Leadership in Finance: MF Global’s Randy MacDonald

The CFO talks about his rocky first year as CFO of the options brokerage.
Sarah JohnsonJune 15, 2009

J. Randy MacDonald says he wanted a real challenge for his next role when he was in between jobs last year, following his seven-year CFO stint at TD Ameritrade. And he got it with options brokerage MF Global, which was just beginning to recover from a financial scandal.

Last year, two months before MacDonald joined the firm, a trader who has since been fired used a personal account to trade wheat futures beyond the amount allowed under the company’s policy. The firm took a $141 million write-off, and quickly saw a falloff in its stock price and investor confidence in its liquidity position. Moreover, the U.S. financial crisis was beginning to take shape, putting the firm’s ability to refinance a $1.4 billion bridge loan in jeopardy.

Since MacDonald started the job in April 2008, the firm has begun a restructuring project that included an almost complete turnover in senior management, including that of MacDonald’s boss. Bernard Dan, then MF’s chief operating officer, replaced Kevin Davis as CEO last fall.

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Among MacDonald’s main tasks has been working on improving the firm’s risk-management function, including the hiring of a chief risk officer. The hope is that the new position will prevent “hiccups” and resulting nonrecurring charges against earnings, MacDonald says. “You work really hard every day to get a client, to do trades, to get their balances, to get their assets, and then you have something bad happen,” he adds. “It’s the equivalent of millions of trades, millions of dollars a spread, and it’s all gone in an instant because you didn’t have good risk management.”

While improving how the firm manages risk was a top concern, MacDonald had to put some of his other priorities on hold, at least temporarily, as the economy began to sink and his ability to get refinancing slowed to a crawl.

Indeed, in an interview with, MacDonald acknowledges that not everything has gone as planned. For instance, the firm recently offered to repurchase up to $210 million in convertible notes that were due in 2038, but only $5 million of the notes were tendered. A more successful offer could have put a dent in MF’s annual interest costs, according to Moody’s Investors Services, by about $19 million.

In the meantime, MacDonald has worked to effect change in MF’s business model as well as the structure of the finance department. “All of the additional stress we as a firm and as an industry are going through is analogous to trying to change the tires on a speeding car,” MacDonald says. “We’re asking people to do some fairly big things in a short amount of time and keep their eye on the horizon.”

Some of those changes have involved keeping a focus on the firm’s short-term financial risks, by paying off $240 million in cash for an unsecured term-loan facility that would have matured next July. MF used almost half of the more than $500 million in excess capital it was able to free up from its overseas regulators.

MF Global claims it’s one of the few, if not the only, financial services firms to retire debt entirely with cash during this downturn. However, like other financial institutions, it’s had negative news to report: a 12% decline in net revenue, to $1.4 billion, for the year ended March 31, and resulting in a $69.5 million net loss. The fourth quarter was especially down, from an $83.1 million loss to a $111.7 million deficit.

An edited version of MacDonald’s interview with follows.

Why did you take this job?
MF was  without a CFO at that time and worried about whether they could get their $1.4 billion bridge loan refinanced. I came here to talk to the CEO and the board about what they were going through but said I wasn’t really interested in a traditional CFO job — it’s not what I do. However, I said, if the CEO wants to have a partner in the business, then I’m certainly interested in helping to engineer MF for future growth and success and profitability.

What do you mean by not being a traditional CFO?

I’m responsible for some of the things you would expect, like treasury, finance, and tax. But I’m also in charge of strategy and M&A, and I told them I’d like to get the risk process started.

How did your expectations of what you would accomplish when you took the job evolve as outside factors changed?
What consumed my time for the first three months was refinancing the $1.4 billion. Remember, at that time, Bear Stearns was going out of business. There was this hint that maybe a wave was going to hit the beach, but no one knew it was going to be a tsunami. Within a couple of weeks, it was clear that the capital markets were drying up, and very quickly. I was pretty much consumed with getting the refinancing taken care of and taking away any refinancing risk away from our shareholders.

So this refinancing took longer than usual?
Yes. For three reasons: the malaise of the economy and it’s impact on MF’s business; the closing of credit markets; and the complexity of the bridge loan. It involved 11 banks, and the facility needed a 100% vote. Normally you have one lead bank. In this case we had 11 lead banks that represented the syndicate. If one of them dissented on our terms, tough luck. Certainly, it was a unique structure I got handed.

You had to begin with those terms — they couldn’t be changed?
That was a given. After we closed the deal, Lehman was out of business and rumors were flying abut everybody else. People called and said, “Wow, either you’re really brilliant,or lucky, or both.”

What became your next priority?
In July, I turned my attention to the governance model. I introduced the concept of program management. If you have a strategy and an executable plan but nobody knows how to do it, it’s all for naught. It’s teaching people how to do things in a better, more efficient way. Also, we didn’t have a chief risk officer, so I started a framework for a much more disciplined process around enterprise risk management. We have since hired a CRO, and we have created a first-class enterprise risk management process.

Did you make any changes to the way your department is structured?
I had to introduce a process for all of the areas that directly report to me. We call it reengineering. I did this for this finance, treasury, and tax. We got together as a team, including CFOs in each region, and drew up the most optimal organizational structure. It turns out that after they drew up a new organizational structures and filled in all roles and responsibilities, there wasots of confusion about what one person’s role was versus another. That’s an easy way for someone not be accountable.

Once we got the right roles and responsibilities [designated], we looked at our processes. For instance, one of our regions was posting 7,000 journal entries every month to close the books. That’s way too many. We were able to eliminate 5,000 entries.

We’ve also improved our transparency around the financial model and the balance sheet in particular. We have gotten very high marks for how transparent we made our business model. Basically all we do is take money from our clients as deposits against their trading, invest, and make a spread. We have carefully and precisely managed our capital, optimized it to the point where the rating agencies and the regulators are very comfortable with our governance model. And we’ve been able free up a lot of our capital. Some of that has been because the markets are bad and we’ve been able to retire a lot of debt.

Why did you decide to use your excess capital to retire debt?
There are only a handful of things you can do with capital. You can pay a dividend, buy a company, reinvest it in the business, retire debt, or do nothing. For M&A, very few people want to sell out for cash; they want to do a stock-for stock-deal. We have more than enough cash for a small deal, but if it’s a large deal, chances are it would be stock for stock. [We believe] private-equity firms would love to buy our equity if we had a large deal that required cash.

So cross M&A off the list — we have the ability to do M&A under almost any circumstance. Dividends don’t make sense given that we have debt on the balance sheet. I’d rather retire the debt than pay a dividend; that’s a better use of the money. And sitting on the money doesn’t make sense when fed funds are at 25 basis points.

We offered senior convertible notes, which had an equity component, and offered to buy those notes back at a discount. That way we would be retiring the [debt] but also buying back in shares. But we only got $5 million out of $210 million completed. That doesn’t mean we can’t go back to the market and do that again. In the meantime, we did have term debt. We felt we had more than enough capital to pay that off and retire that [$240 million], which we did in April. And we still have excess capital and cash.

At the time, Standard & Poor’s looked down at the tender offer, saying it was worried about MF’s liquidity and financial flexibility and thought the offer could increase your need for more long-term financing. Do you feel you have enough flexibility if the economy doesn’t improve or stays the same?
We have a ton of liquidity. The definition of liquidity is what I need to finance the business every day. Part of it is long-term capital. I have a $1.5 billion revolver and have drawn down only $642 million of that. We have a great liquidity profile in terms of capital structure, we have permanency of capital, we have laddered maturities, and diversity.

Can you distinguish how your role as CFO would have played out differently without the downturn?
I don’t think they wouldn’t have needed me. If the fast-finger trader incident hadn’t happened last February, and if Bear Stearns hadn’t happened, MF might have gotten a more traditional CFO. Who knows what would have happened, but I don’t think you’d see the same governance structuring, the reengineering, or the capital structure you see today.

How have you decided where to cut costs and when to put some projects aside?
I refer to cost-cutting as engineering. It’s easy to cost cut. The problem is that it may look good the first time you cut the cost and then when things blow up, investors want to know how you allowed that to happen. So you need to be cognizant of how you deploy resources.

For instance, if we’re going to hire someone, I want the analysis of how they’re saving the firm money or how they’ll produce profitable scalable growth for the firm in the short term. I’m not going to hire people unless there’s a multiple of return on that investment. And I do that for every single one of my functions, including tax and HR.

How do you know you’ll get the ROI you want?
Nearly everyone in the firm has a scorecard. Anyone who wants to do a project has to answer: Is this going to help the firm grow? How scalable is it, or do we have to hire a person every time we do another trade? What are the margins, and is this attractive for shareholders? What’s the profitability? And, since we are not interested in creating gobs and gobs of capital, what is the capital commitment on this?

We also have to identify our risk appetites. For every piece of business and every product, we detail for ourselves and the board risk tolerances. How we measure that and everything we do is relative to that. It’s easy for people to tell me they’re going to bring in new clients or new business, but it’s a harder for them to tell me what the risk profile is. We have a risk-management team that monitors that.

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