Ahhh, nothing is worse in the morning than the smell of leverage gone very bad. LTCM, Lehman Brothers, and the list goes on. Now comes the news of the bankruptcy of MF Global, the futures trading firm with roughly $7.3 billion in customer accounts and $41 billion in assets, making it the eighth largest bankruptcy in U.S. history.
The firm, led by former Goldman Sachs co-CEO and New Jersey Governor, Jon Corzine, filed for Chapter 11 yesterday after failing to reach an agreement to sell itself to Interactive Brokers. The stumbling block was apparently “discrepancies” in client account balances which has triggered a regulatory probe by the CFTC according to the New York Times. Arrow, by the way, does not have any exposure to MF Global.
MF Global had roughly $1.2 billion in equity but decided, as only an experienced Wall Street veteran could, that leveraging that amount to absurd levels would best serve shareholders, clients and employees. So here’s a smart idea; let’s go to Europe and buy $6.3 billion of Italian, Spanish, Irish and Belgian government debt. And better yet, let’s fund this 5:1 leverage with short-term paper to ensure we will be squeezed out of our position at the first sign of trouble. Is it just me, or does that not seem like a really dumb idea? Not the bet per se, but the magnitude and structure makes no sense for a futures broker. But then, why be a futures broker when you can be a mid-sized investment bank? So Mr. Corzine added a ton of these great traders, risk managers, “great people,” etc., as other market participants did the opposite. Mr. Corzine joined MF Global in March 2010 and it only took him 19 months to bust the company. Sorry for being politically incorrect but this scene from Trading Places sums it up nicely! Put all of the assets of Duke & Duke up for sale at once.
Let’s hope this does not lead to even more cynicism and lack of faith in our financial system.