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Poster Child

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.

15 thoughts on “Poster Child

  1. I can’t believe that they were still operating so fast and loose when they must have known everyone was watching them closely. If this has been going on at a broker this size there have to be many other scandals out there waiting to be revealed. MF Global may be the poster child but this could be the start of a wave of investigations if we really wanted to get at it.

  2. I encountered Corzine as a senator; he was helpful to us on a couple of environmental things.
    He crashed and burned on many levels as governor of New Jersey. Among other things, he pissed off the NJ Environmental Federation so much that it endorsed Christie, a pretty hard right Republican, who beat Corzine at the polls and is now Governor.
    Now this. Makes one wonder how he made his pile at Goldman … I suppose people will now be doing some digging there.
    Sad … especially for so many people of ordinary means who will move towards poverty as the Corzines of the world dodge the bullet yet again…


    • I have been wondering about him, too because someone literally bet the company that Eurobonds would be paid off at face value – a completely ridiculous idea if ever there was one. And I do wonder what happened when he was Gov – something went horribly wrong there. So I was going to include a lot more about Corzine in this piece but it seems to me that there is something going on that I sure don’t understand.

  3. Occupy Wall Street excites the liberal imagination because it may be a sign that an undiluted form of New Deal liberalism will be resurgent at the polls next year and in public policy at all levels. However the tactic of camping outdoors to me makes them look like they are out of the mainstream. And many of their views are actually in the mainstream. Some of the Occupy Wall street encampments believe that confronting the police and local government is the way to go. I think they are sadly mistaken and they should all begin a phased, peaceful withdrawal immediately. I advocate this because the power of the state is very strong and they will lose in a confrontation. The police and local governments are not the enemies. They can be creative but I think they need to take to all available communication and organizing channels other than occupying a nice park or space. If they don’t desist, their movement may end very badly, with very bad feelings all around.

    If Occupy Wall Streeters become a type of truth-teller for the average person, then I think that is a more effective strategy. Anbody who shares their point of view can present research and opinion, as in this blog. Their are some who can take on a prophetic role if they have the communication chops.

    • No argument here – that’s what I’ve been up to for a long time. I think that regular people are interested in the truth and are willing to read a lot more stuff critically. There’s a reason Barataria has become successful and a lot of it has to do with people like you who make this into a rich conversation – something much better than a lot of signs and slogans.

  4. If this is what it takes to get action then let’s have more of these companies exposed for what they are. I doubt that every company is this bad but if Wall Street can’t police itself then it is time to take action and get them under control. What MF Global did was ridiculous and they got away with bad behavior for a very long time. They were aided and abetted by the entire industry. That is reason enough to rein in the whole mes of them.

    • They were a bad actor and I think they got away with it because they served a purpose for everyone else. But that may be yesterday very shortly. There will be more scrutiny, at least, and probably more regulation. They have it coming after this.
      I think three questions remain at this point –
      What was JPM doing in all this, esp. regarding the mixing of accounts?
      Where was PWC, the auditor, when all this was happening?
      And why did they bet so hard on something so stupid – as if they really thought the fix was in Eurojunk?

      Unless we can answer these questions in a way that makes it clear that there is not an industry-wide problem, there will be more action. And I think the issue with PWC alone needs to be mined much more heavily – how can audited companies have constant systemic problems like this and still get a PWC seal of approval?

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