Tuesday, November 1, 2011

Goldman Sachs Taste on an MF Global Budget

  Jon Corzine, the Goldman Sachs trader/governor/Senator/broker, thought he had MF Global under control. He would leverage what little cash the brokerage had, make a huge bet on European debt, flatter his contacts at the ratings agencies, and walk away with a gigantic bonus for 2011. Except he ran out of money - even customers' money it appears.
  There is an old saying in the markets that goes "He who has the most money wins". It refers to playing poker, where if you have more money than your opponents you can keep on betting until they all fold - broke. But it is also applicable to trading. If you have a very large position which you believe is right and will be profitable, you have to have enough capital to stick with it when it is going wrong. Jon Corzine made the mistake of using his Goldman Sachs champagne taste on MF Global's beer/broker budget. The money wasn't there. Capital requirements are not just for large investment banks, Mr. Corzine.
  Corzine never really seemed to understand what a brokerage actually did. He started out on the wrong foot, I heard, when he told the brokers that they would all take pay and bonus cuts. They responded by putting two fingers up and walking into other brokerage shops, for the same money they had been making previously at MF Global. I get the feeling he had no idea what brokers actually do, and tried to treat them like lowly floor traders.  Then took the money they brought in and tried to leverage it into a Goldman-like fortune. You can file this blog under "hubris."

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