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by Al Martin

MF Global Blows Up: A Forensic Analysis of What Went Wrong

(11-8-11) How MF Global, headed by former New Jersey governor and former Goldman Sachs CEO Jon Corzine, got into trouble was that its bets about sovereign debt not being written down or discounted. Also MF Global was too “long” the risk, as they say in the trade and it didn’t have enough counter-party trades on the other side. Then as Euro peripheral state debt, like Greece and Italy, got shakier and shakier, the credit default swaps that MF Global had put on came to be increasingly more worthless.

      All governments, investment banks and large corporations enter into these types of agreements called “swaps.” This is done to get short-term funding. For instance, GE and other large corporations can sell commercial paper to fund its day to day operations. This is called “short term borrowing.” The commercial paper is usually sold on a 5 or 7 day basis, where they would issue the paper then buy it back. It works similar to the way that US Treasury bills are sold. In other words, they sell commercial paper which is discounted then redeemed at par. This is the same thing that’s done with short term US Treasury instruments.

      When it comes to investment banks it’s different. They’re not borrowing to fund their day to day operating costs. They’re borrowing to take on risk.

      So what went wrong? Everybody’s trying to be a hero – looking to make more “home runs.” Investment banks and those who run them tend to make their personal reputations on the so-called “big hit.” Corzine was no different.

      Corzine then essentially bet big and bet wrong on Euro debt. He was the only one to believe that the ECB would give guarantees for Euro peripheral state bonds, that the haircuts that were agreed to would wind up to be the final haircut, which of course was never reality.

      Let’s look at it on how to avoid these kinds of problems. A lot of investor losses could be avoided if the underlying governmental regulatory agencies, whether it is the US Treasury or the Fed, the SEC or the CFTC, should require that managers of investment houses, those that are actually making the decisions, should have to continuously post their track records. If that had happened in this case, Corzine would have never gotten to be chairman of MF Global, the former Man Financial Group.

      This is simply another “failure” of the regulatory agencies. And what about this Gary Gensler, head of the CFTC, a guy who looks like Skeletor? What’s his excuse for dropping the ball?

      Gensler is a do-nothing who avoids answering any question as much as he can. We saw that last week on CNBC when he gave testimony up on the Hill. Gensler never holds press conferences and never answers media’s questions. Reporters from CNBC and Bloomberg had to chase him down the hallway and corner him by the elevator to force him to answer questions.

      The problem again is that the chairmanship of the CFTC has always been a political appointee. Chairmen and senior officials of regulatory agencies that deal with securities, banking and insurance tend to be political appointee jobs. Consequently you get people that have very little practical experience, never having done what they are now regulating. That’s something that should change.

      Political appointees exist in regulatory agencies which are really designed to provide stability – and not rock the boat or institute any needed changes. This is particularly true within the CFTC and the SEC. They’re always afraid to institute any changes that make sense for fear of rocking the boat and roiling the markets. They don’t want anyone to know just how incompetent they are.

      It should be noted that Corzine himself as a former CEO at Goldman Sachs as well as Governor and US Senator from New Jersey lobbied against new CFTC regulations. All of those who come from the Goldman Sachs fold into public office form a knot n Congress that attempt to block any regulatory reform when it comes to securities, banking or insurance. That is to guarantee that the political patronage system of the appointees of jobs in these agencies is maintained and that the façade of stability is maintained as well.

      So how did the MF Global debacle happen? When you’re leveraging a trading position, let’s say, at 70:1 which is what Corzine did, and the position moves against you 1.5% in net value, then the assets of whatever it is you’ve pledged, the equity in that position, is simply gone.

      This is simply another “margin call” disaster. A margin call can be defined as a demand on an investment house using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance level. Margin calls take place when the value of a trading account is reduced to a lower value which is calculated by a particular formula.

      If you want to look at it in very simple terms, MF Global kept getting margin calls to support a position that was “wrong” in the markets. Instead of just getting out of it and admitting he was wrong -- which is what Corzine should have done, even though nobody is ready to admit they’re wrong because it destroys their careers. They’ve always been wrong anyway, but they have been able to spread the pain among a lot of “small” investors. If any group of investors lost $20 billion, and an investment manager or even the chairman of an investment firm was wrong, the pain gets spread around many small investors. In this case, small investors means anybody that bought the underlying instruments as a package of something as a fund they invested in or some sort of deal they invested into without understanding or ever knowing the risk. This is 99% of the small investors in the United States who never know the risk.

      Why? Because regulatory agencies don’t require any of the firms to ever really keep them apprised of what the actual risk is.

      In the final moments of MF Global before it declared bankruptcy, the problem was that they had 5 or 6 bidders lined up to essentially take over these positions. Forget MF Global Group. That’s just a name on a piece of paper. It’s the positions that are important. They tried to line up a group of investment houses to take over the positions.

      The houses, however, backed away when it was announced that client accounts got looted in order to support the firm’s positions. That was the deal breaker because you know that the positions you’re taking over will have a capital deficit, but you don’t know where that money is necessarily coming from. And how can that capital deficit be made up?

      How most of the trades were cleared became a problem for the Jefferies company last week and their stock fell more than 20% last Wednesday but recovered towards the close.

      The way the information came out it was presumed at MF Global that Jefferies had a net risk that might exceed its underlying capital.

      Jefferies, unlike MF Global, was very quick coming out with a lot of information concerning the trades and default swaps that it had arranged for MF Global to demonstrate that in fact it had a very small exposure. This was an example of how regulation should be – namely that all firms involved in the daisy chain should be forced to maintain and continuously announce what their net exposure is versus what their net capital is at any given time.

      This is legislation that the WBR (Wealthy Bushonian or Bush-Connected Republicans) continue to block and that is disclosure. Why? Because they don’t want Joe Six Pack Working Class Republican investors to know just how much risk they are assuming.

      Then there are the traders at MF Global who have had their accounts frozen. It will take years for them to get their money back. Just look at the collapse of Sentinel in 2003. That’s still in litigation today – and the account holders have not been made whole yet.

      And therein lies another deception of government and that is investment houses, banks, and brokerage firms which sell this concept – don’t worry, your account is protected by SIPC (Securities Investment Protection Corporation). But SIPC doesn’t protect the account holder against fraud versus any other type of loss. In other words, when a firm fails through no fault of its own.

      However, when a firm loots its clients’ accounts, that’s blatant fraud. It violates the segregation rule – to loot its accounts to support the house’s own positions. SIPC doesn’t protect against that.

      This gets back to the same old problem, i.e. everyone is loathe to admit that they’re wrong. If they’re doing business at Joe Blow Incorporated and Joe Blow comes out and says I lost a billion dollars of the firm’s capital because I was wrong then it’s very likely you’re going to want to do business with someone else.

      MF Global is just another example of the problem that people try to make their reputation they try to make their ‘bones,” as they say on the street. They try to make a home run and they get into a losing trade and they won’t get out of it. Then they get in even deeper and deeper because it costs ever more money to carry the trade.

      In this case, they don’t even need a fall guy because Corzine has already admitted publicly that these were his trades. He really boxed himself in. At least at Goldman Sachs or Morgan Stanley, there’s always the designated fall guy, when something goes wrong. But in this case, Corzine is it.

      Corzine was himself pulling the trigger in these trades, having large positions in Euro sovereign debt which kept losing value moment by moment. It was his position and his idea. He did what was necessary to keep it afloat. When you publicly admit that, it’s now tough to go back and try to find a fall guy.

      Frankly I don’t know how Corzine is going to avoid going to prison. The environment has changed and it’s going to be billions in losses because of him.

      You hear the Republicans a lot on CNBC saying -- we don’t need FinReg. We don’t need more financial regulation. We already have enough regulation to cover any potential problem or contingency. And they’re right. The problem is that the regulatory agencies are not enforcing the regulations because they’re effectively being told not to.

      If you enforce the regulations since all the firms were supposed to cut back to 12:1 leverage, that’s law. But it has never been enforced.

      There are underlying reasons why the regulatory agencies are under political pressure, particularly from Republicans all the time, not to enforce regulations regarding leverage. It has to be that way because in order to make any money, the leverage has to continuously expand because the planet has run out of money. There isn’t any money. That’s the problem. They can’t raise money. There is no what called net real money left on the planet. Thus ever more leverage has to be imposed in order to try to generate revenue within the brokerage, banking and insurance industries which maintain millions of jobs.

      This will continue until it can’t be sustained anymore even as it is unsustainable now. The reason credit default swaps even came into existence, beginning in the 1980s when they began to be traded, was so that risk could be hedged in ever-expanding, leveraged trades. This became necessary under Bushonomics I which so drained the planet’s capital markets. It drained governments of all their reserves.

      That was the time when the Great Planetary Bushonian Frauds were committed. This effectively drained the fiscal reserves of most nation-states. Greece is a good example when the Greek situation fell apart. We’ve written before about the Bushonian Frauds against the Bank of Greece.

      Now we’ve finally got an admission out of Papandreou, a Bushonian clone, that the Bank of Greece had a 10 billion euro hole in it. That was the original Bush I fraud. The Bank of Greece was the butt end, as it were, for a lot of defaulted Bushonian loans.

      What doesn’t occur to anybody is that in order to consolidate wealth in the way it has been consolidated since the times of Ronald Reagan. When he came to power the top 1% owned 37% of all the assets in the nation. Now the top 1% owns 75% of all of the wealth in the nation.

      In order to do that by economic growth, we would have needed a GDP that would have been unsustainable in the United States, a GDP of 13% every year in order for that wealth to be consolidated by legitimate means. Of course that hasn’t come to pass.

      However if you’re going to consolidate wealth by illegitimate means, which is what Bushonomics is all about, then you do it by creating speculative bubbles, bursting the bubbles, which then transfers wealth up. That’s what creates the “trickle-up” effect of wealth.

      Joe gets in on the long side. So do WBRs. The Joes keep bidding it up. At that point the WBRs begin to short. When Joe is exhausted, so to speak, and can’t support the bubble anymore, then it bursts. Then anyone who is on the short side of that bubble makes a fortune – at Joe’s expense. That’s the way it works. That’s how wealth is consolidated beyond what the natural growth in GDP can provide. This is at the very heart of Bushonomics.

      Even though he read it off a teleprompter, Reagan himself said that the post war economic model was unsustainable. He didn’t understand what that meant. But those who told him to say it, like George Bush, understood what it meant. They began to consolidate wealth by spending trillions on wasteful military expenditures. Nothing consolidates wealth like wasteful military expenditures because of who owns military producing assets.

      Remember the fraction of 75% -- that’s all the military producing assets owned by the top 5% of the people. Therefore wasteful military spending becomes a mechanism to consolidate wealth.

      Military procurement fraud is at the very heart of it. You procure a lot of weapons that you know don’t work which the services don’t want, which the public doesn’t want – but you buy them and build them anyway.

      Like George Bush used to say when he would draw the bullseye. There’s the red dot in the middle then a red ring and a larger ring and a larger red ring. This is the Bushonian concept of concentric circles of ever expanding fraud with one goal – the continuous consolidation of wealth and power into ever higher, righter, and tighter hands.

      It was meant to be this way, and the Unwashed just can’t get their minds around it…

    * AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," ( provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" ( will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.


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