The mid-size broker-dealer MF Global filed for Chapter 11 bankruptcy this morning. In the big picture, this isn't huge news. MF Global had a $42.5 billion balance sheet-- not tiny, but about 1/15th the size of Lehman Brothers' when they filed three years ago. Clearly, the financial system isn't going over a cliff because of this one. But what's interesting about this is what it means for the Titans of Wall Street, whose biggest names are seeing their reputations continue to take a hit in the aftermath of the global economic meltdown.
MF Global is probably most famous for the guy in charge-- Jon Corzine. In his last life, he was governor of New Jersey. Before that, he was the senator from New Jersey. And before that, he was a senior partner at Goldman Sachs, succeeding Steve Friedman before Hank Paulson pushed him out in 1999. It's a bit of a stunning fall from grace for Corzine-- he goes from being run out of Goldman to losing a re-election campaign to Chris Christie to presiding over MF Global for 18 months before it collapsed. Corzine took over the sleepy broker-dealer and hoped to turn it into another Goldman Sachs-- a bold risk-taking firm that could make big returns on equity by placing bets with its own money. The perception was that he was succeeding-- in August, MF Global floated bonds whose yield would jump 1% (they'd have to pay more interest) if Corzine left the firm to serve in the Obama Administration before 2013. Instead, Corzine's strategy imploded. The firm found itself with about $185 million in losses last quarter (compared to just under $1.5 billion in equity) after taking an over $6 billion position in distressed European debt. As if that wasn't bad enough, it looks like almost $700 million in customer funds is unaccounted for after the bankruptcy filing. While it's unlikely that it was stolen, it does look like MF Global was mingling its customers' funds with its own capital, which is a big regulatory no-no.
But the big story, to me, is how Corzine's fall from grace continues a proud line of big names from Goldman who just haven't done particularly well in other places. First, it was Bob Rubin, who left with a glittering reputation to join the Clinton Administration, was hailed as a great Treasury secretary... and then left to become Chairman of the Executive Committee at Citigroup. There, he pushed Citi to take bigger risks, Goldman-style, saw his deregulatory policies as Treasury Secretary fall into heavy disfavor, then watched Citi drive itself to the brink of collapse after taking his advice. But Rubin and Corzine aren't the only ones who have fallen out of favor: Chris Flowers, who left Goldman to open his own private equity shop, lost almost $50 million betting on MF Global, and keeps appearing at the scene of financial disaster after financial disaster.
So it seems like Goldman execs don't exactly have a great track record of replicating Goldman's success after leaving the firm. But it's not just leaving Goldman that seems to be a recipe for disaster-- Goldman itself isn't exactly flying high right about now either. Last quarter, they posted their second quarterly loss since going public in 1999 (the first was in 2008). Their stock price is off by about 60% from its 2007 peak, and it had to cut 1000 more employees recently (in addition to the typical performance-related layoffs). What this looks like to me is that it's not Goldman's traders that turned it into the best-performing big investment bank of the last two decades-- it was their risk management people, who kept them afloat through rough market conditions even as other firms teetered on the brink. Take the risk takers like Corzine and Rubin away from the risk managers, and they're no better than anyone else in the industry.
Now, I might be wrong in my diagnosis, but, at least perception-wise, the old superstars of Goldman's past have pretty much all lost their luster over the last few years. Corzine wasn't the first, and I kind of doubt he'll be the last...
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