Jon Corzine’s Revenge on Goldman

Jon Corzine’s Revenge on Goldman

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Had Jon Corzine deliberately set out to seek revenge on his erstwhile colleagues at Goldman Sachs who ousted him as co-CEO more than a decade ago, he couldn’t have done a better job. The reason? The vast $6.3 billion bet on European bonds that went awry and sent Corzine’s current firm, MF Global Holdings, scurrying for bankruptcy protection, may be final nail in the coffin of proprietary trading by Wall Street firms.

MF Global isn’t a Wall Street disaster on the scale of the 2008 financial blowup or even the collapse of Long-Term Capital Management after a similarly ill-judged wager on foreign securities back in 1998. (Ironically, Corzine oversaw similar trading positions at Goldman at the time, losses on which forced the firm to postpone its IPO. In fact, Corzine was pushed out after helping to organize the LTCM bailout.) MF is a relatively small cog in the financial system, and its demise is unlikely to create systemic problems.

What will galvanize regulators and legislators to toughen their approach to implementing the Volcker Rule, which bans excessive risk-taking by financial institutions, is the fact that this kind of massive misjudgment of risk happened under Corzine’s watch. And if Corzine, who learned all he knows about taking proprietary bets and managing risk from his decades at Goldman, could get it wrong, then what could preventthe next screw-up from involving a bigger firm – one whose collapse would send a seismic shock through the entire system.

The Street is already shutting down or has closed most of its openly proprietary dealings. But what remains a subject of negotiationis the extent to which regulators will scrutinize market-making -- transactions done for clients that can leave financial firms holding positions on their books for days, weeks, or even months. Where does the line get drawn? This is a bad time for another big loss from proprietary trading to hit the headlines.

The MF Global bankruptcy has been a bit of a boon for another trading firm, however. Interactive Brokers, which didn’t manage to work out a deal to snap up some of MF’s assets prior to the bankruptcy filing, may still step in and pick them off later. Founded by Hungarian immigrant and automated trading pioneer Thomas Peterffy, Interactive Brokers is far less a household name than Goldman or Ken Griffin’s Citadel, which also has a big presence in market-making. But its electronic brokerage operations are profitable and growing. Its third-quarter, year-over-year earnings nearly doubled, and Interactive posted double-digit gains in virtuallly all categories of trading. That news is particularly significant coming at a time when many other investment firms are griping about the impact risk aversion is having on their profits.
Perhaps the after-hours “pop” in Interactive Brokers’ stock price – it surged 2.3% in the hours immediately after trading closed on the NYSE, to reach $15.23 a share – is a sign that investors are waking up to the stock’s potential. Analysts are already there: they’ve boosted their earnings estimates for this year and next from where they were three months ago, while the consensus is that the stock is one to overweight (up from “hold” in the summer) and the average price target is $16.80. True, it’s pricier than Goldman, with a trailing price/earnings ratio of 33, compared with 14 or so at Goldman, aka “Public Enemy Number One” of the Occupy Wall Street crowd. But then, Peterffy and Interactive Brokers don’t have to struggle with the “masters of the universe” reputation that now seems to be such a curse.