Financial Stability News

News about financial stability, central banking and theory of money

MF Global was just another LTCM – making a big wrong bet

As the hearing of Corzine proceeds today, it becomes all the more apparent, that this was a huge investment bet that failed (like LTCM), with counterparties pulling their funds, putting the firm in a liquidity squeeze, and eventually bankruptcy.[1] The unfortunate effect of MS Global’s collapse was that client funds were compromised in the final days of the collapse, but before it was put in bankruptcy.[2] How this happened and who is responsible for this calamity remain to be clarified. But as one of the congressmen noted today … this is yet another example of the financial industry leveraging ordinary people’s monies.

Before Corzine came in, MS Global was pretty dull primarily a broker firm, with relatively modest income from commissions only. Under Corzine’s leadership (which lasted only eighteen months) MS Global, which became more of a broker-dealer.[3] The exposures to European sovereigns (increasing from 1 to 6 billion dollars during 2011) were intended to boost the income of MS Global.[4] Unfortunately this huge bet went wrong and led to the annihilation of a 230 year old company and huge losses for a large numbers of farmers which trusted their money were safe in the client accounts.

[1] As one congressman noted, can we regulate away “greed, incompetence and fraud” or could something like this happen even with better regulation? Corzine noted that the failure was rather the result of bad judgments and a complex business model.

[2] This was different from the Lehman case, where client funds were made whole.

[3] MS Global also became a primary dealer with the NY Fed earlier this year.

[4] According to an earlier WSJ report … “Europe wouldn’t let these countries go down,” Mr. Corzine, who is also chairman of MF Global, told another executive at the New York City company early this year. When the lower-ranking official suggested that the trade was too big, Mr. Corzine brushed the concerns aside, responding that his career on Wall Street and in politics made him confident about the bets.


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