Risky Business (Part 1)

Well, now we know what MF stands for.

With the MF Global bankruptcy we see the first US casualty of the European debt crisis. Three thousand jobs are on the line as the company desperately seeks to straighten out its customer accounts and line up interim funding while its Chapter 11 filing is pending. The failure of Jon Corzine’s latest enterprise brings to mind Benjamin Graham’s famous admonition in The Intelligent Investor: investing isn’t so much about managing money as it is about managing risk.

At the end of the book Graham lays out four basic admonitions that constitute intelligent investing. The first of these is to know what you are doing. He advises business people to get to know the values of the securities they are investing in as well as they might know the value of some merchandise they might manufacture or deal in. It’s similar to the notion of a “competitive edge”: everyone has some sort of expertise.

Now by all accounts Jon Corzine is an clever man. But I don’t know where or when he became an expert on European finance. By all accounts he had over $6 billion invested in the sovereign debt of troubled European countries. His tenure as Governor of New Jersey might have given him some insight into municipal operations, but Greece? Italy?

Also, basic tenets of risk management demand diversification. Most banks limit their exposure to any single credit to less than 15% of their capital. But MF Global had over 300% of its capital committed to the European debt-circus. That’s not investing—that’s getting a hunch and betting a bunch.

It’s sad to see a storied career end tragically. But we often learn best from failure. Let’s hope that Corzine’s trials can become a profitable lesson for all of us.

Douglas R. Tengdin, CFA
Chief Investment Officer
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