MF Global is a complete, healthy breakfast for Occupy Wall Street. The derivatives brokerage, headed by former Goldman CEO and New Jersey governor Jon Corzine, recently filed for bankruptcy protection and the circumstances of its demise make for a Zuccotti Park dream:
First, there's the sugary pieces of pastry and cereal - those tasty simple starches that pull you in:
- Over-Leveraged The episode is another example of Wall Street's eyes being too big for its stomach. The firm's trades leveragedtheir tangible equity against risky bonds by over 5 times: $6.3 Billion in European bonds against $1.3 Billion in the firm's tangible equity.
- Goldman Sachs Democrat or not, Corzine was once head of the reviled standard-bearer of Wall Street (and nearly took it downin 1998 amidst the Long-Term Capital debacle). Any association between the 'vampire squid' and collapse rings positive in the protest's encampment.
Then, the healthier portions of grapefruits and yogurt - sour stuff that still have some sweet:
- Just Small Enough to Fail MF Global is huge enough to be a titan, but not so huge as to cause contagion. They failed quickly and without risk or panic spreading elsewhere in the market. The firm's failure offers an example of what happens when financial institutions don't grow to sizes that amount to systemic risk.
- Moral Hazard The company had made the assumption of a bailout, and that very assumption in large part was the cause of their downfall. European debt choked off MF Global after their positions in 'PIGS' countries like Spain, Portugal, and Ireland came to light. Their bond holdings presumed that a Euro bailout of some kind was inevitable. Whether or not this harsh judgment was the market's fair valuing of risk, or a sinister combination of poor timing and speculative sales, is worthy of a longer debate.
Finally, the hearty bacon and eggs - a soggy protein punch in the gut that still feels all the better:
- Mark to Market The massive bond portfolio that MF Global held at the time of its collapse was largely hidden from regulators and public view by avoiding mark-to-market accounting. The value of an asset (like sovereign debt) changes with the pace of the market it trades on (a dollar of Greek debt is often worth something quite different the next day), but reporting a firm's holdings at that pace is often incredibly onerous or unduly complex to adequately accomplish. So, the assets have to be 'marked' to market value every so often. How often (and how well) is another question, and one that lied at the heart of the financial crisis. The face value and 'true' market value of mortgage-backed securities differed greatly (with uncertainty about this difference considered the 'toxicity' of assets). To anyone, occupiers or not, it's feels gratifying that the accounting position Wall Street firms held off against in late 2008 now managed to knock one out. If anything however, it may encourage better obfuscation than better reporting and the collapse of a firm that employed over 3,000 people is nothing to glibly celebrate. Nonetheless, it does feel like a victory for transparency.
By no means should the flawed judgment of one major firm stand as example for all of finance, as some commentators have chosen to anoint it. However, MF Global provides a crucial set of lessons for our time, and the protesters at Occupy Wall Street should shout those lessons each and every morning in the square.
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