The Broad Mind | MF Global and the global funk

Last week, while the world’s attention was firmly fixed on the endless Euro zone woes, another big American financial firm went burst. MF Global, a significant futures brokerage firm, went into liquidation after sustaining a major fall in stock value. The trigger for this big collapse, the eighth largest bakruptcy in US ecnomic history, was the discovery that over $600 million dollars of investors’ money had gone missing without a trace at this formerly admired brokerage firm.

Lehmann Brothers all over again? Certainly, the propensity for excessive risk taking and greed which brought down some of Wall Street’s titans in 2008 seemed to go on unabated at MF Global as if no lesson had been learnt from the crash of three years ago.

MF Global’s boss, John Corzine, came from a pedigree of being former chief of Goldman Sachs and a high profile stint in American politics (he is a former senator from New Jersey from the Democratic Party) and was considered one of the most influential figures in Wall Street’s ultra-elite circles. Unlike Goldman, where managers are said to perform lots of risk analysis and exercise caution, MF Global took to extreme risk and raked in billions until the bust came last week.

Corzine had pushed his company (with puppet “independent” Board members not posing any obstacles) to buy sovereign debt from Belgium, Ireland, Italy, Portugal and Spain totalling more than $6.3 billion. His bet on these toxic debts was based on the “moral hazard” calculation that the Euro zone’s big players like Germany and France were never going to let the peripheral PIGS economies go into default and that the latter would repay in whole because of this cushion. MF Global bought European bonds not only from the money of its own investors but also by borrowing widely with a suicidally high leverage ratio of 30-to-1, whereby it possessed $40 billion of assets despite having just $1.4 billion of equity.

For a long while now, Wall Street was shivering at the prospect of a huge blowback from the Euro zone crisis and trying to figure out who will be left on the hook in New York for Greece and company going bust. MF Global may just be the beginning now. Shares of troubled Wall Street icons like Morgan Stanley are down in the dumps and fear is mounting as to which American firm is next in line for a Euro-shock. If Italy with ‘falls’ the way Greece is going,

The case of MF Global is instructive not only of poor financial management and governance within individual corporations, but also of the incapacity of the financial regulatory system in the US to prevent feckless behaviour of traders and speculators.

It has now come to light that the Commodity Futures Trading Commission (CFTC) as well as the Securities and Exchange Commission (SEC) had warned Corzine for months about exposure to toxic European debt, but could not halt his dangerous gambling until it was too late. MF Global was, of course, not “too big to fail”, but Morgan Stanley and Bank of America are. If these stars of Wall Street collapse, there is no telling where the bottom is for a panic and a deeper American economic funk.

Corzine’s fall from the pedestal has surprised Wall Street no end, but when the fundamental regulatory environment for prudent business practices remain gamed and unreformed, what better can we expect?

Corzine continued to bankroll the Democratic Party after his exit from politics and was President Barack Obama’s top fundraiser and troubleshooter to mend fences with angry bankers. Obama’s own political prudence now lies as much exposed as Corzine’s blunderbuss ways. Even before Obama became President, he was quoted as praising Corzine as “our Wall Street guy.”

With ‘Occupy Wall Street’ protests in full motion and Obama being challenged to move to the left by the ’99 percent’ majority, the MF Global fiasco is going to add fuel to the already discontented American public. They will redouble their efforts through the winter to keep pressure on Obama to either cut and run from his coziness with egregious bankers or end up as a one term president.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.