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Corzine Expansion of MF Global Puts Its Cash on Line (Update1)

March 24 (Bloomberg) -- Jon Corzine, the former New Jersey Governor who ran Goldman, Sachs & Co. from 1994 to 1999, plans to expand MF Global Holdings Inc. beyond its futures brokerage by putting its money on the line for the first time.

Corzine, 63, became chairman and chief executive officer of the derivatives broker yesterday, returning to Wall Street following the worst financial crisis since the 1930s and his election defeat last year. New York-based MF Global has applied to become a primary dealer of U.S. government securities to expand its business into trades in which it takes on the kind of risk associated with the world’s biggest banks.

“Since the election, what he’s really wanted is to have an operating base that he could turn into a significant financial services firm,” said Orin Kramer, general partner of Boston Provident Partners LP and chairman of the council that oversees New Jersey’s $67 billion pension fund. “He had more choices than people have fingers and toes,” Kramer said. “He knows that he has to build a serious, profitable business.”

Corzine takes the helm at MF Global at a time when its business has been hurt by low interest rates and depressed trading volumes for futures. Fitch Ratings said the company’s credit ratings may be at risk following the departure of CEO Bernard Dan. Moody’s Investors Service said its outlook continues to reflect the company’s “high leverage and weak profitability.”

Credit Ranking

Moody’s gives MF Global a Baa2 ranking, the second-lowest level of investment grade, and Fitch assigns the company an equivalent BBB. MF Global, which rose 15 cents, or 2.1 percent, yesterday to $7.32 on the New York Stock Exchange, climbed to $8.20 in after-market trading.

MF Global rose the most in a year, rising as much as 15 percent to $8.42 as of 9:44 a.m. in New York Stock Exchange composite trading. That’s the biggest gain since March 23, 2009, the stock jumped 16.7 percent.

“We have some challenges. I don’t think anyone here is happy with the earnings profile,” Corzine said yesterday in an interview. “A lot of the strategic possibilities with MF Global are really exciting and this gets to my desire to play in a more entrepreneurial environment.”

MF Global spokesman Jeremy Skule declined to comment on the process to become a primary dealer, which would allow the company to trade directly with the Federal Reserve Bank of New York and obligates it to bid at auctions for government securities.

Company Investor

J.C. Flowers & Co., which controls two seats on MF Global’s nine-member board after investing as much as $300 million in the company in 2008, said yesterday that Corzine was appointed operating partner. The buyout firm, headed by former Goldman Sachs banker Christopher Flowers, recommended Corzine for the MF Global position, according to spokeswoman Marcia Horowitz. In October 2007, Corzine called Flowers “an extraordinary investor” who helps oversee some of his personal investments.

MF Global’s plan to become a primary dealer is a major part of a strategy to increase revenue, Corzine said. By necessity the company will have to take on trades from the New York Fed with its own money to sell those government securities to its customers, potentially leading the broker to take on swaps transaction in the future, he said.

Corzine’s “very focused on building a franchise, that’s what he finds interesting,” said Bradley Abelow, a former Corzine chief of staff and a founding partner of New York-based private-equity firm NewWorld Capital Group. “He wants to operate at the strategic level.”

Credit-Default Swaps

MF Global has recently hired traders in the credit-default swaps market to boost its offering to customers. The group is headed by James Parascandola, formerly of Barclays Capital, and Tommy Taylor, who was at GFI Group Inc. “Maybe in six to eight months we’ll be seen as a major execution agency player,” former CEO Dan said in an interview earlier this month.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Dan, 50, left for personal reasons and will stay until May 16 to aid in Corzine’s transition, the company said.

MF Global, the former brokerage unit of London-based Man Group Plc, provides execution and clearing services for exchange-traded and over-the-counter derivatives and foreign- exchange products. It became a public company in 2007 and soon saw its shares plunge after questions arose over its risk- management practices. The stock fell 45 percent in two days in February 2008 after the company disclosed that a broker lost $141 million on what it said were unauthorized wheat-futures trades.

Risk Management

By the end of 2008 it had lost more than 90 percent of its value after earnings fell short of forecasts and amid confusion over financing deals that were done to repay debt. The chief executive at the time, Kevin Davis, resigned in October 2008 and Dan, the former CEO of the Chicago Board of Trade, took over.

“We need to make our capital structure more secure over time,” Corzine said. He hasn’t had a chance to evaluate MF Global’s risk-management systems, though that is part of his short-term plan to become familiar with the company, he said.

MF Global expects net revenue in the current quarter to be $235 million to $245 million, the company said. It hadn’t provided prior guidance, Skule said. Net revenue, which excludes interest and transaction-based expenses, was $251 million last quarter. Its capital and cash positions shouldn’t be “materially different” than on Dec. 31, the company said yesterday.

Defeated by Christie

Corzine will be paid an initial salary of $1.5 million and a $1.5 million signing bonus, MF Global said in a regulatory filing.

The former governor has a target bonus of $3 million for the fiscal year ending March 31, 2011, with a minimum of $2 million if individual and company goals are met, the company said. He was awarded a stock option to buy 2.5 million MF Global shares equal to the closing price on April 7 this year, according to the company.

A Democrat, Corzine was defeated in the November election by Republican Chris Christie, 47, amid voter anger over the state’s finances and the U.S. recession. Corzine had said he was interested in returning to Wall Street after leaving office.

Illinois Roots

The Illinois-born son of a farmer and schoolteacher, Corzine graduated from the University of Illinois at Urbana- Champaign in 1969 and received his master’s degree in business administration from the University of Chicago in 1973.

Corzine moved to New Jersey after he was recruited to be a bond trader in 1975 by New York-based Goldman Sachs. He became chairman and CEO in 1994 and left in 1999 as the firm went public. Corzine was elected to the U.S. Senate the following year and became governor in 2006.

Since entering politics, Corzine has spent more than $130 million of his own money seeking office, according to state and federal election records. Divorced in 2003, Corzine currently lives in Hoboken, New Jersey, and has three grown children.

--Editors: Alan Goldstein, Robert Burgess, Michael Weiss

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