November 13, 2011

MF Global: Still With The Makings of A Black Swan (Guest Post)

By Bruce Krasting


Interesting development in the MF Global story.

The $300mm is in the form of a guarantee. The objective is to get the Bankruptcy Trustee to release money owed to former MF customers. From the CME release:

"Though CME Clearing does not guarantee FCM-held assets, CME Group is willing to provide a $250 million financial guarantee to the trustee to give the trustee greater latitude to make an interim distribution of cash to customers now, given the monumental task he faces to sort through considerable data and claims in order to complete the MF Global liquidation and make distributions to creditors.”

Some thoughts:

-The amount of “missing” customer money is around $600 million. So the CME is picking up the tab for half of the nut.

-This is a glass half full for MF customers. Yes, they are getting half their money back. But my read from this is that this other half is very much at risk.

-The CME steps up for $300 large and they don’t have to? Nobody does that. There is more to this offer than meets the eye.

-I can’t see how the CME can be held liable for MF customer losses. Therefore the money is an attempt to preserve the integrity of the exchange and to protect its members.

-It’s possible that the CME action was done with a gun to their head. Absent a fix (partial or otherwise) a systemic risk was (is) a consequence. The only one who could hold a gun in this discussion is Treasury.

-Has anyone noticed that Treasury has been silent on the MF story? I’ve been very surprised at this. It’s long since time that Geithner should have spoken publicly on this important development. The White House wants to steer clear of anything that smells like a bailout. The WH is ignoring its responsibilities.

-It’s (again) clear that there is a ton of cash sitting with the Trustee. The reason this money has not been forwarded to customers is that there is a claim against it. I can’t imagine how that can be.

-The most likely entity that is claiming the money is JPM. It’s possible that JP is acting on behalf of yet another party, but I doubt that.

-That this matter has now gone on for two weekends confirms to me that there are losses outside of MF. What shouldn’t have happened has happened.

-Early next week the Trustee will accept or reject the CME deal (I’m sure there are strings). If the Trustee does reject this (its very unusual) then there will be some fallout. If this happens, all of the customer money is at risk.

-I’ve thought from the beginning that this had the makings of a Black Swan. I’m not sure that the actions by the CME defuse the risk.

-If there is going to be a reaction (capital withdrawals from other brokers, liquidity issues in futures markets), it will be evident on Monday.

-If I had an account with a second tier broker I would take the money out. It’s easy to put it back in. It’s a disaster if you can’t take it out.

Further Reading - $633 Million Missing: MF Global, Goldman and Systemic Risk

About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it." Nowadays, Bruce blogs about his take on financial events at Bruce Krasting. (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Post Alert | Kindle

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