MF Global Fallout

 |  About: MF Global Holdings Ltd. (MFGLQ)
by: Craig Pirrong

FCM, investment bank, primary dealer, and wanna be Goldman MF Global (MF) declared bankruptcy Monday. As is typical with financial firms, the end came quickly. The firm’s problems metastasized rapidly 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, U.S. 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.