The European crisis claimed its first big victim with the collapse of MF Global, a major American broker-dealer in futures and other derivatives. The direct cause of the bankruptcy was bets that the firm made for its own account in short-term eurozone debt. These trades were heavily leveraged. When creditors demanded more collateral during the panic, it was unable to come up with the cash.
While reckless, this part of the collapse is not too alarming. Worse were reports that hundreds of millions of dollars of client money are missing. The exact situation remains unclear; the firm’s lawyers have claimed all client funds are accounted for, but it appears that some firm and client assets were held in the same accounts. That’s a very serious breach of the rules.
What the commentators said
“The shape-shifting at MF Global under its big-hitting ex-Goldman Sachs boss, Jon Corzine, has come to an end,” said the FT. “His strategy – to turn it into a mini investment bank – has killed the patient.” However, the firm’s collapse does not seem to be causing systemic problems – unlike the much larger Lehman Brothers – which may be good news. Occasional failures are healthy and help to clear out the industry, ideally before the miscreants get too big to fail. But the fact that the firm apparently cannot account properly for client assets is extraordinary. “Severe penalties should be imposed if this is not resolved.”
The affair leaves egg on many faces, said Antony Currie on Reuters Breakingviews. MF Global committed errors similar to those seen in the financial crisis. At times its leverage was 30-to-1. The $6bn position that brought it down amounted to 15% of its balance sheet. Many shareholders overlooked this, while debt covenants suggest that bondholders were more occupied with the possibility that Corzine – a former governor of New Jersey – would return to politics. “Regulators bear some blame as well.” They left the firm alone for too long, while the Federal Reserve made it a primary dealer in US bonds earlier this year.
One of the few to escape the mess is Paul Volcker. His proposed Volcker Rule to prevent banks from indulging in the kind of proprietary trading that brought down MF Global now looks even more vital. It could prevent this happening again at another more important institution.