Monday, November 7, 2011


So, the question that has been on my mind over the last couple of days, "What Happened to MF Global? and also, "Why?"  We are finding out all sorts of details of mis-management and lack of risk controls at MF Global and the sheer arrogance of Jon Corizine at the helm of the firm. 

I suggest reading Felix Salmon's article at Seeking Alpha for a perspective on the firm.

Beyond this explanation I think it is important to go further because I believe this week is going to be critical for the markets, currencies, and global economies and we can lay the blame all at the feet of the Eurozone leadership and ISDA and their efforts to save their broken system by destroying their system.

Remember two weeks ago when markets ripped higher because the Europeans finally came together and agreed to agree on things they would attempt to put together in the coming months?  Remember the Slovakia vote that paved the way for the EFSF and saving all of the Eurozone?  Remember how a 1 Trillion levered SPIV would be the catch all for crummy assets and remember how SOME institutional holders of Greek debt would suffer 50% losses and others 21% losses and even others, no losses?

Ok, so we remember all of that.  What I want to turn your attention to though is that despite the 800 point rally in the Dow in a mere week or two, despite all the agreements, we are actually in a far worse position in funding and liquidity terms than we were just weeks ago.  Why?  As part of the EFSF agreement, banks that form the ISDA (International Swaps Derivatives Association) colluded to state that the write off of 50% losses on holdings of Greek debt IS NOT a default triggering event for their purposes and for the purposes of CDS (credit default swap) protection..  Is this important?  Yes. 

If ISDA (the banks) can rule that the insurance protection you bought under a standard ISDA document (binding contract between counterparties- many buyers just use the standard contract instead of negotiating their own contractual triggers) even when the rest of the world knows that an "event" did occur, then institutional buyers that just took a bath and other potential buyers of sovereign debt suddenly need to rethink the risk that they have been acquiring in their portfolios. 

If their hedged portfolios are no longer hedged, why would you ever buy a Greek or Spanish or Italian bond?  The answer clearly is, you wouldn't. 

ISDA would lie for a couple of reasons.  First, the banks would lie because they have written a bunch of this CDS as protection against a sovereign default.  While the total net exposure is probably not huge for Greece, we all know that whatever happens in Greece doesn't stay in Greece and it will be visited upon all of the PIIGS countries, so it is in the best interest of the banking cartel to rule that a 50% loss is not a default event.  If there is no default, they don't have to pay.

Second, a triggering event would immediately call for downgrades of other European banks like the French and German banks that hold alot of these bonds from credit reporting agencies.  Downgrades require more capital and the death spiral continues as the countries that issued the defaulting debt will need to somehow find more money to save their banks that are choking on their own countries exploding debt.  Nice huh?

Third, ISDA would rule in favor of a non-default because it keeps the laughable game going for just a bit longer.  This is the irony of the entire mess in my opinion.  Everyone at the table knows that there is no fix here, it is just a concerted effort to keep the plates spinning as long as possible despite the fact that any extension of the duration of this mess just makes the next mess worse.  It is all a sham.

Well, if you disrupt the natural forces of the market where some win and some lose by ruling that losing isn't losing (no default) you create a situation where all buyers repudiate the offerings in the Eurozone.  Can we substantiate this?  Of course, let's look at Italian bond yields since the heist occurred.

Next like all government interference, we'll see some kind of anti-market forces that try to hold rates down and keep prices up, further distorting the market pricing mechanism.  Take a look at the following  Zerohedge article for information on this escalation.  Italy Calls ECB's Bluff.  By the way, as I'm proof reading my post that I've been working on for a few days, we see that the yield continues to rise another 15 bps or so to 6.65%.  This is not the sign of anything healthy, the Italian crisis is now underway.

So, where we are at today is that the Eurozone, ECB, IMF, G20 solution achieved in the last week along with the outright rigging of the system by ISDA has ushered us one level lower in the death spiral of the Eurozone collapse.  If you had been a buyer of bonds and had excellent risk management techniques by buying protection to offload risk, you no longer have that capability and you actually have a ton of risk on your books.  Essentially, you are very pissed off and scared to death!  Another way of saying it is that you are no longer a buyer of these bonds at any cost.  As a result, the ECB is having to step in an buy these bonds at issuance to keep Italy from blowing sky high, although the damage has been done.

As we can see from Felix Salmon's article, the ECB intervention did nothing to save MF Global, and I suspect that we'll see more of these things as we find that hedgies and even banks that were holders of sovereign bonds are really hurting (Jefferies anyone?) as they don't have the protection they thought they had.  The MF Global bankruptcy and theft and mis-management ranks within the top 10 in terms of size of all bankruptcies.  How can this happen?  How can their be rumors of hundreds of millions of client money missing?  How can this have occurred in this age of significant oversight and regulatory control?  Clearly we've learned nothing and clearly the ECB, Eurozone, or US government are not in a position to save anyone or have any idea how to do it.  The only goal in all of these actions is to extend the time before the implosion finally happens in all of its nastiness.  Get ready, it is still coming.


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at