Demise of the insider

The bankruptcy of MF Global is a narrative of modern Wall Street and its cosy relationship with big government.

In the past, investment banking failures tended to be associated with operations on the fringe of the investment world. Now, the prospect of failure has become mainstream.

Wall Street’s movers and shakers are no longer the likes of Carl Icahn, Ivan Boesky, Michael Milken or T Boone Pickens. For all their differences, these individuals shared two things in common. One, they were outsiders. Two, they enjoyed neither prominent political connections nor dependency on big government.

Jon Corzine, the head of MF Global, is perhaps a metaphor of modern Wall Street. He was Chairman and CEO of Goldman Sachs from 1994 to 1999. During this period, he served on the US Treasury Department’s borrowing committee and chaired a presidential commission for President Bill Clinton.  He also helped devise a rescue package for the hedge fund, Long Term Capital Management, after its collapse in 1998.  In 2000, he was elected as a Democrat Senator from New Jersey and served until 2005. He then served as Governor of New Jersey from 2005 until his defeat in 2009. As a proponent of big government and other sundry fashionable left liberal causes, he left a vast fiscal mess for his successor, current Republican Governor Chris Christie, to attempt to clean up. It may seem astonishing that Corzine, a Wall Street insider, who made hundreds of millions for himself, could see nothing wrong with public finances that did not add up.

Unraveling the financial mess at MF Capital will occupy forensic accountants for some time to come and their expertise will be directed at a detailed analysis of the company and its myriad subsidiaries.  In the meantime, there are more general questions:

  1. Was MF Capital an outlier in terms of its purchases of risky European sovereign debt? Or
  2. Does MF Capital only differ in degree from other Wall Street firms in terms of its exposure to sovereign debt?

Betting on big government seems to come naturally to the likes of Corzine. Such insiders may not only suffer from the delusion of power but also the delusion of knowledge. The notion that governments cannot default is a political conceit. The financial wizards, faced with the financial problems of individual countries in Europe, assume that bigger and bigger government by the European Union is the solution.

The same assumption prompts financial players the world over to look to big government as the ultimate safe haven. Why else would market players pile into US Thirty Year Treasury Bonds during the current European sovereign debt crisis?

Maybe, super-sized governments will not be allowed to fail.  However, insiders may have to put their political predilections aside and start calculating the financial odds, which would mean going through cold turkey.

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