Sunday, December 18, 2011

Barry Ritholtz on MF Global and systemic risk


Watching the MF Global saga unfold, I had to wonder: “How was it possible for a broker dealer to tap segregated client monies to speculate in risky assets and lose billions?  
MF Global’s story, as you will soon understand it, raises serious concerns for any investor. That the activities that led to MF Global’s collapse were possibly legal (!) is stunning. The details are complex, but follow them through to the end and you will see all of the problems of our system — political corruption, excess leverage, focus on short-term profit at the expense of survival — in one sordid affair.
The MF Global story contains six elements that I found astonishing:
Read the rest at The Washington Post
The systemic risk revealed by MF Global’s collapse
by Barry Ritholtz

3 comments:

Matt Franko said...

Makes a good point about the ratings agencies but I would like to know why he thinks those Euro Govts do not warrant a top rating....

And I still do not understand why Corzine thought it was a good thing to go long the Euro govt debt... that is hard to understand.

Resp,

wilwon32 said...

Golem XVI, a documentary film maker, has speculated about Plan B which deals with a strategy which clever bankster lawyers may have employed to take advantage of hypothetication and repos such as have been mentioned to have played roles in rationalizing Jon Corzine's failure to recall how MF Global's client moneys seem to have been misplaced. Funny business? Though this is speculative, it is not likely/ necessarily so, but may stimulate further discussion/clarification regarding the rules of the game.

Plan B – How to loot nations and their banks legally
by Golem XIV on DECEMBER 15, 2011

http://www.golemxiv.co.uk/2011/12/plan-b-how-to-loot-nations-and-their-banks-legally/

'If I am right then MF Global was the first hint of Plan B in action. The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can. To me, this gives a possible answer to why there has been such a surge in derivatives trading.

If I am right about all this, I think this means that some of the biggest banks, themselves, have already constructed and greatly enlarged a now truly massive trip wired auto-destruct on the banking system. If they have and they have explained any of this to our politicians then it would explain why our governments have been so abjectly willing to bail out any and all of the biggest banks and sacrifice anything else in the process. Any hint of relucatnace and the banks can make veiled reference to the extreme ‘risk’ of systemic ‘panic’ and forced liquidations. None of which is really a panic, since they have engineered it.

Are the banks threatening us? No, no, good lord no! Just pointing out the reality of the state of the system. There just happens to be a gun pointed at our head and the banks just happen to find their finger on the trigger. All they ask is that we do nothing to make them feel that their best interests are served by pulling it. And all we have to do to avoid that is stick to plan A. Simple.

But now I come to the really ugly part.

wilwon32 said...

continuation:

For the last four years who has been putting money in to the banks? And who has become a massive bond holder in all the banks? We have. First via our national banks and now via the Fed, ECB and various tax payer funded bail out funds. We are the bond holders who would be shafted by the Plan B looting. We would be the people waiting in line for the money the banks would have already made off with.

It is the money we have been putting in to bail out the biggest banks which they have then been using as collateral for offering weaker banks in weaker nations, repo loans or hypothecation. And the money or government bonds the weaker banks are using to pledge as assets and collateral for those loans or in derivative deals with the bigger banks is also from us. We have and are funding both sides of the deal.

The result is that the assets which the big banks would be legally allowed to seize and keep in the event of the failing bank actually going under would be ours.

To give a concrete example. Spain or Greece puts its tax payer money in to one of its insolvent banks.That bank then uses that money to get a short term repo or hypothecated it for loan. Or it uses it to hedge its currency problems via a currency swap or buys CDS insurance on assets it is deeply worried about. If the weak bank then goes down all those assets are seized by the big bank who was lending or was the counter-party to the derivative deals. The tax payer gets zero. And there is no redress. It was legally done. And the money the Big bank would have used to get themselves into this position would be the bail out money we had earlier given to the mega banks. They would have used that money against us – again.

The largest banks, those with the greatest exposure to bank and sovereign bonds from the most indebted euro nations, have the most to gain from doing derivative. repo and hypothecation deals with the troubled euro area banks and nations. The more assets the weak banks and nations have pledged in deals with teh Big banks, the more theBig banks will walk away with in the event of a crash. I suggest this is why, even as this crisis has worsened, the Big banks have been increasing by 18% their trade in derivatives and why Repo and hypothecation is as large or larger than even before the crash.'