MF Global may prove to be yet another example of how meaningless the word “bonus” has become. One of the trustees overseeing the broken firm wants to pay out hundreds of thousands of dollars to three executives who used to report to Jon Corzine, the former CEO. This sounds bad, but some important details make it even worse.
As you know, MF Global is toast. The company filed for Chapter 11 bankruptcy last Halloween, becoming the 8th largest company to do so in US history. As is usual in Chapter 11 bankruptcies, a trustee has been appointed to oversee the company. Robert Bernstein explains why (emphasis mine):
The Bankruptcy Code provides two justifications for the appointment of a trustee. The first is the appointment for “cause,” which includes fraud, dishonesty, incompetence, or gross mismanagement either before or after the bankruptcy filing. The second is less objective. Under it, the appointment is made if it is found to be in the interests of “creditors, any equity security holders, and other interest of the estate.”
In other words, the fact that a trustee had to be appointed is further confirmation of just how bad the legacy management team of MF Global was. The Chapter 11 trustee for MF Global Holding Ltd. is Louis Freeh, the former FBI director. His aim is to make sure that the creditors, the companies that have lent money to MF Global, are repaid. That is his main priority.
Now that takes care of the holding company, the parent-level entity that provides no goods or services, itself. Now, MF Global’s main business activity was brokerage, i.e. it was an agent executing orders on behalf of its customers. This is why the Securities Investor Protection Corp, the SIPC, has also gotten involved. The SIPC was created by Congress in 1970 and its one and only job is to make sure that the customers of failed brokerages get their money back. It didn’t waste any time: it filed suit against MF Global Inc. (the brokerage entity) on the same day that MF Global Holding filed for Chapter 11 protection. At SIPC’s request another trustee was appointed by the court– James Giddens, the same trustee who helped to liquidate Lehman’s brokerage.
So, to sum up, we have two trustees for MF:
- Louis Freeh, the Chapter 11 trustee who’s responsible for making sure that banks and other large institutions are repaid money that they intentionally lent to MF and
- James Giddens, the SIPC trustee who’s responsible for making sure that customers, large and small, are repaid the $1.6 billion of their own money that MF Global used without asking their permission. Which is just about the worse sin that a broker can commit.
And which of these trustees is now arguing that the same executives who presided over the failure of the firm — the Chief Operating Officer, the Chief Financial Officer, and the Chief Legal Officer — should get hundreds of thousands of dollars in bonuses for helping to unwind the company? Louis Freeh, the trustee working on behalf of the lenders. According to his spokesman the “value” that these three executives are providing to help recover assets for the estate “outweighs the cost to retain them”. More from Bloomberg:
The bonus amounts for the three executives would be less than they made prior to the bankruptcy, said Diana DeSocio, an MF Global spokeswoman. She declined to comment on how much they might be and said Freeh will separately seek court permission to pay another 21 staff working on the estate. The staff are assisting Freeh with identifying assets, and fulfilling the company’s duty to report to regulators and tax authorities, she said.
This is hugely different from the treatment for Giddens’ customer-focused team. Bloomberg again:
Giddens’s staff currently consists of about 70 former MF Global employees, none of whom are executives or get bonuses, said Kent Jarrell, a spokesman for Giddens. The brokerage estate, which is entirely separate from that of the holding company, has cut staff week by week as it comes closer to completing its work and expects to have 50 people left by next month, he said.
This makes it more difficult to argue that Freeh’s team should get bonuses. Especially when you consider the New York Times report that “nearly all of the customers [for which Giddens works] have made claims for less than $100,000.” Giving bonuses of hundreds of thousands of dollars to the execs who helped cause this disaster in the first place might actually prevent swindled customers from getting their money back. The bankruptcy judge should deny Freeh’s request.