MF Global: Another coalmine canary?

 
MF Global

The good news is that MF Global isn't big enough or connected enough for its collapse to risk serious damage to the financial system.

It is a medium size broker, with a leading position in futures, which was in the process of being turned into a mini Goldman Sachs by its prominent chairman, Jon Corzine - who, as it happens, was chairman of Goldman for much of the 1990s (before a foray into US politics as the Democrat governor of New Jersey).

With gross assets of about $40bn, MF Global's lurch into bankruptcy protection under America's Chapter 11 legislation will keep a few bankruptcy lawyers and accountants gainfully employed for some time.

But there should not be a domino effect of other bankruptcies.

There is bad news, of course, which is that it and Dexia - the Franco Belgian bank that has had to be rescued by taxpayers in Belgium and France - are beginning to look like canaries in a life-imperilling coalmine.

What they have in common is heavy reliance on short-term wholesale finance and big loans to eurozone governments whose debts are seen to be excessive.

MF Global disclosed last week that it has a "net long position of $6.3bn in a short-duration European sovereign portfolio…including Belgium, Italy, Spain, Portugal and Ireland".

Or to put it another way, it had lent a sum that is equivalent to five times the value of the equity capital it holds as protection against potential losses to governments whose ability to repay all they owe is moot.

Unsurprisingly the hedge funds, professional investors and banks that lend to MF Global or have funds on deposit with MF Global decided there might be safer and sounder places to lodge their cash.

When that happens, when a financial firm's creditors want their money back, it's cheerio, adieu and goodnight - unless, that is, a friendly central bank is prepared to bail out said firm.

MF Global is not the kind of financial institution that the US Federal Reserve or the European Central Bank feels minded to prop up with emergency loans.

Which is simply a reminder that a number of other European banks would be pushing up the daisies by now, if the ECB had not felt minded to keep them on life support, for the putative health of the eurozone economy.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +3

    Comment number 14.

    The real worry is that investment and income decisions are in the hands of private capital

  • rate this
    0

    Comment number 13.

    A 50% write down of Greek debt has no implications for the finance sector outside the established banks and no implications for triggering CDS's? Really. How many financial canaries will be found at the bottom of their cage before we realise we have another credit crisis?

  • rate this
    +6

    Comment number 12.

    @2.Justin150
    The "financial services" is important because of MF Global's much bigger siblings which also do investment banking and also went long on EU treasuries and, by the way, have been entrusted with the money of most people since they're also retail banks.

    The worry is that, because the banks that have our money did the same "investing" as MF Global, they might have lost all our money.

  • rate this
    +4

    Comment number 11.

    The Financial Zombie march continues

  • rate this
    0

    Comment number 10.

    The first of many 'tweets' of dismay to come.

    Until that is the carbon monoxide & other poisonous mine gases stop their communications of protest.

    Who knows, canaries may take over from parrots as a trendy sketch to be able to quote soon..

    Alternatively..

    Dogs are reputed to be aware when earthquakes are looming & I suspect more than one pack will be howling at the Richter 10 event soon...

  • rate this
    +2

    Comment number 9.

    Given the influence of "market sentiment" these days, I'm not so sure the size of the canary will offer much comfort. Plenty of vested interests to stoke up a panic one way or another - while they take their cut of the cash flows.

  • rate this
    +8

    Comment number 8.

    And yet Deutsche Bank's exposure to MF has seen it's share price lose 8% today. It will only take another hedge fund with even bigger exposure to collapse and the whole rotten structure will come crashing down. And are the equity markets cottoning on to the fact that Italy's bond yields, now at unsustainable levels despite ECB support, are foretelling that the Euro story is in it's death throes?

  • rate this
    +6

    Comment number 7.

    Can we have a league table of instutions/banks etc and their relative exposure to short term wholesale lending?

    It will help with our xmas sweepstake

  • rate this
    0

    Comment number 6.

    @4.fingerbob69
    Just now
    Who else has borrowed short to lend long?

    ====
    Barclays
    RBS
    HSBC
    Lloyds
    Co-op
    Nationwide
    ING
    Virgin
    Tesco

    etc
    etc

  • rate this
    +12

    Comment number 5.

    Robert I am still amazed that you still continue to show almost wavering support for parts of the financial system that have the moral standards of the jungle.These so called financial businesses have little ethics, & do not contribute real wealth to any other than their executives. If we returned to the standards of ethical banking instead of get rich quick schemes we would have less of a crisis

  • rate this
    +5

    Comment number 4.

    Who else has borrowed short to lend long?

    Come in, come in ...your time is up!

  • rate this
    +3

    Comment number 3.

    I think we've had all nine of the dead cat bounces. No problems load it onto the nth generation taxpayers.

  • rate this
    +8

    Comment number 2.

    It is difficult to get excited about this. Strip away the financial services aspect and the headline is simply medium sized firm gets strategy wrong and goes bust. Shareholders will lose the lot, debtors will take a small hit - rest of world carries on as before

  • rate this
    +12

    Comment number 1.

    Decisions of what to prop up and what to not, are made by? Well it must be the tax-payer. Nope they don't make the decision, they just fund it, it's usually done by someone who thinks they know better. And the current track record stands at.. And so this nonsense continues. Given the latest predictions I am impressed that we've lasted this long. Who's for Elastic Easing that abounds?

 

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