Incarcerate Corzine

If wishes were horses, beggars would ride, according to a 16th century British proverb.

Continuing that logic, if wishes were $1.2 billion of missing client assets at MF Global, the company’s former CEO, Jon Corzine, would not be a criminal. But alas, wishes are neither horses nor missing client funds…so beggars don’t ride and CEO’s that “misplace” $1.2 billion of client funds are criminals.

Does Corzine deserve his day in court? Absolutely. Let’s give him several days in court…after which let’s give him several years in jail.

Perhaps there is a legitimate defense for Corzine’s overtly indefensible act. But we pity the poor defense attorney who has to come up with that one. In the heavily regulated, frequently audited and continuously marked-to-market world of broker-dealer operations, $1.2 billion does not simply “go missing”…and if it does, the CEO absolutely, positively knows about it, if he did not directly authorize it himself.

Were it not so, dear reader, Mr. Corzine would not have appeared before Congress yesterday with the lamest of all possible defenses. He would not have delivered a series of “oh my gosh,” “gee whiz,” “golly gee,” “I wish I knew what happened,” and “shucks, I feel awful” remarks.

“I certainly would never intend to direct or have segregated funds moved,” said the über-sophisticated former CEO of Goldman Sachs. “I simply do not know where the money is.”

Hard to believe? Not at all. It is impossible to believe.

Goldman Sachs built an empire on one simple principal: Know where the money is. A lifelong “money man” does not take the helm of a “money business” without knowing exactly where the money is and what that money is doing. That defense is preposterous, ridiculous, absurd, unbelievable and utterly false…as Corzine’s days in court will unquestionably prove.

To provide a bit of context, the remarks of Jon Corzine, the newly installed CEO of MF Global seem far more illuminating — and credible — than the remarks of Jon Corzine, the recently dismissed CEO of MF Global.

“In May 2010, on his first conference call [as CEO] with analysts, Mr. Corzine made clear he wanted to take big risks,” The Wall Street Journal reports. “‘As he seeks to realign the brokerage, Corzine said MF Global will begin taking principal risk across most of its product lines,’ reported Dow Jones. In other words, MF would increasingly bet its own capital, instead of simply servicing clients. MF Global created a new proprietary trading desk…and Mr. Corzine began making the bets on European sovereign debt that would total $6.3 billion and eventually wreck the business.

“MF Global’s new trading frenzy might have attracted even more attention,” the Journal continues, “if Mr. Corzine had hidden his biggest bets. His purchases of European government bonds added up to several times MF Global’s [net worth]. But by using a ‘repo-to-maturity’ technique, he was able to consider them ‘sold’ for counting purposes and therefore they disappeared from MF Global’s balance sheet.”

Seems a bit Enron-esque, doesn’t it. Enron was, of course, the massive fraud perpetrated a decade ago that prompted the anti-corruption Sarbanes-Oxley financial regulation bill, which then-Senator Corzine voted for.

“It’s really rather simple,” writes Karl Denniger in The Market Ticker, “No more off-balance sheet anything — anywhere. There is only one purpose for such ‘instruments’ and games — hiding the amount of risk you have on and exactly where and how you are exposed. There is no other reason for these vehicles; if you are willing to take the risk you should have to do so in the open on your balance sheet where it can be seen.

“Next,” Denninger continues, “enforce Sarbanes-Oxley. Start with indictments. Sarbanes-Oxley, which Senator Corzine voted for, makes the CEO and CFO responsible for knowing — not merely responsible for attesting to what they [happen to] know — and it also makes them personally responsible for the sufficiency of internal controls. ‘I didn’t know’ was a common defense after the Tech Wreck began and it got many executives off — Sarbanes-Oxley was passed to specifically deny executives this defense.

“Last,” says Denninger, “make it a criminal felony to operate a financial firm holding customer funds of any sort for any period of time — even one day — while ‘underwater.’… That would do it… We must put a stop to this crap.”

Agreed. Let Corzine be the first high-profile test case under the legislation he himself endorsed. I think the term is “poetic justice.”

Some of you may be saying, “Hey Eric, hang on. Corzine may be innocent. And even if he is guilty, give the guy a break. Let him defend himself.”

I agree…completely. Whether the man be innocent or guilty, let the due process begin…immediately. Let the due process begin — the identical due process that never managed to gain any traction during the serial financial rape of 2008, otherwise known as the Credit Crisis of 2008. In the midst of that crime scene — featuring one infamous Treasury Secretary and a cabal of infamous finance company CEOs — due process went into hibernation.

Many were the victims of the institutionalized fraud — and cover-up — that produced the 2008 crisis. Zero were the indictments of suspected perpetrators. Maybe there were no criminals in that circumstance. Maybe the whole thing was just a great, big tragic accident. But why deny the criminal justice system in the United States the opportunity to air the facts of various suspected frauds, weigh the evidence and render a judgment, innocent or guilty?

Due process does not merely exist to punish the guilty; it also exists to protect the innocent, like the folks who can’t find their money inside their MF Global accounts. One could argue that if due process had been allowed to operate during the aftermath of the 2008 crisis, the MF Global tragedy might never have occurred.

I’m not asking that Corzine go to jail, at least not without a trial; I’m just suggesting that “Justice” puts her blindfold back on. Lots of people break laws…sometimes even former Senators. In fact, would you believe it, sometimes a former Goldman Sachs CEO is also capable of breaking a law or two.

If Corzine didn’t break any laws, so be it. Let him present his case in court in the full light of public scrutiny. But if he did break a law or two, there’s a special housing development for him on New York’s Upper East Side; it’s called Rikers Island.

And by the way, the Statute of Limitations has not run out yet on the probable crimes of the 2008 Crisis. So after incarcerating Corzine, how about we prosecute Paulson?


Eric J. Fry,
for The Daily Reckoning

The Daily Reckoning