Friday, December 9, 2011

Corzine Avoids Cause of MF Global Failure: Bank Run


MF Global CEO Jon Corzine slimed his way through testifying before the House Agriculture Committee.  Jon didn't know what was going on as the firm slipped from "meticulous record keeping" on customer accounts to "chaos over a two to three day period."  Oddly, Corzine said the firm was in due diligence over the prospect of selling MF Global.

A panic sale can occur when the firm's tangible assets aren't close to clients' investments and is deep underwater.  Not many buyers will take on risk they can't understand, even at fire sale prices. 

What would they have bought?  Corzine pushed MF Global to invest in repo's, of which he stated in his written testimony:

MF Global was required to recognize its profit immediately in RTMs, and the asset (the debt security) and the liability (the money owed to the Counterparty) must be “derecognized,” i.e., removed from MF Global’s balance sheet.

It sounds like Enron fiction, immediate income statement profit with off balance sheet liability.  Corzine's MF Global might as well be Greece, with its Goldman Sachs repo.

During the last hours, last days, Corzine stated there were "many, many, many more transactions than typically occur."   Customers wanted their money.  The lucky ones were at the head of the line.  It's called a bank run.


Levered up 30 to 1, it didn't take much of an equity hit, combined with imploding sovereign asset values to put MF Global into the grave.  Corzine played personal risk manager for much of his testimony.  After 19 months as CEO of MF Global, the firm no longer exists.  The buck stops nowhere for Jon Corzine.



Be sure to check out the video.   It shows how far the leadership ball has fallen.

Update 12-10-11:  Lehman used repos, which hid its imploding financial position.  MF Global shows it can happen again.