Under normal circumstance the travails of a mid-sized brokerage firm
like MF Global shouldn't be receiving this much attention,
particularly when reporters have so many drugged-up hippie Wall Street
protesters to interview down at Zuccotti Park.
But MF Global -- which is unlikely to survive through the weekend, at
least in its current form -- is no ordinary firm and the tale of how it
became the latest casualty of mindless risk taking is something that
every risk taker on Wall Street could learn from.
It begins in March of last year when former Goldman Sachs chairman,
Jon Corzine, decided he had enough of New Jersey politics and decided
to jump back into the Wall Street game. Times have certainly changed
since Corzine was one of the street's top executives.
He left (he was actually booted) from Goldman in 1999 after the firm
made a series of bad bets on his watch tied to the money-losing trades
of the faltering hedge fund, Long-Term Capital Management. The LTCM
fiasco was big enough that it affected every major Wall Street firm
and required a government bailout to save the financial system, or so
we were told (sound familiar?). But it also occurred in the middle of
the technology bubble that showered huge profits on the banks and made
Corzine a millionaire 500 million times over.
Corzine's reputation should have been in tatters; by the end of his
days at Goldman, Corzine was regarded as a lousy manager, a poor judge
of risk and the reason why Goldman had to delay plans to convert from
a partnership to become a public company. But he used his winnings to
finance a career in New Jersey politics, first being elected as US
senator and later as the state's governor.
Meanwhile, the man who booted Corzine from Goldman, Hank Paulson, went
on to become Treasury secretary during a period of risk taking
unprecedented in modern financial history. And you know how this story
ends: The financial crisis of 2007 and 2008, where massive losses tied
to housing debt caused the demise of Bear Stearns, Lehman Brothers and
nearly every surviving firm before Paulson arranged for the mother of
all Wall Street bailouts.
With that came a wave of regulation to reduce risk-taking. In many
cases, firms simply decided the downside of losing big bucks and going
out of business wasn't worth the occasional big score, so they began
to reduce risk on their own.
But Corzine was clearly asleep during much of the risk-taking years,
not to mention the fallout that occurred after the financial system
imploded (If you live in New Jersey and witnessed how badly he ran the
state, you'll know when I mean). When he took over at MF Global, he
vowed to run the firm as if the financial crisis didn't happen.
First he threw out the playbook developed by his predecessor Bernie
Dan, who was rebuilding MF Global after a trading scandal by cracking
down on risk. Under Dan, MF Global would return to its roots as a
broker, mainly for commodities, earning fees to execute business on
behalf of others.
The firm was achieving some degree of success as well. Its balance
sheet was clean and some on Wall Street said it was poised to begin
earning modest profits.
But put a clean balance sheet in the hands of someone who saw the
financial crisis as nothing more than a passing storm, and you know
what happens. Within minutes of taking the job Corzine began boasting
that he was building a mini-Goldman, as he sought to emulate Goldman's
business model of taking enormous bets in various markets.
There was just one problem with that strategy: it's prone to error.
Even the best traders like those at Goldman screw up, as the events of
2007 and 2008 demonstrate.
Corzine isn't close to being among the street's best traders. so he
didn't waste any time screwing up. Less than a year after taking the
job, he and his traders made a calculated bet that Europe wasn't the
basket case that we now know it truly is. His traders bought more than
$6 billion sovereign debt most of it issued by Italy and Spain, the
two countries that are now replacing Greece in the likely to default
department.
With that, Jon Corzine gambled away MF Global, which is now in a mad
dash to sell parts of itself while it moves closer to liquidation,
Lehman style. Hundreds of people will likely lose their jobs in the
aftermath, which is sad since most have nothing to do with the part of
the firm that's causing the problems.
Meanwhile, anyone dumb enough to buy Corzine's plan to remake MF
Global into Goldman Sachs will lose most if not all of their
investment, though analysts tell me those investors want blood and
will likely sue Corzine and MF Global when the dust begins to clear
next week.
It seems that offering documents for a bond deal issued this summer by
the firm didn't really mention the size and scope of the MF Global's
sovereign debt holdings, so investors will likely make the case that
they were misled into think Corzine was running a firm with a clean
balance sheet, even if it was neck-deep in the Euro morass.
There is some good news to report: MF Global won't be bailed out by
the federal government, and will likely fail. Unlike Corzine's old
firm, MF Global isn't big enough to be "systemically important" to the
nation's economy and the financial system
And when it does fail, it will finally end the Wall Street career of
Jon Corzine, and finally prove that there are consequences to idiotic
risk taking.