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How Goldman Envy Destroyed MF Global

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Traders are unique among Wall Street professionals. They are a restless bunch always in search of the next thrill. The people who climb to the top of Mt. Everest, jump out of planes, engage in hardcore sports or high stakes poker have lots in common with traders, or they might be traders themselves. Like other risk takers, traders thrive on the adrenalin rush. The promise of the high at the end of the winning trade propels them forward. And while they hate losing more than most people, the fear of losing doesn't seem to stop the best of them from piling risk on top of risk.

After the collapse of Lehman Brothers, a former MBS trader at one of the big shops explained the motivation behind bond market excesses in terms of a high speed car race. He explained:

"When you're accelerating a vehicle from 0 to 60 mph, you can feel the speed as it increases. You are aware of how fast you are accelerating and it feels good. Once you reach 60mph, the feeling diminishes and things seem normal. So to get that feeling back, you accelerate to 90 or 95. Once you have reached that speed, the feeling of acceleration disappears and it also seems normal. But now you are cruising at a dangerous speed. The level of control you have over the vehicle is substantially reduced. When the car crashes, there are usually no survivors."

He claimed that one of the main reasons for the mortgage market collapse was because, "The Street got velocitized."

It seems at MF Global, Jon Corzine got velocitized too. How did this happen, we wonder? How did the former CEO of one the world's most successful financial firms, Goldman Sachs, blow himself up? Greed, you might say? Nope, the man has over half a billion in the vault. How about competition? Now you are getting warmer. Everyone in finance understands that on the other side of a winning trade is a loser. You never want to be that loser. So why would a guy of Corzine's stature and accomplishment, having reached the pinnacle of power in investment banking, the heights of personal wealth, and even added a big ticket political seat to round out the resume, risk it all? Apparently, Jon Corzine has something to prove.

Here's the skivvy from a former Goldman partner who knows him well: Jon Corzine, a 64-year-old man with a long list of successes, doesn't like to lose. But lose he has and publicly too -- a wrong he was determined to right at all costs. Corzine, according to my source, was "devastated" when he lost the New Jersey governorship. To right that wrong, his goal at MF Global was to turn the little broker-dealer into the next Goldman Sachs and leave a big swinging...legacy behind him. The man hates losing so much; he put all his chips on the same number and let it ride on the chance for glory.

Perhaps traders watching these events secretly sympathize with Corzine's attempt to reach the highest high. They also must sigh in relief that the guy so publicly humiliated before the nation, the industry and the world is not them. On the Street, you are only as good as your last trade. In 2010, Corzine lost the bid for governor to Chris Christie, the straight-shooting fat man from Newark. In 1999, he was pushed out of the sandbox after reining for five years at the top of the Goldman food chain where he had spent two decades of his career. These losses fueled his desire to beat everyone else on Wall Street.

It has been widely reported that Jon Corzine and Hank Paulson did not get along. In 1999, Paulson was on the side of partners that preferred to keep Goldman Sachs private. Corzine was among the opposing camp pressing to bring the firm public. The deal made him $400 million personally, but lost him his job. Yet, there was a bit more to the power struggle that may be forgotten. Corzine was also held personally responsible by Paulson and crew for exposing the firm in a dangerous way to ill-fated Long Term Capital Management.

In other words, the little hedge fund that couldn't, was levered up at 90 to 1. Corzine as CEO had taken extraordinary risks through the firm's proprietary trading desk to invest along with LTCM -- forcing Goldman to affect a costly rescue. Whatever you think of Paulson and Goldman, the firm had a much smaller appetite for risk and frowned upon the cowboy antics that would have been welcomed at Bear Stearns and Lehman Brothers. (Full disclosure: Goldman was a client of my search firm at the time that Paulson and Corzine were there. GS commonly took a more conservative approach to risk and reward than most of its peers.)

So what does the former Goldman partner say about Corzine and MF Global?

"Jon thought he was a better trader than he was. He wanted to make a big comeback. He wasn't in the business when Lehman and Bear blew up and thought he could do it better. What happened was his ego got in the way. He was blindsided by ambition. He had incredibly grand ideas to turn MF into the next Goldman. His agenda was to leave a legacy for his children and grandchildren. But his ego was so big; he couldn't see that MF Global was not Goldman Sachs. It couldn't handle the infrastructure of the trades. It made no sense. It was a futures broker."

So in many ways, MF Global's demise is really Goldman Sachs's fault. They are just too good at what they do. Basically, everyone wants to "be" Goldman -- apparently even the firm's former CEO.

All of this is kind of remarkable. In the days following Lehman's crash and burn, many industry insiders recalled that Dick Fuld wanted to turn Lehman into the next Goldman and subsequently pushed outsized risks. It was also said that Stan O'Neill wanted to do the same with Merrill Lynch. The result of this "Goldman envy" was that these two firms and Bear Stearns along with them pushed the market to reckless levels of velocity. Overheated competition fueled by the desire "to be Goldman Sachs" inevitably destroyed the market. Jon Mack, former CEO of Morgan Stanley, said of the dangers of competitive markets: "You have to control the Street. We can't control ourselves."

That brings us back to Jon Corzine and MF Global. A Congressional House inquiry held Corzine to task over his bad bets this week. Yet absent from the testimony was the elephant in the room: Why weren't regulators all over this? Why was Corzine's former employee Gary Gensler at the Commodities Futures Trading Commission (CFTC) allowed to oversee his boss' trades? House Committee member Collin Peterson of Minnesota opined: "It appears to me that no one has learned a thing; that Wall Street is still operating as if 2008 never happened."

But the real issue is that given the appetite of traders for risk revealed in the 2008 banking collapse, why was a firm like MF Global legally allowed to lever up to 40 to 1, the same risk levels that caused Lehman's fall? It appears to the investing and observing public, that Congress hasn't learned a thing and that the CFTC and the Securities and Exchange Commission are still operating as if 2008 never happened.

For most of us watching, the thrill for these high stakes trades is gone. For MF Global, its investors and thousands of employees, the car crashed and there were no survivors. The demise of MF Global three years after the worst financial crisis in nearly a century, for anyone other than a few rogue traders like Corzine, shows the thrill has definitely gone away.

Yet a key question remains: How many other firms are there out there like MF Global that suffer from "Goldman envy" and continue to operate at dangerous levels of velocity?

Monika Mitchell is a former senior partner of a premier Wall Street search firm serving the institutional debt markets. She is also the co-author of a soon-to-be-released book on rebuilding the financial system called: Conversations With Wall Street: The Inside Story of the Financial Armageddon and How to Prevent the Next One.