MF Global, the hedge fund run into the ground by former senator/New Jersey governor, Jon Corzine, is in bankruptcy. For the record, New Jersey nearly experienced the same fate when Mr. Corzine was at the helm there. The ignominious collapse carries this added bonus: A cool $1.2 bil (at least) is missing, and the bankruptcy trustee is struggling mightily to figure out what happened. The Barometer is keenly aware when one of her children has â€œborrowedâ€ a twenty from her wallet. Losing $1.2 bil staggers the imagination.
Last year, MF Global cut the pay of 1,121 employees. The 10% pay cut was not truly a pay cut, just an alteration in how compensation would be paid. The 10%, instead of being doled out in cash, would be used to purchase restricted stock in MF Global for those employees. The company saved $58 million in cash compensation with this new pay plan. For those of you attempting to keep score as you make about $1,121 per week, that translated to an average of $51,739.52 per employee in the 1,121 group. The change-in-pay also meant that these employees would be subject to the buffetings of our unforgiving market. In other words, whether the 10% pay cut was indeed a pay cut depended upon how well MF Global performed.
Well, as those not living under a rock know, Mr. Crozine bet heavily on the debt of the PIGS (Portugal, Italty, Greece, and Spain). Even as Greece was torn apart by riots and its rating sank to a â€œdonâ€™t even travel to Greece let alone invest in itâ€ level, Mr. Corzine bet the bank that there would always be a Greece as long as Merkel and Sarkozy were bailing out the EU. Mr. Corzine bet wrong. Indeed, Mr. Corzine bet foolishly.
Before the bankruptcy filing, MF Global shares were at $7.27. On Friday, December 2, those shares were at $0.13, so the 1,121 employees lost $113.5 million in total. One employee was outraged that the pay plan cost him $100,000.
Perhaps the employees should sit down with an MF Global customer or two to discuss losses. MF Global employees still got paid, despite working at a company that has been on a Bataan death march since it opted to believe in Greek resilience. Customers will be lucky to get $0.10 on the dollar.
It takes some nerve for these MF Global employees to be photographed and interviewed for the Wall Street Journal complaining about their pay cuts from their company when said company is in bankruptcy, its executives are lawyered up, and its documents are under Congressional and federal subpoena. Indeed, it would be easier to list the federal agencies that are NOT investigating this collapse.
The market does have its risks, and if your pay is tied to the performance of what you dabble in â€“ i.e., trading and investing, well, the theory goes that you will use caution due to your skin in the game. The problem may not have been the 10% cash compensation translated over to restricted stock. The problem may have been that the 10% was simply not enough to motivate employees at MF Global to work at investment management with the same diligence and prudence they would employ in managing their own funds. Hereâ€™s the best part: The employees now say that they were upset about the stock compensation at the time because they didnâ€™t want to be subject to that kind of risk.
Wall Street now follows the suburban â€œall children are winnersâ€ mentality â€“ all the kids on soccer teams get a trophy, regardless of skill, results, or effort. That kind of mentality is whatâ€™s killing companies, markets, and economic systems. Irwin Stelzer was right. Capitalism without failure is like religion without sin â€“ you are not going to get much self-improvement in either system if there is no downside. In fact, what you get is a failed company whose fate was determined by illogical, nay, foolhardy, investment decisions.