Before his tenure in politics, New Jersey Gov. Jon Corzine spent 24 years at Goldman, Sachs & Co., eventually working his way up to chief executive officer and steering the company from a private firm to a publicly traded corporation.
He then became a U.S. senator from New Jersey in 2000, serving on the Banking and Budget committees, among others. Corzine, a Democrat, also helped craft the Sarbanes-Oxley Act, which tightened accounting practices in response to the corporate corruption scandals of Enron, WorldCom, and other businesses.
He became the Garden State's 54th governor in January 2005 and has yet to formally announce his bid for re-election in November. Corzine last week sat down with The Bond Buyer at the governor's mansion in Princeton to talk about recent events in the capital markets and fiscal issues facing his state.
BB: When the federal officials were putting together the Troubled Asset Relief Program and then also the American Recovery and Reinvestment Act, the new stimulus plan, did anyone - in particular, people who you might have known at Goldman Sachs - call you up to get your input?
GOV. JON CORZINE: I had almost no discussions with anyone in the Bush administration. I've had more regular contact with people in the stimulus program. In fact, very active participation, and there is this so-called gang of six, which included [Massachusetts Gov. Deval Patrick, Wisconsin Gov. Jim Doyle, Ohio Gov. Ted Strickland, New York Gov. David Paterson, and Michigan Gov. Jennifer Granholm], that met on a pretty regular basis and tried to make sure that we had a coordinated viewpoint. And we worked with the National Governor's Association, too, but that group of six stayed together pretty tightly and typically stayed focused on stabilization of education spending. Just a huge gutting of education would have occurred without [President Obama's] initiative on adding that to the overall program. And all of us are very pleased, but I can't recall a discussion with anybody in the Bush administration.
BB: With the contraction of firms on Wall Street and the conversion of investment banks to bank holding companies, what does this mean for the future of capital markets?
CORZINE: I think that ... capital markets may actually be enhanced from the standpoint that people will go back to their core businesses of intermediating as opposed to positioning, because you're going to pull down the leverage numbers as they go from investment banks, which didn't have the kinds of constraints on leverage that banks did.
And that means that they'll focus more on their traditional underwriting and distribution, which is also a revenue producer. So I think capital markets can be - once there is stability returned to the market - I think actually very positive. I think that thoughtful and controlled and understood securitization will return to the markets. I don't think that capital markets are dead or unimportant.
I think actually they are going through what would happen naturally in a very difficult period of time economically, and we've come through a very lax regulatory period that I think was not good for the participants in the market.
You need some oversight and speed bumps in the system, and when they weren't there, I think people went to extremes and excess and that hurt capital markets and the participants in it. I think that those speed bumps and oversight will get reestablished in a more productive way.
I'm sure people will be griping and moaning that there's too much interference, but the idea that we have rationally leveraged institutions that are focused on core responsibilities like intermediation is a good thing. It doesn't mean that trading is bad, it just means that all those other things need to get done, too, and I think there will be decent returns on capital available to those people that do a good job of it.
BB: Do you think that nationalization might need to enter the picture?
CORZINE: Nationalization is a pejorative term that somehow has gotten into the water. The [Federal Deposit Insurance Corp.] has been taking over banks for a very long time. Bankruptcy has often had the federal government as a lender of last resort. I cite Chrysler.
BB: But if the federal government were to nationalize Citi or another investment bank ...?
CORZINE: What's the difference between Citi and Continental Bank [which underwent an FDIC takeover in the 1980s] given the size of the economy and the position? I'm not advocating one way or the other. I think if you get to 40% of the shareholding, generally that's pretty much a controlling share of interests.
You can call it whatever you want. It depends - what does the balance sheet look like? What does the capital position look like? I don't know those facts. We have the stress tests, whatever that ends up being, which should give the Treasury and the Federal Reserve a little insight into the capacity of that institution to survive under its own merits.
We essentially took over [American International Group Inc.] and they're now investigating a breakup plan that doesn't look too much different than what a private sector person might do. The guy running it is a former private sector CEO of an insurance company.
In and of itself, the government's participation doesn't have to be bad. By the way, it's not exactly like we were running these things like humming machines with private sector shareholders.
BB: In looking at Wall Street bonuses, how do you think they might change in the future and do you think they are still an appropriate way of compensation?
CORZINE: I think that bonuses that tend to be focused only on a certain time frame, an annual time frame, probably need to be rethought.
Sometimes what you earn in one year doesn't sustain itself in the second year, in the third year, and in the fourth year. So maybe we're going to have to stretch the horizons. I don't think people would pay bonuses for what you made in a week, right?
So one wonders whether the time frame and the long-term interests of the institution are properly aligned, and so I think structurally, if I were back on Wall Street, I'd be trying to create a longer-term responsibility for the earnings that are produced and that means some kind of longer-term payout on compensation packages.
There's a zillion different ways. I mean, you could have clawbacks, you could have people in restricted stock and out of money options, and a lot of different programmatic ways that you could look at these things that stretch people's horizons for what their responsibility is - as opposed to very, very short horizons that I think changed the dynamic in how people take risk and sort of skew it.
It doesn't mean that bonuses are forbidden. I just think they need to be restructured, and some people could argue that we've gotten a little unreasonable in some of the elements of bonus payments, but I guess that's in the eye of the beholder.
The overemphasis on financial services in the broader spectrum of the economy relative to real production is probably a bigger problem than bonuses. I mean, I think we got up to nine or 10% of the GDP out of financial services. And you wonder - you're always going to need bankers and remediation, but is this the best allocation of the bright minds, and are relative compensation levels in other parts of our economy properly represented in that competitive marketplace?
BB: New Jersey will use stimulus money to help balance operating budgets for this year and next. What happens in fiscal 2011 and beyond?
CORZINE: This is a bridge over troubled waters. I don't think we will be adding incremental programs. What we're doing is sustaining programs through this period of time and obviously recognizing that in a weak economy a lot of your counter-cyclical stabilizers kick in. Medicaid usage goes up, unemployment goes up, so you have ... increased demands on state budgets at times when revenues are going down. And so this is, particularly the Medicaid match, is vital for providing that stabilization effort.
Some of the unemployment elements are also true along those lines, and then the underlying support is not necessarily for state budgets but for [Temporary Assistance For Needy Families] and food stamps, which are key to being able to work with our communities through a fairly sizeable dip that we have going on in the economy. And the anticipation, I think both in Washington and in the Obama administration, and how we are planning is that we would see a recovery. I think you saw that in their budget. They're actually more aggressive than we would be by the time the turnaround [occurs], but if your revenues start growing again at some point in 2010 or 2011, you won't be under the same strain. It can make up some of this as some of this revenue expires.
