his private-equity career with a tremendously successful deal involving Japan's Shinsei Bank, but then lost a bunch of investor money by doubling down on the bet before the stock took a dive. He apparently also took a bath on a bet on bailed-out German lender Hypo Real Estate. And then, of course, there's MF Global. Reports say Flowers' firm could lose close to $48 million in the bankruptcy.

David Schamis, board member at MF Global and partner and managing director of J.C. Flowers & Co.
Hand-picked to be Flowers' representative on the MF Global board in 2008, Schamis displays all the signs of an executive primping to build his own firm at some point. He's a savvy, well-connected millionaire managing director at Flowers' firm, which he's served since 2000. He's married with three young children. He's a fan of his hometown New York sports teams.

In almost every way, Schamis was living the American Dream -- right up until about three weeks ago, when reports say he woke his boss, Flowers, at 3 a.m. to break the news of MF Global's insolvency. But that was the easy part. Schamis could see legal scrutiny for his roles on the audit committee and risk and compensation committee of the board. In each case, Schamis would have had oversight of MF Global's growing risk appetite as well as Corzine's unusual employment agreement, in which Corzine was permitted to continue as an operating partner at J.C. Flowers & Co. at the same time as he served as MF Global's CEO. Talk about a sweet deal -- for Corzine as well as Flowers and Schamis.

Michael Stockman, chief risk officer of MF Global
Given the spectacular way in which MF Global failed, readers may be surprised to learn the firm even had a chief risk officer. And yet, at first blush, Stockman's pedigree appears impeccable for a CRO. He had years of experience as a trader at Morgan Stanley, Salomon Brothers, and -- surprise, surprise -- Goldman Sachs. He spent more than a decade at UBS (NYS: UBS) , serving as its CRO for the Americas and as managing director of the fixed income division. After UBS, he started a risk-advisory business, co-authored a white paper on the 2008 financial crisis, and helped develop a course on "credit crisis analysis and risk management" for Dartmouth's Tuck School of Business.

But at MF Global, it appears he didn't behave like a CRO who had learned from the last crisis. Then again, maybe it's not so surprising. Stockman's tenure at UBS included disastrous years that led the firm to become one of the worst-hit European banks during the subprime meltdown.

Henri Steenkamp, chief financial officer of MF Global
Call him the rookie. In March of 2011, Steenkamp, still in his early 30s, replaced a much more seasoned CFO. His predecessor was Randy MacDonald, who had served as MF Global's CFO for three years after holding the CFO and chief operating officer posts at TD Ameritrade (NAS: AMTD) . Prior to that, MacDonald was CFO of Investment Technology Group (NYS: ITG) .

Steenkamp, by contrast, was promoted to CFO after four years as chief accounting officer and controller. He had spent eight years with PricewaterhouseCoopers before joining Man Financial's accounting department in 2006.

What makes the switch intriguing is that MacDonald wasn't leaving the company. Instead, he was named head of MF Global's retail business. Coincidence? Oddity? You don't need a tinfoil chapeau to wonder why this relatively inexperienced executive was put in place over a much more experienced one. Nor is it stretching to wonder whether this C-level shake-up had something to do with MF Global's failure just seven months hence.

Gary Gensler, chairman of the Commodity Futures Trading Commission
Another veteran of the Goldman Club -- he made partner at 30 and spent 18 years at the firm -- Gensler has thus far avoided much criticism, but that may not last. It was Gensler, after all, who was appointed by President Obama to lead the Commodities Futures Trading Commission in May 2009. He served as assistant and Undersecretary of the Treasury in the decade prior.

Pedigree isn't Gensler's problem. What is? His agency has been uncomfortably silent on why a securities regulator -- the Securities Investor Protection Corp., in this case -- was allowed to select a trustee for unlocking billions in frozen customer assets when only a few hundred MF Global accounts were securities-related. (Versus roughly 140,000 commodities and futures accounts.)

Gensler is nevertheless saying all the right things. He's recused himself from investigating MF Global because of his relationship with Corzine. He also publicly supports rules that prescribe segregating client funds at futures clearing firms, all things you'd expect from someone who helped develop the Sarbanes-Oxley legislation that was born out of the Enron scandal. Yet actions speak louder than words, and Gensler's CFTC failed to take an active role in making customers whole as soon the agency's regulators learned funds were missing.

Brad Abelow, chief operating officer of MF Global
For somebody with an impressive resume -- a former Goldman Sachs partner, treasurer of the state of New Jersey, chief of staff to the New Jersey Governor, and founder of a private equity fund -- there's not a whole lot of color readily available about Abelow. But understanding how he fits into the MF Global picture comes down to understanding his relationship to Corzine.

Abelow's career at Goldman overlapped with Corzine's, and he was named a partner while Corzine was co-CEO. Abelow was named New Jersey treasurer by then-Governor Corzine and was the chief of staff for -- you guessed it -- Corzine. And, finally, it was Corzine who hired Abelow to take over as COO at MF Global.

James Giddens, partner at Hughes Hubbard & Reed and appointed trustee for unwinding MF Global assets
A partner at the New York law firm Hughes Hubbard & Reed, Giddens is the trustee responsible for unwinding MF Global, appointed at the behest of the SIPC, which he's been involved with since 1970. He's also the man responsible for leading the effort to unwind Lehman Brothers. Giddens has been involved in at least seven major liquidations of securities broker-dealers. What hasn't he done? Liquidate a futures commission merchant like MF Global. It's because of Giddens' inexperience in this particular segment of the financial markets that has sources we've spoken with expressing concern that it'll take longer to unwind MF Global than optimists would like to believe.

Our team here at The Motley Fool is continuing to dig deep into the MF Global mess. If you'd like to share any information, you can email us at tips@fool.com or call our tip line at 703-254-1546.

Also, if you want to stay up to date on the emerging story at MF Global and participate in efforts to reform Wall Street, shoot a blank email to imoscovitz@fool.com.

At the time this article was published Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Berkshire Hathaway at the time of publication. Fool contributor Matt Koppenheffer also owned shares of Berkshire at the time of publication.The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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bobandiane

Strange how silent the national LIBERAL media has been on MF Global or is it? The CEO was a DEMOCRATIC Senator and a Governor. Had he been a Rebuplican Sen. and Gov. the media would as likely as not be taking him apart piece by piece right now. It says a lot when the third most populous nation in the world and supposily the freest nation on earth has a media akin to the recently defunct Soviet Union's political arm Pravda. If this is not so how is it possible that an entire nation wide media in a country of over 300 million people speaks with one political voice.

November 25 2011 at 10:57 AM Report abuse rate up rate down Reply