It happens so fast. One day they are here (Lehman Brothers, now MF Global), the next day they are gone. Poof. How is it that these multi-billion dollar institutions, with thousands of employees, simply disappear in a day?
Ok, fine. Business is bad, lay off a few folks, reduce bonuses, no more free soda and snacks in the refrigerator, “folks we need to tighten our belts.” But all those steps are skipped. First stop, bankruptcy. Close the doors, auction off the artwork, and will the last person in the office please turn off the lights?
Is this a failure of regulation? Hardly. The problem is one word: greed. Add a little leverage and a high tolerance for risk and you are ready to destroy a company.
Take the case of Senagovenor Corzine and MF Global. After being defeated in his effort to remain Governor of New Jersey (which cost him, say, $50 million), he heads back to Wall Street mad as hell. His legacy cannot be one of a defeated-incumbent-turned-lobbyist for the Chinese Dairy Industry or some such obscure posting. Nope, he’s going to show them. He is going to transform MF Global into the most profitable and powerful firm on the Street.
How? A five year strategic plan? A new vision for a new century? Nope. Just start trading. Or rather betting, and big time.
"Let’s see, hmmmmm where could we make a few billion? Fred, you head up our equity desk, what do you think?” “Well Senagovenor, how bout Baseball cards?” "Baseball cards, you’re killing me. Besides the Honus Wagner rookie card, baseball cards are worthless until they can be securitized. Anyone else?” "How bout Ming Dynasty porcelain? The Chinese are entering the market and prices are sure to skyrocket." "Same problem. No derivative market to hide our big bets. Fellas, come on, we need something where we can make some money fast. Nancy, you’ve worked in the mailroom for six days, what do you think?" “European debt, Senagovenor, sir. Nearly a trillion or more. And no way Merkel let’s them fail.”
"Let’s hear it for Nancy in the mailroom. This is brilliant. I did this at Goldman, but now we can leverage the heck out of our bets – maybe even borrow some cash from our customers to really expose ourselves, oops I mean position ourselves for some real profits. My old friends will see I am still brilliant and at the top of my game…"
A faint voice is heard from the corner of the room, “Sir this is Louis from legal. I don’t think the regulators are going to buy this, especially borrowing from customer accounts.” "Thanks Louis, but don’t you worry, I will have those regulators eating out of my hand."
And so it goes. Wall Street profits come from trading which means risk, and in the case of MF Global it results in doubling down on a bad bet that destroyed a company. Poof.