MF Global Holdings is the latest of the high profile bankruptcies that I had been reading on. In many ways, its fall was quite similar to Lehman Brothers. I attributed its collapse to two main cause – overleveraging and weak economic environment. MF Global was a brokerage firm. It was supposed to execute orders for its clients and earn fees from this trades. However, it also began trading its own deal as a way to supplement the incomes from those fees. During good times, this was well and the employees enjoyed good bonuses but recent months were not good times. MF Global fall, while other brokerages are still standing, because it has overleveraged on its assets. Its methods of execution was similar to the pre 2008 crisis, it still take massive risk and leverage on a relatively narrow investment.
According to Forbes’ Robert Lenzner, MF Global has leverage ratio of 82 to 1! It owned $41 billion in assets, against which it apparently had $39 billion in debt and an equity value of $500 million plus $325 million of investment grade debt. When Lehman Bros fell in 2008, it was levered up only to 30.7 times, already a very shaky position to be in. Also, CEO John Corzine apparently was buying short term Euro debts on the chance that the Euro would recover and his investment would pay off big. I don’t know if he is oblivious that many smart money hedge funds are taking the opposite view, shorting the Euro debt when they could. Not to say that this contrarian approach is not recommended. John Paulson did it with the subprime crisis and it pay off – a lot, but he has the data and understanding to back his positions. So, was John Corzine faulty in his analysis? Perhaps, or perhaps not? He might be right that the European financial market will rise again, but in this case, his timing is way off.
The reason behind this plight was Europe’s weak economic outlook, in particular Greece. Isn’t it an irony that financial crisis occurred because there is too much confidence, too much spending and too much borrowing, yet the solution to get out of the crisis is more confidence, more spending and perhaps more borrowing. I assumed that the bailout fund was enough to buy a little confidence and more time for Greece to settle things out. Then, the Greek Prime Minister George Papandreou pulled out a shock yesterday by having a referendum on the latest aid package to solve its debt crisis. He is asking his people to vote for the next move because this is all political. His public approval was very low due to austerity measures from EU’s pressure to handle Greece debts but the people itself do not necessary want to move out of the Euro Zone. Basically, he is saving his seat of power, but sacrificing his country in return. This shatters any lingering confidence that investors would have in Greece and reflected badly on the Euro block. A referendum takes time to complete, time that financial markets do not have. PM Papandreou is negating other countries goodwill and sacrifices in helping out Greece.
After all, this trouble started because Greece cheated about its borrowing statistics to gain entry into the Euro in the first place. And now, it is expecting other countries to clean up its mess but rejecting their help at the same time! I don’t like this at all, this is leaving a very bad taste in my mouth.