Moral Hazard – MF Global Bankruptcy

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Although there was some news out of Europe today, the big story was a huge bankruptcy due to…Europe.  So in a way – the big news came out of Europe.  We’re one big family now.

According to the AP: MF Global Holdings Ltd., which Corzine has led since early last year, filed for bankruptcy protection Monday. Concerns about the company’s holdings of European debt caused its business partners to pull back last week, which led to a severe cash crunch, the company said in its filing.

Corzine, the former head of investment banking giant Goldman Sachs Group Inc., (and former US Senator and former Governor) oversaw MF Global as it amassed $6 billion in debt issued by financially strapped European countries such as Italy, Spain and Portugal. Their bonds paid bigger returns than U.S. Treasury debt because bond investors believed that they were more likely to default.

Haven’t you wondered during this time just who the heck was buying these garbage bonds – other than the ECB?  Thanks to the moral hazard put in place buy Greenspan, Bernanke, the US Treasury, and now the EuroZone, people like Jon Corzine think they can bet the entire firm’s bankroll because if there were problems…the government would bail them out.  Of course, Bernanke, Greenspan, and the rest would all deny but they refuse to take any blame for anything so what else would you expect.

MF Global’s bankruptcy is the eighth-biggest ever in the U.S., according to the research firm BankruptcyData.com. It’s bigger than Chrysler LLC’s in 2009 and smaller than those of financial-crisis casualties Lehman Brothers Holdings Inc., Washington Mutual Inc. and CIT Group Inc.

Last week, MF Global reported its biggest ever quarterly loss, and rating agencies downgraded its debt. Its stock plunged 66 percent. Spooked business partners required it to post more money to guarantee its trades.

And that last (bolded) bit is where it gets interesting.  It seems like MF Global has “misplaced” hundreds of millions of dollars.

According to the New York Times:  What began as nearly $1 billion missing had dropped to less than $700 million by late Monday. It is unclear where the money went, and some money is expected to trickle in over the coming days as the firm sorts through the bankruptcy process, the people said.

But regulators are examining whether MF Global diverted some customer money to support its own trades as the firm teetered on the brink of collapse. If that was the case, it could violate a fundamental tenet of Wall Street regulation: Customers’ money must be kept separate from company money.

If true; will Jon Corzine go to jail?  Do monkeys fly?  Just the opposite is happening: Jon Corzine has wrecked a good firm, put thousands of people out of work AND will RECEIVE a $12-million “bonus” for his (terrible) work.

Will any of this stop the bailouts and thus the moral hazard associated with it?  Again I ask – do monkeys fly?

Larry Levin