Posted: May 25th, 2022
Mf Global — Case Study Question
Which ethical systems were at work for key individuals in the organization managers, executives, and employees?
After Jon Corzine took over as CEO in early 2010, he piloted a highly risky investment in the bonds of European countries whose financial situation were already in crisis. The main problem with the move was that MF Global, under Corizine’s direction, made substantial investments that were not secured by any collateral other than by the bonds themselves (Lucchetti & Spector, 2011). The plan was to fund the investments with the firm’s assets and with customers’ money in the short-term until those bonds matured (Protess & Ahmed,, 2012). The firm’s Chief Risk Officer, Michael Roseman, specifically cautioned that MF lacked the necessary cash on hand to counterbalance the potential risk of its bond holdings in Belgium, Ireland, Italy, Portugal, and Spain. Furthermore, Roseman argued that the risks of those positions could result in a credit rating downgrade, precisely because of the exposure. To make matters worse, executive management issued simultaneous orders to middle management to instruct traders to take more risks to try to increase profits in the short-term (Lucchetti & Spector, 2011).
Despite Roseman’s warnings about the inadvisability of the move, both Corzine and the MF Global Board of Directors discounted those risks and proceeded with the risky plan (Lucchetti & Spector, 2011). Ignoring the risks identified by the risk management office presents an inherent ethical violation of due diligence on the part of the CEO and the Board. Instead of heeding that advice, MF Global relied on accounting manipulation based on loopholes allowing it to keep its reliance on bonds for the loan collateral off of its balance sheet, and therefore, hide the inherent risk from public view, at least until it was questioned by one of MF Global’s regulators, leading to public disclosure (Lucchetti & Spector, 2011).
How did the organizational leadership come into play? How did ethical behavior and responsibility differ between employees and management? Pay particular attention to the role of middle management and executive management in causing or resolving the issue.
The principal problem at the middle management and employee level at MF Global was that the task of measuring the capital at risk from proprietary trading was not performed by executive management and that those risks were ignored after being brought to their attention (Protess & Ahmed,, 2012). Meanwhile, traders typically do not conduct thorough risk assessment of their trades and of the capital required to fund investment strategies because their competitive concerns are day-to-day and not long-term or strategic. Since the traders were not responsible for their own stand-alone balance sheets, they had little incentive to worry about the larger implications of their trades. Moreover, their income was directly linked to their sales volume, making it unrealistic to expect them to exercise greater caution than being asked of them by middle management. It is difficult to consider the actions of traders an ethical violation because managing risks associated with linking proprietary trading and other firm activities onto the same balance sheet falls outside the scope of their ethical responsibilities (Lucchetti & Spector, 2011).
Ultimately, the fall of MF Global was mainly the fault of the firm’s CEO, John Corzine, and of the Board of Directors for failing to heed the warnings from the risk management office in connection with a hedged bet of the firm’s capital on bonds issued by European nations with highly unstable economies. Within that framework, middle management and individual traders had comparatively little ethical responsibility to second-guess those decisions or to manage risk more carefully at their respective levels.
Protess, B. And Ahmed, A. “U.S. Inquiry of MF Global Gains Speed.” The New York
Times (January 9, 2012). Retrieved online from:
Lucchetti, A. And Spector, M. “The Unraveling of MF Global: With $1.2 Billion Still
Missing, Corzine’s Desperate Strategy Comes into Focus.” The Wall Street
Journal (December 31, 2011). Retrieved online from:
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