The macho, bet-the-house-on-red mentality is alive and well on Wall Street. And that’s despite the disastrous meltdown of 2008, which was caused by massive Wall Street bets on derivatives. Those ill-fated gambles nearly destroyed the global capital markets and have put our economy in a hole that it will take years to dig out of.
If you’re skeptical that the gambling spirit is back with a vengeance, all you have to do is look at Jon Corzine and the wreckage of the firm he ran for little more than a year, MF Global (OTC:MFGLQ).
Details of the firm’s collapse into bankruptcy are still emerging, but one thing is clear: Mr. Corzine will spend the holidays far away from the casino of Wall Street. Instead, he’ll be huddling with his lawyers in deep discussions about his mismanagement of the bank, his billions in misguided bets on European debt, and the location of $600 million of missing customer funds.
Remember, MF Global was a highly specialized institution. It was designed for a select group of investors, those who used its platform to trade in commodities, futures and derivatives. This is heady stuff, for the smartest guys in the room only.
But that doesn’t make Mr. Corzine-who made his career by betting on Treasuries for Goldman Sachs in the 1990s-a genius. Sure, he was right in the 1990s, and Wall Street guys love to believe that, since they got it right once and got rich, they will get it right always.
A schoolboy could tell Mr. Corzine and his former traders at MF Global that history doesn’t work like that. For all its pretentions to headiness, MF Global, we believe, failed to perform several of the basic tasks required of securities houses. First, MF Global broke the cardinal rule in this industry: It failed to segregate customer funds. Second, it appears that Jon Corzine used the firm’s capital to play his own hunches, placing bets on European bonds and ignoring the advice of other managers and senior executives. Third, MF Global issued a $25 million bond offering in August and it’s already worthless.
While Mr. Corzine repeatedly said he wanted to build the next Goldman Sachs, this all reminds me more of Lehman Brothers.
This mess could wind up with civil and criminal charges against management, including Mr. Corzine, as well as massive lawsuits brought by the firm’s victims- its shareholders, bondholders and employees.
The management at MF Global was scrambling weeks before its collapse. The balance sheet was eroding as the firm’s euro debt trades were rapidly moving against them. They were doing whatever they could to prop up firm as long as they could, but it was like using a spoon to bail out a sinking ocean liner. Senior manager and traders will be held accountable.
The Feds have been AWOL with Lehman Brothers and its executives got off scot-free, so there’s a good chance they will take a very different tack with MF Global. Regulators and law enforcement have to take serious steps to restore confidence in the market.
And Mr. Corzine, please, do us all a favor. In the future stay away from making big bets on the markets. Maybe one of your lawyers can get you a game of Yahtzee for an early Christmas present.
Disclosure: Zamansky & Associates is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers. The firm may represent investors in cases against companies mentioned in this blog.