LTCM Shall Have Its Revenge

November 1, 2011 7:27 AM

MF Global - once mostly a Futures Broker and more recently a budding full-service Investment Bank run by ex-Governor/ex-Senator Jon Corzine has collapsed following ratings downgrades on the back of large losses on Eurozone Sovereign Debt. Trades that Corzine himself oversaw. It will be the 8th largest Bankruptcy in US History. Much of the blame is being placed on Corzine's efforts to recreate his old firm, Goldman Sachs. He was forced out as Goldman CEO post IPO by none other than Hank Paulson - the Secretary of Treasury who oversaw the creation of TARP.

But there is a silver lining. To some commentators the MF collapse and the lack of contagion (so far - fingers crossed) is an argument in favor of both the Volcker Rule and Dodd-Frank's efforts to more sharply regulate the futures broking industry. As well as a statement on the value of having risk taking firms that are small enough to fail.

That being said questions still remain-
-$700 million in missing client funds - either from sloppy book keeping, or perhaps more nefariously diverted into MF's own trading book. Of course had they been segregating client assets per CFTC rules then the odds of the money being temporarily lost rather than diverted would be much higher.
-Was this karmic revenge for the famously profitable double-dealing trading Corzine led during the collapse of John Meriwether's Long Term Capital Management?

Background Reading:Why do Futures Brokers Blowup

posted by JPD (41 comments total)

Oh never fear, America. I'm sure Jon Corzine will come out of this just fine.
posted by caution live frogs at 7:34 AM on November 1, 2011 [9 favorites]

It's insane. There is no evidence that their government debt holdings are actually in jeopardy - it's pure market hysteria and political dogmatism that drove MF Global under. Someone's going to pick them up for a song when the company is dismantled, and rake in some serious simoleons.

It's even crazier that MF Global arranged their business to allow it to happen - and a clear indication that the lessons of 2008 have not be learned. An investment firm is not a casino.
posted by Slap*Happy at 7:39 AM on November 1, 2011

An investment firm shouldn't be a casino. If only what things are and what things should be matched up cleanly in real life.
posted by zjacreman at 7:42 AM on November 1, 2011

Some more wonky coverage of the trades themselves.

An investment firm is not a casino.


Well - except 1) MF was not an investment firm 2)The equity holders who put Corzine in place knew a large part of his planned business model was prop trading. An investment bank taking outsize risk that goes against them is only a problem when the damage caused by its collapse extends out beyond its employees, debt holders, and equity holders. Now we are going to find out if MF was small enough that this holds.
posted by JPD at 7:44 AM on November 1, 2011

Excellent post! This is one heck of a story -- kinda like the Madoff scandal, but with a far more political angle.

Don't forget the part where Jon Corzine was the guy tapped to raise money from Wall Street for President Obama's 2012 campaign and there was so much speculation that Corzine would join Obama's administration in the next two years that the bonds that MF Global sold recently had an unusual clause in them where the interest rate would go up of Corzine was confirmed by the Senate to join the Administration. Also, MF Global was only added to the Primary Dealer list in the past two or three years, under the new more stringent requirements! Which doesn't imply many good things about the other PD's...

Unconfirmed rumor: MF Global also held much of Obama's reelection money; like other MF Global customers, the campaign may or may not have access to its money right now.
posted by Asparagirl at 7:47 AM on November 1, 2011 [8 favorites]

The equity holders who put Corzine in place knew a large part of his planned business model was prop trading

We don't know what we're doing when we invest in firms like this. A lot of well-respected managers are having some tough conversations with their investors right now.

Firms like MF Global ought to be private partnerships. Goldman and Morgan Stanley included.
posted by mullacc at 7:53 AM on November 1, 2011

Unconfirmed rumor: MF Global also held much of Obama's reelection money; like other MF Global customers, the campaign may or may not have access to its money right now.

From JPD's article:

We’re not sure exactly how easy it is to undo a “repo-to-maturity” trade, but it does leave us wondering who exactly those counterparties might have been.

These two factors should have the conspiracy buffs slathering. A Big Business plot to take down Obama by hitting him in the pocketbook! Awesome.
posted by Slap*Happy at 7:55 AM on November 1, 2011 [1 favorite]

Should have learned from Grayson Moorhead:

We will make a list of our clients, and how much money each of them has given us to invest. We will keep this list in a safe place. If we have time, we will make a copy of the list, in case something happens to the first list.

posted by Rock Steady at 7:57 AM on November 1, 2011 [9 favorites]

We don't know what we're doing when we invest in firms like this. A lot of well-respected managers are having some tough conversations with their investors right now.


At the end of the day its always funding risk that carries you out the door. If you have to fund long-term with short-term you are always at risk for getting carried out just on pure fear and emotion. MF teaches us that lesson again.
posted by JPD at 7:59 AM on November 1, 2011 [2 favorites]

Also, this will not be the only financial firm found to have been dipping into the piggy bank -- excuse me, commingling client funds -- in the next few years.

Note that SIPC does not cover fraud! O_o
posted by Asparagirl at 8:02 AM on November 1, 2011 [1 favorite]

Denninger, in his usual ranty way, had a good point: these guys are one of the officially-dubbed market makers for US Treasuries. I mean, that's about as 'blessed' as you get in this financial system. And yet, these people appear to have stolen $700 million from customer accounts to speculate with, and lost it.

If an entity THAT NEAR the center of things is that corrupt, what the hell else is going on in this financial system? Why aren't heads rolling?
posted by Malor at 8:03 AM on November 1, 2011 [8 favorites]

Well-framed post, interesting story, thanks.
posted by Sticherbeast at 8:03 AM on November 1, 2011

Oh never fear, America. I'm sure Jon Corzine will come out of this just fine.

You're referring to, of course, his gold-plated parachute, woven of spun-gold thread, and coated in gold dust.
posted by Thorzdad at 8:16 AM on November 1, 2011

You're referring to, of course, his gold-plated parachute, woven of spun-gold thread, and coated in gold dust.

Summon the eagles!
posted by atrazine at 8:17 AM on November 1, 2011 [11 favorites]

Boy my home state can sure pick governors.
posted by octothorpe at 8:24 AM on November 1, 2011 [3 favorites]

I've been following this on Marketplace, and what's interesting is the "meh" attitude analysts and the market have toward tthe bankruptcy. Their response has been "Financial firm makes risky investments, over-leverages itself, goes out of business. *yawn*. This is the way the market is supposed to work."

Not every bankruptcy is a major tragedy., even on this day of making every failure a portent of DOOM.
posted by happyroach at 8:38 AM on November 1, 2011 [1 favorite]

A Big Business plot to take down Obama by hitting him in the pocketbook! Awesome.

Or Corzine's MF Global was a political plot to suck Wall Street money into Obama's campaign coffers. Take your pick.
posted by oneswellfoop at 8:41 AM on November 1, 2011

See, if the US would just go ahead and completely collapse already in a cloud of failed crony capitalism we could go to Thunderdome and make Corzine spin the wheel.
posted by bardic at 8:41 AM on November 1, 2011 [6 favorites]

If you have to fund long-term with short-term you are always at risk for getting carried out just on pure fear and emotion. MF teaches us that lesson again.

It also shows us--again--how bizarre and dangerous the rating agencies are (or, rather, the system we've built around the rating agencies). I have difficultly expressing how absurd it is that Moody's could downgrade a firm from slightly above investment grade (Baa2) to slightly below investment grade (Baa3) and then that firm becomes insolvent within days.
posted by mullacc at 8:52 AM on November 1, 2011

Somebody should create an ETF that is indexed to the current level of doom. I would buy some just so I could go around telling people how much my DOOM was up or down each day.
posted by diogenes at 8:54 AM on November 1, 2011 [3 favorites]

yeah that exists - it's called the VIX. Its an index of implied volatility.
posted by JPD at 8:55 AM on November 1, 2011 [3 favorites]

Yeah, but you can't invest directly in the VIX, and the ticker symbol isn't as snappy ;)
posted by diogenes at 9:01 AM on November 1, 2011 [1 favorite]

Sure you can.
posted by JPD at 9:03 AM on November 1, 2011

(tho I recognize you were being ironic)
posted by JPD at 9:03 AM on November 1, 2011

6 things no one will tell you about MF Global
posted by ryoshu at 9:05 AM on November 1, 2011 [8 favorites]

Yeah but what does MF DOOM think about all this?
posted by symbioid at 10:52 AM on November 1, 2011 [2 favorites]

Yeah but what does MF DOOM think about all this?

I'll go with this line:

"How is only one left? The pack come in 6"
posted by Hoopo at 11:03 AM on November 1, 2011 [2 favorites]

In related news: The Romneys' Ponzi Problem?
posted by ericb at 11:14 AM on November 1, 2011 [1 favorite]

I have difficultly expressing how absurd it is that Moody's could downgrade a firm from slightly above investment grade (Baa2) to slightly below investment grade (Baa3) and then that firm becomes insolvent within days.

It's because many pension funds and other investment managers are required to only invest in securities deemed "investment grade" by the ratings agencies. Once MF's credit rating was downgraded, many of the bondholders had no choice but to liquidate.
posted by Guernsey Halleck at 12:45 PM on November 1, 2011

It's because many pension funds and other investment managers are required to only invest in securities deemed "investment grade" by the ratings agencies

Not to get too techincal, but no, that's not what happened here. As a broker dealer you require access to the repo markets and various short-term lending lines from other banks. Once you get downgraded below a certain level you lose access to these funding sources. B-D are basically in the business of funding long-term assets with short-term liabilities. If MF was funded with the sort of debt pension funds and money managers mostly own the downgrade would have impact their ability to raise future funds, but would not have pushed them into default.

The actual debt outstanding that was impacted by what you are talking about was only about 1 bil on an asset base of 33 bil or so. Nearly all of the creditors were secured.
posted by JPD at 12:53 PM on November 1, 2011 [1 favorite]

Yes JPD, you're right. I was trying to answer in a more general sense, but you are completely correct as far as this specific case.
posted by Guernsey Halleck at 1:01 PM on November 1, 2011

B-D are basically in the business of funding long-term assets with short-term liabilities.

As an aside, borrowing short to lend long is an excellent recipe for disaster.
posted by Malor at 1:03 PM on November 1, 2011

I've been mildly obsessed with the Fair To Midland track "Golden Parachutes" for a few months now, since I found the lyrics and realized they were about the financial collapse.

It continues to be applicable in this current situation.

And I'll wear a tie.
posted by hippybear at 1:10 PM on November 1, 2011

borrowing short to lend long is an excellent recipe for disaster.

Isn't that the traditional role of banks? They take in your money in short-term CDs or savings accounts, and then make 5 year car loans and 30 year mortgages?
posted by GregorWill at 1:24 PM on November 1, 2011

yes that's what a bank is. That's also why they are supposed to be tightly regulated and have minimum capital requirements.
posted by JPD at 2:04 PM on November 1, 2011

Ran across the Stocks & Jocks podcast on Stitcher as a "you might also like" from Planet Money this morning & the were ranting about the crazy "key man" clause in MF Global bonds. From the FT:

The five-year bond issue was priced to yield 6.25 per cent but the issuer has pledged to pay a percentage point more if Mr Corzine leaves the company for a federal government job before July 1 2013, in a so-called “key man event” clause.

posted by morganw at 5:18 PM on November 1, 2011

Yeah but what does MF DOOM think about all this?

That it's looking Grimm.
posted by DLWM at 8:42 PM on November 1, 2011

Unconfirmed rumor: MF Global also held much of Obama's reelection money; like other MF Global customers, the campaign may or may not have access to its money right now.

That explains why I got an email from them today asking me if I had a spare bedroom or pull-out-couch for an Obama volunteer coming to my community.
posted by SirOmega at 9:46 PM on November 1, 2011

Hang the banksters.
posted by Ludi at 6:28 AM on November 2, 2011

Corzine now under FBI investigation.
posted by ericb at 1:36 PM on November 2, 2011

Latest reports put the amount of the missing customer funds at $1.5 Billion.
posted by Asparagirl at 3:58 PM on November 2, 2011