MF Global

1st November 2011

Instead, the question asked not just by Occupy Wall Street's 99% but probably by 99% of the other one per cent as well is "who?". 

MF Global's Background

Here is a firm which practically no one has ever heard of, which received practically no public scrutiny, but whose filing for chapter 11 protection has suddenly pushed it to the top of the news agenda – ahead of the proposed Greek referendum in the print edition of The Financial Times. 

It was spun out of UK group Man Financial (hence the initials) some four years ago. This was part of the London-based Man Group which can trace its origins back to sugar trader John Man in 1793, when the business was involved with the use of slave labour.

While not in the Lehman Brothers league, its liabilities could be as high as $40billion, putting it on a par with the 2009 Chrysler collapse, and making it the seventh largest company by assets to become insolvent in the United States.

Its apparent tipping point was a $6.3bn association with distressed or likely to be distressed eurozone debt.  There's a succinct summary here.

Real World Dissociation

The word "association" is used advisedly. The most commonly applied words are "bet" or "punt".  But gamblers typically have more involvement in what is happening. They watch the horse races, they pay attention to the cards.

And, they punt their own money – MF Global used Other People's Money, a form of highly addictive OPiuM – some hundreds of millions of dollars from outside investors are currently missing.

And just like dangerous drugs, this form of addiction allows a real world dissociation – as here, a phenomenon more usually noted in academic studies into obsessive computer gamers.

Chrysler made products which fewer people wanted. Its problems were long standing and easily understood.

 MF Global made nothing, its problems were short standing and hard to understand – other than to see it as a bunch of out of control traders playing very expensive computer games.

Sitting in front of their screens, insulated and isolated in their gaming world, they may even have imagined they were shooting up Italy or riding to the rescue of Portugal, countries which some may not even have found on a map even if they were investing billions into those countries' debt instruments. 

How other than advanced gaming to describe a company taking wild punts on events which may not have seemed real to the traders watching ticks up and ticks down on their computers?  Lost in their own versions of cyberspace, these gamers continued to up the ante, just like players of commercial games. They had become dissociated from the world of the other 99%.

 'Wild-West Captitalism'

To refer to the MF Global collapse as anarcho-capitalism is to downgrade that concept of the free market. It's more like wild-west capitalism, an aggressive free-for-all that stresses a positive anti-regulation ahead of the more simple non-regulation.  The local sheriff, in the shape of auditor PwC seems not to have noticed what was going on, according to Forbes.

Regulators are now looking into whether the brokerage used some of the money to support its own trades, the New York Times reported, citing unnamed sources.

The New York Times stated "regulators had expressed "grave concerns" about the viability of MF Global. One of the regulators that pressed MF Global, the CFTC, was unhappy with the brokerage's failure to give it the required data and records.

And, in yet another attack on brokers trading on their own behalf with customer money, Bloomberg suggests  that some trades were geared on a 40 to 1 ratio, a higher level than Lehman ever managed. This means that a move of  just 2.5% can either double the original stake or wipe it out the capital backing the deal.

How many computer gamers are prepared for Armageddon on this basis?

Another question

Is MF Global an isolated incident or is this a precursor of a systemic breakdown?

There are hopes that this will be containable, that the inevitable ripple effects can be absorbed. But given the tight and interlocking world of finance, no one can be sure.

What is the effect on the real world?

·       Insolvency practitioners in New York are trying to find a buyer for what's left of the company.

·       Trading in agricultural commodities in the Australia has been severely restricted

·       Investors in MF, whose shares were traded in New York, are likely to lose all or nearly all of their money.  

·       There will be more questions posed on the advisability of turning a brokerage which placed bets for others into an operation which also took bets with its own capital – the route chief executive Jon Corzine, a former Goldman Sachs chief executive, had decided upon.

More from Mindful Money:

Company life cycles: from birth to death

Economic crisis: What is the end game?

To receive our free email newsletter sign up here.

Leave a Reply

Your email address will not be published. Required fields are marked *