The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications of Lehman 2.0!!!

Reggie Middleton's picture

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For
those who do not know, I was a real estate investor between 2000 and
2006. By 2006, I came to the realization that there were no longer
profitable deals to be had on a sound risk/reward basis, and the entire
Ponzi scheme looked to be ready to do the Humpty Dumpty thing. So, I
took a year off to raise my brand new baby girl, and came back to pursue
plans to start a hedge fund that focused on shorting the FIRE sector
and European banks - basically any and everybody who ever did business
with me and my colleagues in real estate - the writing was evidently on
the wall for anyone who bothered to look at walls.

Those who have followed me for a few years know my mantra, and for those that don't, review my early thoughts and calls on Europe and the global FIRE sector.
At a fundraiser that MF Global threw in Rockefeller Center's rolling
skating rink, I sat down with the then CEO of MF Global and his wife and
informed them of my plans. They sincerely wished me luck and told me to
let them know when I got started (I would speak to them on and off
annually at the skating rink event or over lunch). I said nothing then,
but I was highly suspect of the firms prospects going into what I saw
was a risky asset firestorm of a correction. As it turned out, it
appears I may have had a point. Even more interesting is the fact that I
was the only one that I knew of who proclaimed that Fed ZIRP policy was
truly poison laced in Myrrh. Contrary to that espoused by ink stained
ivory towers of academia and those who so often correct in the Sell
Side, ZIRP is killing the banks while regulatory capture is hiding the
metastizing tumors. I also now a few who used to work in the risk
departments of MF (yes, they did have one) and they said that
Goldman/governer guy was the one that ran MF into the ground.
Accordingly, MF was a good brokerage, but he came in and tried to make
them bankers and traders, which they were not (at least they weren't
good ones, anyway). By forcing the firm to carry inexperienced
proprietary risk, he doomed the firm (according to this insider).

Hmmmm... Up is down, and down is up, I bendeth you over if you spilleth my cup! Again, as excerpted from There’s Something Fishy at the House of Morgan":

Again,
I have warned of this occurrence as well. See my interview with Max
Keiser below where I explained how the Fed's ZIRP policy is literally
starving the banks it was designed to save. Listen to what was a highly
contrarian perspective last year, but proven fact this year!

 

 

Provisions
and charge-offs: I have been warning about the over-exuberant release
of provisions to pad accounting earnings since late 2009!

Declines
in provision was one of the major contributors to bottom line. JPMorgan
reduced its provision for loan losses to $1.2bn (0.7% of loans) in Q1
2011 from $7.0bn (4.2% of loans) in Q1 2010 and from $3.0bn (1.8% of
loans) in Q4 2010 while charge-offs declined to $3.7bn (2.2% of loans)
in Q1 2011 from $7.9bn (4.4% of loans) in Q1 2010 and from $5.1bn (2.9%
of loans) in Q4 2010. Although banks delinquency and charge-off rate has
declined, the extent of decline in provisions is unwarranted compared
to decline in charge-off rates. As a result of higher decline in
provisions compared to charge-offs, total reserve for loan losses have
decreased to 4.3% in Q1 from 5.3% in Q1 2010 and 4.7% in Q4 2010. At the
end of Q1 the banks allowances to loan losses is lowest since 2009.

Although
the reduction in provisions has helped the banks to improve its
profitability it has seriously undermined the banks’ ability to absorb
losses, if economic conditions worsen. As a result of under provisioning
for the past five quarters, the banks Eyles test, a measure of banks’
ability to absorb losses, has turned to a negative 7.7% in Q1 2011
compared with +6.4% in Q1 2010. A negative Eyles test has serious
implications to shareholders – the losses from banks could not only
drain entire allowances for loan losses which are inadequate but can
also wipe off c7.7% of shareholder’s equity capital. The negative value
of 7.7% for JPM’s Eyles is the lowest in this downturn.

MF Global Files for Bankruptcy; Shares Remain Halted

MF
Global Holdings filed for Chapter 11 bankruptcy protection in New York
on Monday morning, after an effort to sell itself to Interactive Brokers
Group failed.

MF
Global [MF 1.20 --- UNCH ] had a tentative deal to sell assets to
Interactive Brokers [IBKR 15.55 0.33 (+2.17%) ] as of late Sunday, but
the agreement fell apart as talks continued overnight, said people
familiar with the matter. Discussions ended around 5 a.m. ET, one of
these people said.

MF
Global had been considering filing just its holding company for
bankruptcy protection and then executing the sale. That plan is now off
the table, one of the people said.

This
person said MF Global's parent company would be included in the
bankruptcy filing. Voluntary bankruptcy petitions for MF Global Holdings
and MF Global Finance USA hit the docket in a U.S. bankruptcy court in
Manhattan mid-morning on Monday.

The
Chicago Mercantile Exchange said on Monday that customers of
broker-dealer MF Global were limited to liquidating their positions. The
exchange, which owns the Chicago Board of Trade, said it would no
longer recognize MF Global, which has filed for Chapter 11 bankruptcy
protection, as a guarantor for floor trading.

...
"It was quite difficult to get our money out on Friday, because they
had a lot of redemption calls," a trader, whose firm used MF Global as a
brokerage said. "The company is not initiating any new position. They
are trying to close down positions that they already have with clients
that are open."

At MF Global's London office, in Canary Wharf, staff were coming and going from the office as normal at Monday lunchtime.

There was a tense atmosphere and most declined to speak to CNBC.com.

"We're not allowed to speak to you; so you can probably read into that what you will," one MF Global worker told CNBC.com.

The
last set of statements are teiling, indeed. MF Global is a mini-Lehman,
and while many may not be taking MF Global's demise as seriously, it
definitely is. They died from the same disease that afflicts much of
Wall Street, and most of European banking. They are smaller, that's the
only real difference - and the asset management company that they were
spun off is doing just as bad. I said it before, and I'll say it again,
Europe is housing Lehman Brothers x 4!

From ZeroHedge: Presenting The Bond That Blew Up MF Global

Reaching
for yield (and prospectively capital appreciation) while shortening
duration had become the new 'smart money' trade as we saw HY credit
curves steepen earlier in the year (only to become the pain trade very
quickly). The attraction of those incredible yields on short-dated
sovereigns was an obvious place for momentum monkeys to chase and it
seems that was the undoing of MF Global. The Dec 2012 Italian bonds (in
which MF held 91% of its ITA exposure), as highlighted in today's
Bloomberg Chart-of-the-day, appears to be the capital-sucking instrument
of doom for the now-stricken MF. As if we need to remind readers, there
is a reason why yields are high - there is no free lunch - and while
some have already leaped to the defense of the bet-on-black Corzine risk
management process with comments such as 'He was simply early and will
be proved correct' should remember that only the central banks have
bottomless non-mark-to-market pockets to withstand the vol. It also sets
up a rather useful lesson for those pushing for EFSF leverage to buy risky sovereign debt - but given today's issue demand, perhaps that is moot.

Hmmmm!
I remember over the summer, when MF probably put these trades on, I
warned about Italy sparking France while NEARLY EVERYONE ELSE was still
focusing on Greece! Reference the following excerpt from Wednesday, 03
August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In
case the hint was strong enough, I explicitly state that although the
sell side and the media are looking at Greece sparking Italy, it is
France and french banks in particular that risk bringing the
Franco-Italia make-believe capitalism session, aka the French leveraged
Italian sector of the Euro ponzi scheme down, on its head.

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

So, how accurate was I? Well, we'll see in a few... In this morning's headlines:

So, What's the Next Shoe To Drop? Read on...

For
those who claim I may be Euro bashing, rest assured - I am not. Just a
week or two later, I released research on a big US bank that will quite
possibly catch Franco-Italiano Ponzi Collapse fever, with the pro
document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers,
be sure to be prepared. Puts are already quite costly, but there are
other methods if you haven't taken your positions when the research was
first released. For those who wish to subscribe, click here.

Now, let's refresh the output from And The European Bank Run Continues...and more importantly BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional, I strongly urge those who haven't to click upon said link and download your intellectual weapon of choice!) where I modeled Greek losses on BNP.  Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)This scenario was run BEFORE the Greek bonds dropped even further in price...

image014

Using more recent market inputs (you know, assuming this stuff was Level 1), we get the following...

Notice
here the base case TEC impairment is now approaching the adverse case
from just a few weeks ago - and this is using market pricing, not some
pie in the sky model!

I
have not recalculated the adverse scenario in this example, but you can
simply use your imagination, or download the model and run it for
yourself.

A
Greek default with haircuts somewhat inline with market prices will
wipe out 13% of BNP TEC, with a more severe cut (quite likely) taking
out nearly 20%. This is not even glancing upon the many problems we
discussed in our forensice reports ( French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers, Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers).

Now,
if the ZH referenced report above is accurate (and I believe it is) the
banks are going to try to delever by selling assets in the open markets
(all at the same time, selling the same assets to the same pool of
potential buyers at the same bad times). This means that the prices used
to populate this model are probably still too optmistic. Even if they
weren't, look at the capital short fall the Greek default will leave BNP
with assuming our institutional bank run thesis holds true and they see
a slight withdrawal of liquidity of 10% this year and 15% next (knowing
full well the numbers for Lehmand and Bear were much, much higher than
that before they collapsed). First, a refesher on our European bank run
theory expoused 5 months ago...

    1. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
    2. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
  1. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
    1. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

And the BNP results????

bnp_haircut_exposure_bank_run

Half
trillion euros here, half trillion euros there... Sooner or later,
we'll be talking about some real money! Since the problems have not been
cured, they're literally guaranteed to come back and bite ass.
Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional).

On Derivatives Implosions and Debt Destruction...

Just like the US banks and EU leaders have somehow gamed (or at least tried
to game) the CDS market into a sham, they look to do the same in the
discorporation of those entities who have been destroyed by the highly
deflationary forces taking hold. To wit: MF Global Creditors Led By JPMorgan

The following are MF Global Holdings’ largest unsecured creditors and shareholders, according to the company’s bankruptcy filing and related court papers submitted today in U.S. Bankruptcy Court in Manhattan.

Unsecured
creditors rank behind secured lenders in getting repaid in a
bankruptcy, and are ahead of preferred and common shareholders.

Unsecured Creditors:

JPMorgan Chase & Co. (JPM)’s JPMorgan Chase Bank, bondholder trustee, $1.2 billion.

Deutsche Bank AG, trustee for $1.02 billion in bonds:

Deutsche Bank Trust Co., bondholder trustee for 6.25% notes, $325 million
bondholder trustee for 3.375% notes, $325 million bondholder trustee for
1.875% notes, $287.5 million bondholder trustee for 9% notes, $78.6
million.

From ZeroHedge, we are sourced the ISDA "determinations committee":

Americas Voting Dealers
Bank of America / Merrill Lynch
Barclays
Citibank
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Société Générale
UBS

EMEA

Voting Dealers
Bank of America / Merrill Lynch
Barclays
BNP Paribas
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Société Générale
UBS

To suscribe to our research services, click here. This will be a very, very profitable quarter!

More from Reggie Middleton...

The Street's Most Intellectually Aggressive Analysis: We've Found What Bank of America Hid In Your Bank Account!

This Bank Is Much Worse Than the Rest and the (Guaranteed?) Bust Will Probably Be Funded Right Out Of Your Bank Account!

French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days!