Wall Street traders who make bets with a firm's own money usually have at least several sets of bosses looking over their shoulder.
At MF Global Holdings Ltd., where Jon S. Corzine made $6.3 billion in trades on European sovereign debt that sank the company last month, a different set of rules applied.
Corzine, the 64-year-old former New Jersey governor and Goldman Sachs Group Inc. chairman who took over as chairman and chief executive of MF Global in March 2010, reported only to the company's board of directors.
That means when Corzine put on the European trade, he didn't rely heavily on the risk-management department at MF Global, a system of internal oversight and controls. The arrangement is in sharp contrast to the growing power of risk managers at many U.S. banks and securities firms since the financial crisis.
In order to avoid potential blowups and satisfy nervous regulators, risk-management chiefs often report directly to the CEO or board, which are responsible for refereeing disputes between traders and risk officials.
At Morgan Stanley and Goldman Sachs Group Inc., for example, top executives rarely, if ever, initiate a specific trading strategy, according to people familiar with the matter. Instead, those securities firms rely on traders who must seek approval from superiors for large bets, sometimes seven or eight layers of management that might even include the CEO's thoughts about the trade.
At MF Global, Corzine and a seven-person board that included directors with several decades of combined experience in the financial industry had several "vigorous debates" about the European bets he began making in September 2010, according to a person briefed on the situation. Those discussions continued as the size of the trades swelled earlier this year.
People familiar with the matter say the board set specific limits so that the overall bet on bonds of countries such as Portugal, Ireland, Spain and Italy wouldn't grow larger. Those restrictions suggest that MF Global directors may have viewed themselves as Corzine's risk-management department.
Still, one former MF Global executive who owned shares in the New York company when it filed for bankruptcy protection Oct. 31 says having one oversight procedure for the boss and another for the rest of the firm's traders was "a bad recipe."
"I could kick myself for not recognizing it sooner," he adds.
MF Global's operations chief, Bradley Abelow, also had concerns about the European trade, according to people familiar with the matter. While he didn't have much influence over trading, he preferred the firm take risks to help clients rather than make its own bets, one of the people said.
Corzine made his name and fortune as a bond trader at Goldman, and his employment contract with MF Global noted he would "report exclusively to the board."
Corzine often visited MF Global's trading desks. He said MF Global needed to take more risks, and he brought in more than 1,000 new employees, including new traders who had worked at large firms such as UBS AG and Citigroup Inc. The company also lost or let go nearly 1,400 workers.
One of the highest-profile departures was MF Global's chief risk officer, Michael K. Roseman, who left the company early this year. Roseman couldn't be reached for comment.
Some executives and regulators asked questions about the size of Corzine's bet on Europe. In one case, Corzine responded to suggestions from a trader that the bet was too big by saying he thought it was the best way for the firm to make money, according to a person familiar with the conversation.
Roseman was succeeded as MF Global's top risk officer by Michael Stockman, a former risk official at UBS. After joining MF Global, Stockman often helped prepare presentations about Corzine's trading strategy to the board, a person familiar with the matter says.
After conference calls about the trade, Stockman would help make sure the bets adhered to limits set by the board, this person says.
Stockman couldn't be reached for comment, but a former MF Global official says he didn't openly support or resist Corzine's trading strategy.
One reason Corzine stood by the European bet: Its structure allowed the firm to get favorable capital treatment from regulators and book all the potential yields on the bond purchases at the same time the trades were made. But in August, the firm's U.S. brokerage unit was required by regulators to set aside more capital in case the bets soured. The firm met the toughened requirements by shifting money to different units.
On Tuesday, the trustee winding down MF Global's brokerage said $1.3 billion of "previously identified" segregated cash and securities at Harris Bank, which cleared some MF Global trades, had begun to be returned to the firm's estate. Those funds are separate from money missing from segregated customer accounts, which the trustee says could exceed $1.2 billion
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