Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Could MF Global Have Survived With More Time?

Sounds like Joe Nocera of the New York Times has much the same read that I have about the meltdown of MF Global.

From the Economix blog:

The great irony of the failure of MF Global, the firm run by Jon Corzine, the former governor of New Jersey and the former chief executive of Goldman Sachs, is that its bets will, in the long run, probably turn out to have been good ones. He is said to have bet large sums that Europe would not let countries like Italy and Spain default.

If that was right, then the elevated interest rates available on government bonds represented a phenomenal bargain.

And so it may be. But even it proves to play out just as Mr. Corzine forecasted, it won’t do MF, or Mr. Corzine’s reputation, any good.

Whatever is going to happen in the future, in the present sovereign bond prices have been sliding.

An unleveraged investor could have ridden out the current downturn, but MF, as is the fashion on Wall Street, was heavily leveraged. Its June 30 balance sheet showed $44.4 billion of liabilities and only $1.4 billion of equity. The firm was heavily dependent on short-term funding, with less than half a billion in long-term debt. That meant the firm was vulnerable if the value of its holdings fell, or if its lenders simply got nervous and demanded more collateral to back the loans.

I would caveat this with the reminder that we do not yet know whether Corzine would eventually be right about Italy and Spain. The resistance of Germany to a credible bailout, which would need to involve an ECB-backed commitment to keep rates sustainably low in Italy and Spain, has been far greater than most people (including me) expected. There's a real chance that Germany will prefer to see the euro broken by the debt crisis than see it debased to prevent the crisis.

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