MF Global is MF Kaput
- Posted by Jeff Carter
- on October 31st, 2011
There are a few sides to the futures business. I was always a “local” trader, and never had customers, filled orders, tried to get retail accounts or anything like that. Locals had different needs and wants from a clearing house than a customer, a broker, an introducing broker or some operation like that.
I continue to clear any trades I do at Shepard International Trading. I pay more in commissions there, but everything is clean. I never have a problem with my account. I don’t have to worry about the positions being leaked out of it, and the people that run the company play straight.
One of the great fears of a local trader is that one day some idiot bankrupts the clearing firm, your assets get frozen, access to trading is denied and you are stuck. If your clearing firm has a good risk manager, that shouldn’t happen.
However, that happened to a bunch of people today with the bankruptcy of MF Global ($MF). Traders couldn’t access their accounts and the trading MF did was liquidation only, meaning closing positions. I feel bad for the employees of MF Global. They didn’t have a hand in running the company into the ground.
This dislocation is only a short term operational problem. Money in clearing firms is segregated away from the assets of the firm itself. Traders don’t worry about that. But when assets get frozen up and you need to post margin on positions it’s a royal pain in the you know what.
The market decline today wasn’t about MF Global. It was about continued worry in Europe. The Europeans papered over their problems by throwing more money at it. Do you really think the Italians can continue to auction of debt at 6% interest rates and pay for it? Not a chance. The broader market isn’t affected by one futures firm. The only reason it’s a big story is they are led by a former Goldman CEO, and former government official (Senator, Governor) that was rumored to become a Treasury secretary.
MF Global went bankrupt for the same reason a lot of clearing firms go under. They chase yield. All the guys like me that have excess money in their account after their positions are margined give firms a chance at some cash flow. The firms that go bankrupt use that money to buy overnight treasuries and earn some interest on it. The problem today, no one is paying any overnight interest so that cash flow stinks.
When you are an operation like MF Global, you might do some financial budgeting based on earning a certain return on assets. When you don’t earn that return, you need to bump up the risk you take to earn more yield. In MF’s case, instead of buying US Treasuries, they decided to buy European securities. What could go wrong?
A haircut that’s what.
Boom went their balance sheet. Now they are done. Refco and MF Global followed a similar strategy. They rolled up IB’s and then tried to sell a lot of value add products and generate cash flow from deposits and commissions. In Refco’s case, fraud brought them down. MF just made some really poor business decisions.
Those of us in the know in the futures industry never thought MF was a particularly clean house anyway. My friend Dan Dicker from New York can tell you chapter and verse about their reputation on the NYMEX/COMEX floor. It wasn’t very good.
I mean, what did you expect? Their CEO ran the state of New Jersey into the ground. His claim to fame was front running customer business at Goldman before he became a US Senator. All you have to do is read “When Genius Failed”. Goldman downloaded the positions of LTCM before they lent them the money, then pressed the positions and caused them to go bankrupt. They took the other side as they blew out and made a ton of dough. Karma sucks. What did Corzine run better? MF or NJ?
Anyway, if you are a futures customer, or considering trading futures it’s sometimes important to check out your firm. Like I said, I use Shepard. For S&P execution, I also know a guy named Charles Reynolds that is pretty sharp. He runs his operation through FC Stone($INTL). Happy to put you in touch with either of them if you desire.
To clarify on the MF reputation-it was far before Corzine showed up. There are conflicting stories on my “chasing yield” meme. Thestreet.com says that isn’t the case.
It’s ugly for the customers and the employees that had nothing to do with it. But, let’s see what the forensic accountants say when they go through bankruptcy. We learned a lot about Enron after the fact.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)
Tags Cloud2012 election American Conservative Union Anthony Weiner Austin Bitcoin Blago Bourbon St Budget Crisis Business model California CDOs College football Consulting Demand-Supply Democrats de Toqueville Exchange Feds Generations and Age Groups Greek Debt vote Guns H-1B visa Hiking Housing Insider Trading J. C. Penney Law School LeBron List of Medal of Honor recipients for World War II Market clearing Michigan Governor Middle East New York Giants Northern Trust Obamanomics Pathfinders Paul Ehrlich Prohibition Quantitative easing Rick Santelli San Tropez Sprecher Startup Weekend Tim Pernetti Ukraine
Becker Posner Blog
Ben Horowitz Blog
Betting the Business
Black Line Review
Blue Sky Innovation
Both Sides of the Table
Business News Network
Chicago Booth Graduate School of Business
Cooler By The Lake
Daily Economic Release Calendar
Doug Ross @ Journal
Economics of a POW Camp
Foundation for Families
Garden and Gun
George Stigler Institute
Good Beer Hunting
Great Food In Chicago-Steve Dolinsky
Hyde Park Angels
Illinois College of Business
John Taylor's Blog
Legal Issues in Angel Funding
Macroblog-Federal Reserve Bank of Atlanta
Microbrews in Chicago
Mike And G
Milton Friedman Institute
National World War Two Museum
Notes From Underground
Ronald Coase Institute
Senate Banking Committee
The Big Picture
The Clubber Fund
The Daily Crux
The Grumpy Economist
The Jack B Show
The Minimalist Trader
The Musings of The Big Red Car
The Polsky Center
The Streetwise Professor
Tough Love Marketing
US Federal Reserve Bank
US House Financial Services Committee
World War Two Blog