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Guest Post: MF Global Shines A Light On Monetarism's Incapacity To Enhance The Real Economy

Tyler Durden's picture


Submitted by Jeff Snider, President & CIO of Atlantic Capital Management

MF Global Shines A Light On Monetarism's Incapacity To Enhance The Real Economy

The temptation to compare any financial institution’s failure to those that preceded the 2008 crisis and panic are reasonable.  It is easy to classify MF Global as 2011’s “Lehman” event, just as it was to use the same term to describe Dexia a few weeks ago.  The use of the term “this year’s Lehman” is somewhat misplaced simply because its users are looking for an event that kicks off another crisis or panic.  Instead of using “Lehman” to describe a potential inflection point that propels the crisis into panic, it might be better to see MF Global as AIG.

The comparison to AIG is not to say that MF Global was as interconnected, that its failure will be as devastating, or that it is the straw that breaks the European camel’s back.  The urge to see the past in the present is historically valid, but it will never be exactly alike (Mark Twain had this right).  Rather I think the comparison is useful in that AIG taught the wider world what was really rotten at the core of modern finance, namely hidden risks that were shockingly existential.  MF Global’s failure importantly shows that none of the lessons have been heeded in the days since, providing a somewhat unique window into the real dangers that still lurk hidden in the shadows.  More than that, though, MF Global demonstrates an obvious shortcoming of the financial system as it relates to the real economy.

ZeroHedge posted the bankruptcy affidavit of MF Global’s President and Chief Operating Officer Bradley I. Abelow, drawing attention to Section E, item 33 on page 13.  Mr. Abelow makes the following statement under oath:

“On September 1, 2011, MF Holdings announced that FINRA informed it that its regulated U.S. operating subsidiary, MFGI, was required to modify its capital treatment of certain repurchase transactions to maturity collateralized with European sovereign debt and thus increase its required net capital pursuant to SEC Rule 15c3-1.” [emphasis added]

The transaction in question was a “repo-to-maturity” financing deal, collateralized with the troubled sovereign European debt that everyone has been talking about in the past few days.  What is particularly striking about this is that a “repo-to-maturity” deal is accounted for as a sale, meaning that what is essentially an ongoing collateralized loan is, surprise, hidden off the balance sheet.  Maddeningly, MF Global likely booked a profit up front at the transaction’s consummation using obviously faulty mathematical expressions of those “reasonable” expectations of profit, thus avoiding the need to post any liability to the balance sheet.

This makes a lot of sense, then, in why FINRA “demanded” it change its capital treatment of the transaction.  Though it was “properly” accounted for according to convention, the risks of collateralizing a loan with questionable debt means that MF Global has ongoing liquidity risk attached to it.  As the value of the European debt collateral is questioned, or falls, the lender/cash owner counterparty will ask for additional collateral posting as it applies a stricter haircut to that original, troubled collateral.  So, even though this transaction has fully cleared MF Global’s books, the company is still on the hook should it be required to post additional collateral or cash (which ended up with the company in bankruptcy, just like AIG).

The stink here is that this is not an isolated case of cheating (aside from MF Global’s use of client funds).  It is a pervasive shadow element to the modern financial system, fully allowed by accounting conventions and regulators.  Just like AIG, MF Global was not brought down by bad debt per se, it was brought down by the hidden liquidity risk of the deterioration of off balance sheet arrangements that were allowed by accounting standards.  The fact that it was classified as a sale was completely inappropriate in terms of describing the overall liquidity risk of the company, as FINRA belatedly recognized.

MF Global was expressing a bet that it could earn a spread, essentially risk free, on the rate it paid on the repo transaction (the lowest borrowing rate around) and the interest it received on the Euro sovereigns (among the highest rates of the sovereign class), all the while counting on the European politicians and the ECB to provide enough “support” to maintain a relatively constant debt price in order to fool the marketplace into complacency about real risks.  So the risk hidden but embedded within the transaction appears long before there is a default, hitting the company once the repo counterparty devalues the collateral (the market was apparently not fooled enough by the ECB’s attempts at price stability).  This is the essential financial misrepresentation of the age.  Repo accounting is responsible for so much hidden risk, yet it has become central to the ongoing survival of the system as it is currently constituted.

The pliability of how the system is allowed to “book” and account for risk is certainly the driving force making repos so vital to modern banking.  For instance, a gold or silver lease arrangement is essentially the same as a repo-to-maturity transaction, yet it is accounted for in exactly the opposite way.  A gold lease is really a sale transaction since the physical metal is literally removed from the custody of the gold owner, yet it is accounted for as a collateralized loan where the gold remains on the owner’s books as if it is really there (since it technically involves a repurchase agreement on the back end, even though these deals are simply rolled over in perpetuity and the repurchase never takes place, nor is it intended to).  Both gold leasing and the repo-to-maturity transaction are forms of collateralized loans, yet they receive far different treatment so that they accomplish exactly what the banks want to accomplish, which is disguising the real nature of each transaction.  The gold lease presents risks in that metal may not be where everyone thinks it is, and the sale treatment of the repo-to-maturity removes haircut and liquidity risks from what are supposed to be transparent statements of condition.

That is why this system has to change at some point.  It is exactly designed to be misleading, and the reason is so very simple.  In any fractional system there will be a desire to amplify that fraction to the maximum degree.  But in doing so, participants recognize that the process of maximization entails creating negative human emotions and perceptions since history is not really that kind to this manner of fractionalization.  So the system has institutionalized, abetted by the very regulators that are supposed to cap fractions and leverage, these methodologies of hiding just how much financial entities have engaged in maximizing themselves under the cover of mathematical precision.  Trillions in derivatives are no problem because there are powerful and elegant equations to net and hedge them.

Without any sort of exogenous anchor to credit production and banking, risks are theoretically nearly infinite (since the slightest disruption to expected haircuts renders firms utterly bankrupt!), while at the same time there are multiple avenues for misdirection and disguising those realities.  The Panic of 2008 was supposed to correct these excesses and remedy the fact that risks have not been accurately priced for decades.  Yet the system has resisted every effort, simply settling for redefining the appearance of safety yet again.  Somewhere in that mathematical pursuit of maximum fractions, the very goal of finance changed, as if traditional banking was no longer sufficient to support the pursuit’s ever-growing ambitions.  So the financial economy has broken away from the real economy, using the ironic cover story of enhancing price discovery to the process of intermediation – complexity is good!

Intermediation is supposed to be about matching the wider (real) pool of savings to worthwhile economic projects that have a real, productive impact on the real economy.  MF Global’s repo-to-maturity transaction cannot be fairly classified as real intermediation since the firm knowingly advanced credit to an economically unfeasible obligor with the expectation that the price would never reflect that reality (how’s that for enhancing price discovery).  This crystallizes, I believe, just how far the financial system has moved away from real intermediation and reflects the biggest part of the real problems in the real economy – money is no longer productive in economic terms and has not been for decades. 

The Occupy Wall Street crowd sees this as a problem with capitalism.  I believe that they are correct in their target, but wrong in their diagnosis.  This is not a problem of capitalism since Wall Street is a practitioner of monetarism.  A real capitalist system works through real intermediation creating positive opportunities for productive enterprises (scarce money is actually vital here).  Our current system of repo-to-maturity and gold leasing is nothing but empty monetarism’s habit of regularly forcing the circulation of empty paper.  And when the system begins to doubt itself, as it did in 2008, the answer is always about finding a way to restart the fractional maximization process yet again, which means disguising the real risks inherent to that process.  There is no real mystery as to why prices and values have seen such a divergence, and why that is a big problem to a system that depends on appearances.

The fact that money is disconnected from the real economy never enters the consciousness of monetarists since money is always the answer.  But make no mistake, the primary reasons for this global malaise are that money has lost its productive capacity and its proper place as a tool within the system, not as the ultimate object of that system.  MF Global’s failure is an apt demonstration of just how far modern finance has strayed, just as AIG was three years ago.


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Wed, 11/02/2011 - 18:57 | 1839060 mynhair
mynhair's picture

But it's for the Children!

Wed, 11/02/2011 - 19:23 | 1839130 iDealMeat
iDealMeat's picture

Get to know em!    See any Familiar names?

Michael G. Stockman Chief Risk Officer Michael Stockman is chief risk officer of MF Global Holdings Ltd. He joined the firm in January 2011. In his role, he oversees management of the firm’s global risk profile including market, credit and operational risk. He is a member of the firm’s management committee and reports to the firm’s chief operating officer. Mr. Stockman has more than 25 years of domestic and global experience in risk management, trading and capital markets. From 1995 to 2008, he held several senior positions at UBS Investment Bank including as chief risk officer for the Americas and as a managing director in the fixed income, currencies and commodities divisions. Prior to joining UBS, he held senior mortgage and asset-backed trading positions at Morgan Stanley and Goldman Sachs. He began his career in mortgage trading at Salomon Brothers. Prior to joining MF Global, Mr. Stockman helped build a risk management and capital markets advisory practice including a quantitative real estate solutions business—initially in a joint venture with State Street Global Markets—at financial services boutique CQ Solutions, LLC.

Wed, 11/02/2011 - 19:24 | 1839139 SwingForce
SwingForce's picture

As I suspected, it is/was the traders who have all the brains. LBO the trading Arms guys! Don't let cronie Jamie or Lloyd become your new boss, they are A1 Assholes. Good luck.

Wed, 11/02/2011 - 19:27 | 1839152 WestVillageIdiot
WestVillageIdiot's picture

So Mister Stockman has gone from the Gambino family, to the Genovese family, to the Lucchese family and settled at the less well known Bonanno family.  That is really what I get from what you copied and pasted.  These are not financial firms.  These are mafia style organizations with a capo de regime at the head with names such as Lloyd, Jamie or in the case of MF Global, Jon. 

Wed, 11/02/2011 - 20:30 | 1839342 Canucklehead
Canucklehead's picture

You likely are not far from the truth.  Pravda had an interesting article...

Wed, 11/02/2011 - 20:32 | 1839350 Freddie
Freddie's picture

The Mafia families (who are scum) are far more honorable than Goldman, Morgan Stanley, MF Global, State Street et al.

Thu, 11/03/2011 - 00:43 | 1839903 AldousHuxley
AldousHuxley's picture

Where are the mafia folks who lost money with the banksters?


We could use some mob justice about now.


You know shit is really bad when mafia looks better than banksters and police.

Thu, 11/03/2011 - 02:12 | 1839968 Canaduh
Canaduh's picture

Because con men are usually good at spotting other cons.

Wed, 11/02/2011 - 22:48 | 1839728 iDealMeat
iDealMeat's picture


Tried to "qote" but was blocked by a reply..  nextime. 

Wed, 11/02/2011 - 21:05 | 1839453 sgt_doom
sgt_doom's picture

Thanks for the due diligence on this one, iDealMeat.

Surprisingly, a hedge fund or corp. blows up and Martin Feldstein ISN'T on their BoD (he was at HCA when they paid the $1.7 billion out-of-court settlement for medicare/medicaid fraud, at Eli Lilly when they paid the then largest criminal penalty in US history for illegal marketing certain drugs, and at AIG Financial Products group when they were involved in the largest insurance swindle in US history -- selling $460 billion worth of swaps with little or no capital on hand to cover them).

Again, thank you.

Wed, 11/02/2011 - 22:50 | 1839735 iDealMeat
iDealMeat's picture

thanks for the leads...  casually working on a BoD project..

Wed, 11/02/2011 - 19:36 | 1839158 mynhair
mynhair's picture

Gave all the late to the party Aholes a TD.

Go reply to number 2 comment, bitchez!

I waz first.  Sukkers.

Bitchez don't even do me the courtesy of a TD.

They just like being on top.

Wed, 11/02/2011 - 19:05 | 1839090 I am a Man I am...
I am a Man I am Forty's picture

I can't imagine why there was a problem.

Wed, 11/02/2011 - 19:46 | 1839212 paarsons
paarsons's picture

Good Citizens of Metropolis!

According to my calculations, we've got another 10 to 15 years of this shit.

It's a good thing I'm an idiot.

Thu, 11/03/2011 - 05:28 | 1840035 gangland
gangland's picture


paarsons your posts and blog crack me up, i enjoyed the one about your son the bluce  your style cracks me up, reminds me of a good friend of mine.  look forward to continued reading. regards.


fuck you dirty marxist motherfuckers, ill pray for your souls oh and fuck lloyd blankfein.


btw i live next to mr lee's market, great beef, 6 buck 6 pack of soju in tiny cans. deadly.

Wed, 11/02/2011 - 19:05 | 1839092 PAPA ROACH
PAPA ROACH's picture

Voodoo economics coming home to roost.

Wed, 11/02/2011 - 19:48 | 1839216 JLee2027
JLee2027's picture

Even a caveman can understand it.

Wed, 11/02/2011 - 20:12 | 1839283 Mactheknife
Mactheknife's picture

So...they made a 6.3bil trade that only allowed for a 3% move against them that blew up the firm. My GUESS is that they had already lost a boatload of client money and bet the farm trying to get it back. Several names for that come to mind, caveman isn't one of them.

Thu, 11/03/2011 - 00:45 | 1839904 AldousHuxley
AldousHuxley's picture

cavemen saw the world of today and went back into the cave. At least he is not in debt slavery (mortgage, education, auto, credit card)

Wed, 11/02/2011 - 19:09 | 1839101 Mr. Lucky
Mr. Lucky's picture

I think I got it.  This is a ponzi with in a ponzi with in a ponzi etc...   Eventually the music stops and there are no chairs at all.

Wed, 11/02/2011 - 19:19 | 1839131 Don Birnam
Don Birnam's picture

Yes, like one of those Russian nesting dolls: one is opened and -- voila ! Another !

Wed, 11/02/2011 - 19:46 | 1839213 peekcrackers
peekcrackers's picture

Don Birnam +1

Ashkenazi  russian dolls

Wed, 11/02/2011 - 19:50 | 1839223 JPM Hater001
JPM Hater001's picture

Almost.  This was like collateralizing an insurance contract with a ponzi scheme designed to hide the depth of the ponzi scheme they were on the hook for covering...namely in the interest of the companies future.

Wed, 11/02/2011 - 19:11 | 1839106 peekcrackers
peekcrackers's picture

compairing  the biggest thief  allways a good read.  ..real life crime stoires

Wed, 11/02/2011 - 19:11 | 1839109 proLiberty
proLiberty's picture

Don't confuse creating (paper) money with creating (real) wealth. 

Wed, 11/02/2011 - 19:20 | 1839123 SwingForce
SwingForce's picture

Don't confuse being a Clearing Broker & Fed Dealer with being a lowlife online broker- MF was BIG TIME in the biz it knew best, don't let these guys go down without glory- MF Traders know the biz like no others, this is another example of MSM and Sheeple having no brain cells.

Listen to CME- who gets these "seats" when MF poofs, JPM? HSBC? GS? Corzine is a PATSY no doubt.

Thu, 11/03/2011 - 00:49 | 1839910 AldousHuxley
AldousHuxley's picture

Banksters ate up main street so there's nothing left. Banksters ate up savings of old Americans so there's nothing left. Banksters ate up futures of young Americans so there's nothing left.


Banksters eating each other now. GS, BAC, JPM are TBTF.....MF is not. Corzine's rival was Hank Paulson.


Capitalism will self-destruct from within just like any powerful group. Even look at  the Koch brothers with billions...half of the brothers are non-speaking terms with each other. All that money just ends up spliting up the family. All that money will just end up spliting up America.

Wed, 11/02/2011 - 19:18 | 1839125 New American Re...
New American Revolution's picture

Bravo dude!!!  Excellent rendition of MF's current event in the economic fabric of money and time.   Kudos.

Wed, 11/02/2011 - 19:18 | 1839126 kaiserhoff
kaiserhoff's picture

Excellent summary of the sorry state of modern accounting.  Ben's sorry ass should be a lot more worried.

Powerful and elegant equations to net and hedge them.

Tell it to the judge.

Wed, 11/02/2011 - 19:23 | 1839138 A Lunatic
A Lunatic's picture

But, but..........I thought Congress did "something" back in 08 so this type of thing could "never ever" happen again.........

Wed, 11/02/2011 - 19:31 | 1839160 wombats
wombats's picture

Look for something like a Dodd-Frank II

Wed, 11/02/2011 - 20:20 | 1839304 jcaz
jcaz's picture

Sad part is, both Dodd and Frank understand how this works, yet they intentionally wrote law that failed to address it;

That makes both of them the biggest criminals of all in this equation.

How are those slush funds doing these days, boys?

Wed, 11/02/2011 - 19:29 | 1839147 baby_BLYTHE
baby_BLYTHE's picture

Gerald Celente Predicts Ron Paul Can Win The Election.

 Gerald Celente Predicts, on Freedom Watch with Judge Napolitano, Congressman Ron Paul Can Win The Election . Ron Paul is America's leading voice for limited, constitutional government, low taxes, free markets, sound money, and a pro-America foreign policy.Gerald Celente says in many interviews that he thinks obama will win, but he does dream and hope that RON PAUL wins the republican nomination. Listen to what hes says at 3minutes cause its true. You start with 1% income tax and end? up with 30%. You start with Ralph Nader as a "wise regulator" and end up with the same corporatism. Let consumers vote with their dollars and pennies. Without big governments, business will fight themselves as dogs for a chance to serve a consumer. In that environment they cannot afford a mistake or a fraud for long.

Wed, 11/02/2011 - 19:55 | 1839233 zwscott33
zwscott33's picture

Ron Paul doesn't need to win the nomination. If he doesnt get it he should run as a third party candidate, even better, run with no party affiliation. End the two party system

Wed, 11/02/2011 - 20:04 | 1839263 mynhair
mynhair's picture

Re-Elect Obama!

Vote Rue Paul!

Wed, 11/02/2011 - 20:37 | 1839370 Freddie
Freddie's picture

I wish Ron Paul's son was running.  The son is really good.  I like the dad but he almost comes off as too nice.

Wed, 11/02/2011 - 21:50 | 1839467 baby_BLYTHE
baby_BLYTHE's picture

Rand isn't even 50 yet. He has at least half a dozen election cycles following the up and coming to throw his hat into the ring. If you wanted my honest opinion, I say Rand has a much better chance of becoming president than his father. The republicans will shoot themselves in the foot once again which they have done consistently the past 30+ years (HW Bush, Dole, W Bush, McCain) by electiing another puppet like Romney. Never has a true conservative Constitutionalist been nominated in almost all our lifetimes, unless you were alive for the likes of Goldwater (I was born in 1990). Unfortunately Obama will most likely be re-elected. However, after four more years of absolute misery the country will be in total dystopia with the impending dollar collapse and third World War that a Rand Paul (pending he continues to stick to his fathers consistent, time tested, Constitutional principles) will be uncontested in any future election. The MSM media will have no credibility once Obama leaves office after 8 years with U-6 unemployment at 40% and real inflation running at least that amount.

Thu, 11/03/2011 - 01:22 | 1839936 FeralSerf
FeralSerf's picture

I was alive and supported him until his 1964 nomination acceptance speech. Then LBJ seemed the least undesirable of the two. What an awful choice.

Wed, 11/02/2011 - 22:15 | 1839637 Flakmeister
Flakmeister's picture

I have heard the son talk enough about Medicare reimbursement of Doctors to know he is classic political hack.... Definately not a chip off the ol' block

Thu, 11/03/2011 - 05:07 | 1840026 theprofromdover
theprofromdover's picture

No, he has to stay inside the system.

If RP stands as an independent, the mass media can ignore him, like they have been trying to do all of this year.

Wed, 11/02/2011 - 19:27 | 1839148 Archimedes
Archimedes's picture

Great! Another month of this bullshit!

Wed, 11/02/2011 - 19:39 | 1839189 mynhair
mynhair's picture

You no like 3 digit daily moves?

Can see you never experienced 3 point daily moves.

Wed, 11/02/2011 - 19:33 | 1839167 defn8Dog
defn8Dog's picture

You just know there's more to come like MF'ing Global as the "risk free" sovreigns get dumped. Think of it as the first shoe, like Bear Stearns was to Lehman.   Don't suppose there's a list of holders on Bloomberg, but you have to wonder how many U.S. retirement funds have Italian 10y.  Wait til the real world marks start hitting. 

Wed, 11/02/2011 - 19:35 | 1839174 NumNutt
NumNutt's picture

Amazing! MF Global snowballing into a huge ass problem, Greece getting ready to shit in the Euro bed...both things that will have a direct impact on peoples lives, and what does the MSM focus all their attention on? A twenty year old sexual harassment case that was settled out of court by a (maybe) next years presidential candidate. Total bullshit. It isn't like he posted his wiener on the internet, or was getting a BJ in the oval office, smoke and mirriors, keep the sheeple distracted...........

Wed, 11/02/2011 - 20:28 | 1839330 bobert
bobert's picture

You can't have multiple sexual harassment complaints managed by your industry's professional organization in your history and plan to run a successful campaign for US president.

Especially if you are a conservative black man.

Cain is finished!


Wed, 11/02/2011 - 20:36 | 1839368 NotApplicable
NotApplicable's picture

Let's see if he plays the race card before calling him finished. (not that he was 'viable' to begin with)

Wed, 11/02/2011 - 20:41 | 1839385 Freddie
Freddie's picture

I don't dislike Cain but he is ex-Federal Reserve which is a no for me.  I would take Ron Paul followed by Santorum.

Wed, 11/02/2011 - 22:12 | 1839625 DollarMenu
DollarMenu's picture; background-attachment: initial; background-origin: initial; background-clip: initial; background-color: initial; color: #000000; display: block; font-family: Georgia, Times, serif; font-size: 2em; height: 240px; padding-top: 120px; text-align: left; text-decoration: none; width: 500px; background-position: 50% 0%; background-repeat: no-repeat no-repeat;" href="">santorum (san-TOR-um) n.
   1. The frothy mixture of lube and fecal matter
      that is sometimes the by-product of anal sex.

Wed, 11/02/2011 - 20:47 | 1839410 ThisIsBob
ThisIsBob's picture

The lesson here for all young black men is that if they aspire to high government office like the Presidency or the Supreme Court, it would be easier if they didn't try to get laid.

Wed, 11/02/2011 - 19:35 | 1839175 Lady Heather...UNCLE
Lady Heather...UNCLE's picture

 the primary reasons for this global malaise are that money has lost its productive capacity and its proper place as a tool within the system, not as the ultimate object of that system

 ie money is fuel for an enfine, not the engine itself (bit like a tail wagging dog scenario. Don't blame capitalism, blame materialism 

Wed, 11/02/2011 - 20:25 | 1839325 Island_Dweller
Island_Dweller's picture

I blame debt based ponzi schemes.....

Wed, 11/02/2011 - 21:08 | 1839465 sgt_doom
sgt_doom's picture

Naaah, capitalism always goes predatory and eats its own tail --- ALWAYS!

Recall what Louis Brandeis said in his classic, Other People's Money...:  (paraphrasing) that the money trusts inhibited economic and industrial growth, they didn't aid it.

Economic democracy, now there's another outstanding idea whose time has come:


Wed, 11/02/2011 - 22:10 | 1839624 slewie the pi-rat
slewie the pi-rat's picture

hey, uncle_leather!

he quoteth zeroHedge:  "ZeroHedge posted the bankruptcy affidavit of MF Global’s President and Chief Operating Officer Bradley I. Abelow,..." leading into the discussion of the off-book, completed transaction, which was accounted for in one way (finished and providing income/profit most likely) but which led to a FINRA requirement to post additional collateral due to the deterioration in price of the underlying bonds

so, (quote/my emph): "Both gold leasing and the repo-to-maturity transaction are forms of collateralized loans, yet they receive far different treatment so that they accomplish exactly what the banks want to accomplish, which is disguising the real nature of each transaction."

in other works (i think), very much like the tranches of the CDOs, the risk is mis-stated by the banks, whether they're buying, selling, bundling, or burgling:

banksters = bullshit, BiCheZ!

Wed, 11/02/2011 - 19:35 | 1839177 InconvenientCou...
InconvenientCounterParty's picture

Great article.

Willful deception has no place in a functional market. Bankster shills have sold this as innovation and they too are fraudulent.

How to cure this cancer without killing the patient is the real question.




Wed, 11/02/2011 - 19:46 | 1839199 mynhair
mynhair's picture

Not possible, is the answer.

Bet accordingly.

(Most of the time, I feel like the only trader here.  And I've had some issues for over 6 mos.)

Wed, 11/02/2011 - 20:35 | 1839356 bobert
bobert's picture

I trade Mynhair.

I've put my cynicism into practice and have experienced good success trading the headlines.

Wed, 11/02/2011 - 19:39 | 1839190 A Lunatic
A Lunatic's picture

TPTB are not trying to enhance the real economy. They are carrying out the final stages of the consolidation of power, money, and control into the hands of a few maniacal and diabolical overseers of the new Global economy.

Wed, 11/02/2011 - 19:40 | 1839193 nmewn
nmewn's picture

"The stink here is that this is not an isolated case of cheating (aside from MF Global’s use of client funds).  It is a pervasive shadow element to the modern financial system, fully allowed by accounting conventions and regulators."

Repo 105, 106 &

Wed, 11/02/2011 - 19:44 | 1839204 mynhair
mynhair's picture

but it makes Q end look soooooo good.....

Wed, 11/02/2011 - 19:50 | 1839225 nmewn
nmewn's picture

Which shell is it?...find the pea!

Wed, 11/02/2011 - 19:50 | 1839222 Yen Cross
Yen Cross's picture

b The stink here is the fact that no-one has the guts enough to act!  I do and am. It will be expensive.


  End the Ass Hats!

Wed, 11/02/2011 - 19:55 | 1839234 nmewn
nmewn's picture

Well, most have left...its just the diehards & the HFT programs now.

All goober-mints are supposed to supply a level playing field...but alas, a large chunk of their coin is derived from "the game".

For the young coming up...its work harder for less...and assorted SNAP programs funded by mythical skittle shitting unicorns...a very strange situation.

Wed, 11/02/2011 - 19:45 | 1839208 Yen Cross
Yen Cross's picture

 And yet the " PUSSY " Japs don't have the guts enough to ride the strong dollar wave?  Whimps/ BoJ Kampo, MoF, Exporters are all Whimps! 


  Japan has ZERO Credibility!     ZERO!!!

Wed, 11/02/2011 - 19:45 | 1839210 MethodMan
MethodMan's picture

The monetary policies of the US federal government will eventually diverge too far from the states; their local tax-base and power to operate in a fiscally sovereign manner under the Constitution will falter, and only then will it come to a head.

Wed, 11/02/2011 - 19:58 | 1839228 mynhair
mynhair's picture

O/T, but more ammo for pulling CNBS off the air.  Yesterday, those morons boxed 'KKR in talks to buy all or part of Sampson Oil & Gas'.

Gee, it is Sampson Investment Co, a totally different entity.  SSN spiked up 20 cents (it's a penny stock) on the 'news'.

They never aired a correction.

Only noticed cuz I was overheated, on the couch, watching the tickers with no sound, and have SSN in expectations of a takeover.

My point is that some morons trade off of CNBS still, just like morons will vote for ODummer again.

Wed, 11/02/2011 - 20:01 | 1839251 Yen Cross
Yen Cross's picture

 Kudlow is " Mud Sharking" ! Come on Larry? You can do better than that!


   Jeese, I have to head back over to Singapore tonight and I'm looking for some Kudlow ( old school )....


  I already took profit on my trades. This doo-doo is for another day<

Wed, 11/02/2011 - 20:14 | 1839276 mynhair
mynhair's picture

Congrats.  I'm stuck with a missing update, making my Fx screen blank.

The XP machine is fine, but it's a desktop, and I can't smoke and harrass youze guys inside.

Wed, 11/02/2011 - 20:17 | 1839291 Yen Cross
Yen Cross's picture

Super short term buy into the shoulder. T/P and let the cliff fall out.  I'm flat personally. T/P on that last dip.

  I'm speaking of a/u and e/u.  Do not mess with Cable!


   I like a 2:1  r/r on e/a. Stay sharp.

Wed, 11/02/2011 - 20:31 | 1839326 mynhair
mynhair's picture

Shorter the better.  Have a weird tendency to pass out.

Never had a black out position that didn't pay, tho.

Just strange coming to the next day and finding I was in whatever.

It's why I drink heavily.  My alter ego is dyn-o-mite!

I'm a HUFfer by nature.

Wed, 11/02/2011 - 20:42 | 1839388 Yen Cross
Yen Cross's picture

 Mynhair. You have been respectfull. trade a small eur/aud long position.  Put a 75 pip trailing stop on it. Take profit at will.


      Look foreward to talking with you tomorrow.

Wed, 11/02/2011 - 20:04 | 1839260 Mark123
Mark123's picture

There was a good interview on Chris Martenson site with a bond trader about how the system works.  One of the interesting points he had when Chris asked him if there could be a collapse of the bond market was that, no, he did not think so, because with the Fed holding rates so low it is very attractive to borrow and buy US treasuries levering up 10 or 20 times....that measly interest they are paying becomes magnified 10 or 20 times (so 3% magically becomes 60%).  Of course in a normal world who would lend money to someone to do this sort of thing? But the Fed is providing unlimited liquidity to the big players, and stating they are keeping rates low forever, so the primary dealers (and hedge funds?) are playing along.

It really makes you wonder just how fragile the bond market and all the other highly liquid markets really are.  If all the liquidity is really just leveraged debt then....hmmmm

Wed, 11/02/2011 - 21:11 | 1839477 sgt_doom
sgt_doom's picture

Great points, Mark123, but your ending phrase:

"..just leveraged debt then.."

must be correct to:  ..just ULTRA-LEVERAGED debt then.....Super hmmmmmm..

Wed, 11/02/2011 - 20:04 | 1839262 SDRII
SDRII's picture

"Intermediation is supposed to be about matching the wider (real) pool of savings to worthwhile economic projects that have a real, productive impact on the real economy."

Idealist. MAybe the better parrallel here is Italy and Ethiopia circa 1936 or Sarajevo circa 1914

Wed, 11/02/2011 - 20:08 | 1839272 ejhickey
ejhickey's picture

Where's my F'**ng money?

 Ray Barboni

Wed, 11/02/2011 - 20:21 | 1839306 TrueStrengthTur...
TrueStrengthTurnsTheCheek's picture

who would you rather have your daughter go to prom with timmy 'the franz' flys around in military jets federal reserve bank of new mordor geithner or the new bad boy on the block joey corzine the treasury secretary that wasnt, goldman governor and theif executive officer of Motheerfuckin global bitch??

Wed, 11/02/2011 - 20:21 | 1839309 TrueStrengthTur...
TrueStrengthTurnsTheCheek's picture

who would you rather have your daughter go to prom with timmy 'the franz' flys around in military jets federal reserve bank of new mordor geithner or the new bad boy on the block joey corzine the treasury secretary that wasnt, goldman governor and theif executive officer of Motheerfuckin global bitch??

Wed, 11/02/2011 - 20:24 | 1839321 Yen Cross
Yen Cross's picture

 Do you really have a choice ?  I suspect your daughter will be the by-product of her well rounded parents.


 Any Questions?

Wed, 11/02/2011 - 20:33 | 1839353 TrueStrengthTur...
TrueStrengthTurnsTheCheek's picture

yes actually. they come to your door with a gun and demand you choose, then what? theres a 3rd choice take the bullet for your daughter and they leave.... or do they just walk over your corpse and run a train? bankers are evil and the system they run is truly luciferian. unless your 100% out of the system then your daughter will be the by product of their luciferian environment as much as she is of your so called "well rounded parent" what ever that is.

Wed, 11/02/2011 - 20:42 | 1839379 mynhair
mynhair's picture

Then what?  Ever saw a Barrett .50?

Cheap ass tax-payer raped body armor is no match, nor are those cheap ass tanks they parade around.

Wed, 11/02/2011 - 20:36 | 1839365 mynhair
mynhair's picture

Are the parents as fat as Moochelle?

Wed, 11/02/2011 - 20:32 | 1839324 Bob
Bob's picture

That was beautiful. 

Of course, there's also mark-to-myth and the illusory loss provisioning that supports the sacking of corporate assets by executives called "bonuses" in this Accounting Hell Wall Street has constructed. 

And how about that moral hazard of virtually no prosecutions? 

This piece was really encouraging to read.  I hope this sort of sober analysis continues to get the attention it deserves.  

You never know, it's always possible that finance people will head off that yawning socialist revolution at the pass. 

That's something I think would be good for everybody except the criminals . . . if done right. 

But it's obvious that the system itself must be reformed as well. 

Here's a more accusative interpretation of these issues, btw:


Wed, 11/02/2011 - 20:57 | 1839435 bobert
bobert's picture

I'm concerned that moral hazard is becoming an epidemic.

Wed, 11/02/2011 - 20:38 | 1839364 earleflorida
earleflorida's picture

"So, what's 'Regulation', got to do with it?"

Flash: How does a primary dealer's camel,... get its nose under the 'FED's' tent?

Why was the "Nixon  [disembowelment of Bretton Woods]  Shock" allowed,... when 'We/They' all knew it would manifest into a survivalist instrument [designed-to-fail] European Union, that never could/would get 'old-times-out-of-their-mind's [now let's be honest here?] - eg. Israel getting complete sovereignty,... quintessential status via a political [British de ?] Mare`s-nest junta -

Important Note:  Paul Volcker was Chairman of the 'FRB' under Carter, and Reagan, in which 'Deregulation', was at the top of his priority list, and he pushed all the buttons - both left,  and right! -

"The Price of Abandoning the Gold Standard", by Charles Kadlec {[8/24/11][9/12/11]} @ Forbes ___ *Can't quite get my head around Forbes associating his families name with the likes of Murdock?**

Thu, 11/03/2011 - 10:34 | 1841242 FeralSerf
FeralSerf's picture

If you want a glimmer of what it's really about, read Prouty's JFK.  It's mostly not about JFK actually -- more about the world's real bosses and how they decide whether we and everyone else live or die.  He was there and watched as the power struggle was resolved.  It's not a conspiracy "theory".   The winners are/were not nice people.

Wed, 11/02/2011 - 20:38 | 1839372 Yen Cross
Yen Cross's picture

 let's trade.some key pivots are being taken out. 


 I may have squared up my risk. But I haven't squared up my pivots!

Wed, 11/02/2011 - 20:47 | 1839408 mynhair
mynhair's picture

Wish I were that sophisticated.  Just saw levels being taken out I had in mind.

Wed, 11/02/2011 - 20:38 | 1839373 Seasmoke
Seasmoke's picture

Jon is going to wish he didnt walk away from that accident .................what a nappy headed ho





Wed, 11/02/2011 - 20:41 | 1839383 spinone
spinone's picture

When the system crashes, no one give food to the Wall Street traders

Wed, 11/02/2011 - 20:43 | 1839391 lieto
lieto's picture

Great article.

Pursuit of maximum fractions, does that give anyone else the heebee jeebees??!

Hedges won't be worth a shit as all the counterparties collapse, probably at the same time.

You can feel the winds of disaster blowing harder every day as the shit storm picks up.


Wed, 11/02/2011 - 20:44 | 1839394 illyia
illyia's picture

This was a very well-written article that even a layman could sorta grasp. Good pass-on value.

The monetarist v real economy is the clincher here: wraps it all up as banksters-gone-wildly-off-the-edge - i.e. pointless.

So, fractional reserve insanity is toast and the real economy (humans doing things useful to other humans) will kick in, regardless.

Wed, 11/02/2011 - 21:01 | 1839445 nm1
nm1's picture

Can someone please translate this into plain English for me?

Wed, 11/02/2011 - 22:38 | 1839709 blindman
blindman's picture

"there is no spoon." the bald kid in the 'matrix'
What happened at MF Global
Nov 1, 2011 10:07 EDT
"Izabella Kaminska has the wonky details of MF Global’s repo-to-maturity trade. It’s not easy to follow, but here’s the general gist. MF Global buys a bunch of European debt. The bank’s explanation of the trade says that the purchases were “entered into repurchase and reverse repurchase transactions to maturity, which are accounted for as sales”. This is the repo-to-maturity trade.

In order to understand what that means, you first need to understand that banks like MF Global used to do nearly all their borrowing on an unsecured basis. But in recent years, that’s changed: nowadays, if you want to borrow billions of dollars for what MF Global calls “client facilitation and principal activities”, then you’re going to need to put up collateral.

So as soon as MF Global bought those bonds, it turned around and pledged them as collateral when it was borrowing money. That’s the repo.

Now here’s the trade: the rate at which it was borrowing money was lower than the coupon payments on the European sovereign bonds. And because this was a “repo-to-maturity”, MF Global was essentially locking in the difference as profit. It got to keep all the coupon payments, while it had to pay out something less than that in interest."

Stevie Nicks and Lindsey Buckingham Live singing "Landslide"
there is no spoon. hope that helps.
the monetist believe that "money" (fiat) is the end, the subject of business.
it is not, it is the means and just another object, and one with questionable
value all in all, as it may be more destructive than constructive
when the full story is told.

Wed, 11/02/2011 - 23:37 | 1839814 blindman
blindman's picture
Fleetwood Mac - Landslide
Lowell George's Final Concert 05 Easy Money June 28 1979 Little Feat

Wed, 11/02/2011 - 21:11 | 1839474 jmc8888
jmc8888's picture

This was a good article imo.  A crisis of monetarism.  A crisis of money as a tool vs money as the end all be all.


Wed, 11/02/2011 - 21:17 | 1839493 Cult_of_Reason
Cult_of_Reason's picture

It was precisely one week ago the stupid dog (stock market) rallied ~400 Dow points (idiots like Najarians and Ron Insana were chasing stocks) on fantasy Europe was bailed out by fantasy empty box (EFSF).

Wed, 11/02/2011 - 21:35 | 1839532 prophet
prophet's picture

In my book financial accounting is a fraud.

Wed, 11/02/2011 - 21:45 | 1839563 Lexington Duffet
Lexington Duffet's picture

As the article points out, the theories driving Fed policies are mainly Milton Friedman's so called "monetarist" theories.  In a theory scorned by Friedman, Keynes in general advocated direct spending to move the economy out of recession.  He did not think monetary policy would work so well, claiming that simply lifting the money supply had long term inflationary effects (which Keynes thought was usually the worse danger than deflation) and noted "You can't push on a string."   Of course, its not entirely fair to either Friedman or Keynes to guess what they might do now.  Still, the Fed's monetarists are in control.  So its odd to see the economic failures mocked as the "death of keynesian economics."

IMO,  Dexia and aptly named MF Global weren't Lehman moments.  The market went up despite those failures mainly.  Rather, they are Bear Stearns moments.  By that, I mean people are a little concerned.  For Dexia there was an announced bailout of some sort by France and Belgium; for MF, most articles mentioned how Corzine's rep is now toast and the markets reacted more to Greece's attempt to cut itself a better deal by referendum.  But the markets mainly stayed flat or went up the Dexia/MF news, just like back in 2008 when Bear Stearns collapsed.  

Does it presage the Lehman moment?  When or if some big boy goes down?  Everyone believes Helicopter Ben will simply give away a dozen or so more trillion.  Probably to Italy and Spain.  After all, luxury good sellers need their banner years to continue.  


Wed, 11/02/2011 - 22:15 | 1839634 Downtoolong
Downtoolong's picture

Great article. One of the best I've read on ZH in a while. Our financial system is flawed at it's core, because, it now believes the best way to manage risk is to hide it.


Wed, 11/02/2011 - 22:27 | 1839677 csmith
csmith's picture

FASB and regulators are spineless. Put EVERYTHING on the balance sheet in plain sight:


Wed, 11/02/2011 - 22:30 | 1839688 PulauHantu29
PulauHantu29's picture

I wonder if they have have "fun" when they perform these accounting tricks and hand themselves Billions in Bonuses?

I bet their investors really have fun.

Wed, 11/02/2011 - 22:48 | 1839729 GDog
GDog's picture

SHHHH not so loud.

Wed, 11/02/2011 - 23:47 | 1839739 bsdetector
bsdetector's picture

Should we consider here the old adage where there is smoke there is fire? Where is the next whackamole going to appear?

Wed, 11/02/2011 - 23:38 | 1839819 sasebo
sasebo's picture

More practically speaking -


We've got something called an economy that has factories that produce stuff for sale & export, companies that produce various services, a transportation system that moves this stuff around & various types of retail outlets that sell this stuff plus what we import. The economy employs a medium of exchange consisting of paper & computer money, coins & demand deposits to exchange all the goods & services provided by the real economy. This is all pretty straight forward.


To grow this real economy requires that not all the goods & services produced be consumed. Some must be saved to build new factories & other facilities such as warehouses & infrastructure. This savings mechanism was originally designed to be accomplished by commercial banks. They were intended to provide the mediation of loans between savers & entrepreneurs.


So why isn't our economy growing? What happened?


First how do savers acquire medium of exchange? By producing a good or service, inheritance, stealing it, gambling or creating it out of thin air ( fed & banks). They turn their medium of exchange over to banks & other financial institutions who provide investing services.


Of course it's much easier to acquire medium of exchange by gambling than by producing something.


Most of these institutions have been failing to invest the savers medium of exchange in growing the economy. The banks & other financial institutions instead have been investing the savers medium of exchange in houses, other consumer products & gambling & have lost big.


They misallocated resources.


Many of these institutions became insolvent but were not allowed to go bankrupt by B. Bernanke & the federal reserve. He created trillions of dollars of computer money out of thin air & deposited in the failed institutions reserve accounts to save them.


Bernanke continues to prevent the real economy from growing with ZIRP which  motivates savers to borrow & consume rather than saving. He also promotes investment in the stock market by monetizing the new debt, supplying computer money to dealers to invest in the stock market. He also permits the banks & other investment institutions to gamble on esoteric, secretive investment vehicles with other peoples money including the taxpayer, through moral hazard.


So basically why isn't the economy & employment growing? Ben Bernanke & the fed. If the real economy can produce all our goods & services, why can't it produce our money?   

Thu, 11/03/2011 - 00:06 | 1839863 mccoyspace
mccoyspace's picture

great article.

Thu, 11/03/2011 - 00:27 | 1839885 Gmoney
Gmoney's picture

Excellent summary of repo accounting sleight of hand, add to that SPV accounting gimmicks (used by Citi and other TBTFs) where a 3% investment can off-balance-sheet risk and liability on paper yet keep operating control....when will Occupy Wall Street add an Occupy the Big Four Accounting Firm perpetuators of Worldwide BS?  

Thu, 11/03/2011 - 06:50 | 1840068 Bob
Bob's picture

Occupy FASB!

We need some finance people for this one. 

Thu, 11/03/2011 - 01:29 | 1839942 Ullage_Report
Ullage_Report's picture

There are few better practical examples of the dangers of an uncontrolled endogenous money supply than MF Global's fatal creation of off-balance sheet repurchasing agreements based upon foreign sovereign debt. Thankfully, the Federal Reserve has devised and vastly expanded the reverse repo counterparties list this year to include basically most all of the liquid domestic corporate money market supply. Credit WILL be available everywhere, but yet, there shall be NO such thing called inflation, NOR dis-intermediation!

Thu, 11/03/2011 - 02:26 | 1839971 Joy on Maui
Joy on Maui's picture

Most excellent post, thank you so much.  

Thu, 11/03/2011 - 03:03 | 1839983 honestann
honestann's picture

Excellent article.  Thanks.

Thu, 11/03/2011 - 05:17 | 1840033 theprofromdover
theprofromdover's picture

Great article, very clear. Can you now do one that covers the path that money makes through the financial system.

eg Take a notional $1 million deposit (say settlement of an interest-only mortgage on a house-sale ha-ha-ha), and follow it as it goes through the various banks and financial houses for a year or two. Calculate the commission, the fees, the theft, the off-shoring over the period. Include a column on the leveraging to show how it is pumped up to disguise the fees. I bet you the $1 million is halved in 12 months.

Maybe after that, do a similar exercise on the taxation attacks on the same sum.

Thu, 11/03/2011 - 05:45 | 1840040 jbc77
jbc77's picture

Awesome write up!

Thu, 11/03/2011 - 12:26 | 1841938 piceridu
piceridu's picture

What a great post! Thank you Mr. Snider for reiterating that the emperor is completely naked.

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