Cognitive Illusion At MF Global

This article describes recent failure of MF Global, which was led by Jon Corzine, who has had a storied career on Wall Street, as CEO of Goldman Sachs, and in politics.
MF Global made a big bet on European sovereign debt. He purchased large amounts of debt, at a discount from par, with borrowed money. He was betting that eurozone leaders would not let the distressed country's fail, and that the price would rise on the bonds that he purchased. His bet was consistent with what he had learned at Goldman Sachs. The rewards go to those who take risks when they believe they have a good rationale for the bet.

MF Global ran into trouble when its lenders learned about the size of its bet on European banks. They were less convinced than Corzine about the risk, and they demanded more collateral for the short term loans that MF Global depended upon. Like Lehman Brothers and Bear Stearns in the financial crisis, MF Global became illiquid because of its dependence upon short term loans to cover its highly leveraged bet. It was forced into bankruptcy when potential customers for parts of its business that were put up for sale declined to purchase its assets. They were worried about $600-$700 million that was missing from customer accounts which are supposed to be segregated from the firm's proprietary trading accounts.