If there’s one thing that movements like Occupy Wall Street need, it’s a poster child. You know, a person or company that exhibits everything bad about the system as we know it and can stand as an example for why we need more regulation and public control. Someone like … (drumroll) …
MF Global, the perfect poster child for “Party like it’s 2007” bad behavior.
This company did more than make a very bad bet, it ran what is now being called “Madoff like ponzi scams” and has $593 million of clients’ money missing. It even had a prominent Democrat, former New Jersey Governor John Corzine, so there’s something for the Republicans to gnaw on. If anything, MF Global is too perfect to be the bad guy on a drama that is almost certain to start playing out – it’s time to reign these guys in.
First, a little background. MF Global had assets listed of $43 billion, making them a decent sized but far from big player. They were primarily a brokerage house, trading in stocks, commodities, and a lot of government debt. They were a primary dealer in US Treasuries, meaning that they bought big bundles of US debt directly from the government and sold it off in smaller packages.
What brought the operation down was the purchase of a lot of European government debt that the market had discounted to far less than face value. The idea was that once a bailout was arranged using cash from hard-working German and French taxpayers these would be paid off at par, making a huge profit. When the recent deal to pay off no more than 50% of Greek debt was announced, MF Global was left holding the bag – and had to file bankruptcy.
That’s chapter 1 of the story. Chapter 2 goes back into something a lot murkier.
It turns out that there was something like a ponzi scam being run inside the company that may or may have had anything to do with the entire operation and may not have ever come to light had it not been for this failure. They also had a nasty tendency to mix corporate and customer accounts. But where it gets interesting is that this was all financed by (and operated closely with) JP Morgan, a company that has an amazing ability stand right next to nearly ever scandal that takes place on Wall Street.
That’s what’s great about this story – we have no idea what Chapters 3 onward are going to be like.
There is only one thing that is certain in this story as it unfolds, and that is that this is going to prove extraordinarily useful to just about everyone. They clearly were way over-leveraged in their big bet on Eurobonds, begging for new regulations above and beyond the Collins amendment to Dodd-Frank that have yet to take effect. They were in the process of moving into investment banking, making supporters of the Volker amendment (and those of us who want a full Glass-Steagall) queasy. And the name itself has MF in it, giving comedians something to work with as they made big MF bets on all kinds of MF things.
This scandal also explains exactly why the governments in the Eurozone are so slow to bail out sovereign debt and solve the crisis – it would mean giving money to people like MF Global.
While no one can be sure where this story is going as a scandal, we can be sure that its usefulness will not escape anyone. There’s just too much here to play with. So while this isn’t going anywhere fast it’s going to be one Hell of a page-turner – and ultimately wind up on big posters plastered everywhere. Something good may yet come out of all of it.
Meanwhile, I’m going to guess that the missing $593 million will wind up part of the one essential thing that Bernie Madoff never worked into his own scheme – an escape plan. We’ll see.