Streetwise Professor

October 31, 2011

MFers Go Bankrupt

Filed under: Commodities,Derivatives,Exchanges,Financial Crisis II,Politics,Regulation — The Professor @ 8:26 pm

FCM, investment bank, primary dealer, and wanna be Goldman MF Global declared bankruptcy today.  As is typical with financial firms, the end came quickly.  The firm’s problems metastasized quickly last week.  Another quarterly loss, a ratings downgrade, and worries about losses on trades in European government bonds led to the typical downward spiral of lost funding and lost customers.  These firms are very fragile.  When they fall, they usually don’t get up.

Ironically, MF’s FCM operation was acquired from  . . . REFCO, which cratered almost exactly 6 years ago, in October, 2005.  Will anyone dare to take on this cursed franchise?

Piecing things together, I surmise that the firm bought about $6 billion in Italian and other southern Euro bonds and repo’d them out.  Due to the decline in the prices of these bonds, and the firm’s deteriorating financial condition, the repo counterparties demanded higher haircuts.  The firm couldn’t come up with the cash, and in desperation maxed out its credit lines.  But that couldn’t stop the hemorrhaging.

The most likely explanation for all this is that the firm was already foundering, and CEO John Corzine tried to gamble on resurrection by ramping up the risk.  As is so often the case, this more often results in a more rapid descent to financial hell than resurrection.

One major irony is that MF Global was pushing hard for low capital requirements for members of OTC derivative CCPs.  How’s that idea looking now, GiGi?

Especially since suspicions are rife that MF has misused segregated customer funds, presumably to keep the resurrection gamble going.  Reports state that the firm is stonewalling regulators on turning over records, and that about $300 million in customer funds are missing.  This is one of the most egregious things a brokerage firm can do.

This is already a major fall for former Goldman CEO, US senator, and NJ governor Corzine.  He is also a major Obama fundraiser, who is presumably now a Nonperson.  If the suspicions about misuse of customer funds prove true, major fall won’t even come close to describing what lies in store for Mr. Corzine.  He will long to be merely a Nonperson.

Print Friendly

10 Comments »

  1. MF bankruptcy was the big story today. Didnt know about the potential misuse of customer funds…..

    Comment by Surya — October 31, 2011 @ 8:45 pm

  2. Amen to all the above, particularly as teh Democrats are in full scapegoating mode a la OWS.

    Comment by Sotos — October 31, 2011 @ 9:00 pm

  3. MFers go bankrupt? I thought that’s what Uncle Ben Bernanke, Paulson et al prevented in 08′ rather than allowing those TBTF m-f-s to go down. A bipartisan policy Obamambus is continuing. Not that Dubya had much choice, the banksters woulda had him impeached or worse.

    That reminds me of a certain song. You may have heard it Professor, on the Office Space soundtrack, when the trio from Inatech take that crappy printer into the field and smash it to bits?

    Comment by Mr. X — November 1, 2011 @ 1:45 am

  4. completely off topic – God save and bless the Greeks. I never thought I would say this of any Papandreaou, but God bless George- whether it is a tactic to scare the complacent, self satisfied Krauts/Frogs, a moment when he really decided to give it in the gift and power of the Greek people, or just being sick of eating other peoples – eh – waste products, he has done the right thing. better a crisis now than one compounded with interest and false hopes. Zito Hellas!

    Comment by Sotos — November 1, 2011 @ 7:31 am

  5. http://www.bloomberg.com/video/79205202/

    These past few years reprise the 1930s and ’40s in so many ways … one is reminded of Casablanca (1942)

    Rick: How can you close me up? On what grounds?

    Captain Renault: I’m shocked, shocked to find that gambling is going on in here!
    [a croupier hands Renault a pile of money]

    Croupier: Your winnings, sir.

    Captain Renault: [sotto voce] Oh, thank you very much.
    [aloud]

    Captain Renault: Everybody out at once!

    (see http://www.imdb.com/title/tt0034583/quotes )

    Comment by markets.aurelius — November 1, 2011 @ 9:36 am

  6. @markets.aurelius. Numerous time in the past couple of years I have wondered aloud whether we were going to reprise the 70s or the 30s. I think the 30s have it hands down, now.

    The ProfessorComment by The Professor — November 1, 2011 @ 11:57 am

  7. Does it mean we will have a world war in 10 years? !! I would say thats quite possible….In olden days once countries realized they were in serious financial trouble, they wasted no time in coming up with a pretext for war.

    Comment by Surya — November 1, 2011 @ 4:31 pm

  8. 30′s. Crony capitalism and hubris brought us there. The trouble was, this time there actually was an enlightened path, we just didn’t choose to take it. MF people that co-mingled funds should fry. That’s a sacred oath they broke.

    Comment by Jeff — November 1, 2011 @ 9:08 pm

  9. [...] goes bankrupt, tap city, dormie, zombie, belly up. [...]

    Pingback by Wednesday Moaning Breakfast Links | Points and Figures — November 2, 2011 @ 4:32 am

  10. I always have a catch in my breath during the La Marseillaise scene in Casablanca. It doesn’t look as though that scene will have an analogue in the current situation.

    Comment by pahoben — November 2, 2011 @ 7:07 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress