Must Read: Presenting The MF Global Black Box: A Minute By Minute Breakdown Of The Doomed Broker's Last Week On Earth

Tyler Durden's picture

In order to get to the bottom of every collapse (or death), a forensic analysis of the last minutes of any transition from life to death has to be perormed. So far, we have only had broad strokes of the key events in the last days of MF Global as obviously many of them will implicate the management team in gross criminal behavior. Until now, when courtesy of the CME we have received a full breakdown of every key events in the chronology of MF Global's last days on earth, starting with October 24, and the rating agency downgrade of the futures broker (the same catalyst incidentally that started the AIG death spiral waterfall... and yet clueless pundits will tell you the ratings are totally irrelevant), and ending with the firm's filing for bankruptcy protection. Anyone who has any interest in the MF Global collapse, which incidentally should be anyone who has capital in third party possession and thus has counterparty risk, should read this narrative from first to last bullet.

October 24, 2011

  • Mike Procajlo ("Procajlo") speaks with Mike Bolan ("Bolan"), MF Global, Inc.'s ("MFGI") Assistant Controller. Bolan gives Procajlo a heads-up that a downgrade is forthcoming and that the earnings call for MF Global Holdings, Ltd. ("MFGH"), scheduled for Thursday, which is expected to report losses, is being moved up to Tuesday.
  • Moody's downgrades MFGH and MFGI.

October 25, 2011

  • Procajlo speaks with Bolan via phone; Bolan confirms there has not been a customer run on the bank since the downgrade news.
  • CME senior management, including Kim Taylor ("Taylor"), Terry Duffy ("Duffy"), and Craig Donohue ("Donohue") are in Florida at the Global Financial Leadership Conference.
  • Taylor is advised by an MFGI customer of rumors circulating about problems at MF Global ("MFG" with respect to information not given as specific to a particular entity) stemming from OTC activity.
  • 11 a.m.: Taylor speaks with Laurie Ferber ("Ferber"), the General Counsel of MFGH, and Steve Monieson, another MFG employee, who tell Taylor that the rumor about problems at MFG stemming from OTC activity is not accurate. Procajlo speaks with Bolan about OTC questions.
  • 11 a.m.: Taylor, Donohue, and Duffy seek and obtain Jon Corzine's phone number. They do not recall speaking with Corzine.
  • 11:54 a.m.: Procajlo emails Grace Vogel at FINRA to see if FINRA has any additional concerns or is imposing any additional requirements in light of the downgrade news.
  • 1:30 p.m.: Taylor speaks with Ferber again, who informs Taylor that MFG does not have any large losses attributable to OTC activity.
  • 2 p.m.: CME Audit Department members, including Procajlo and Anne Bagan ("Bagan"), as well as CME Risk Department members, including Dale Michaels ("Michaels"), Amy McCormick ("McCormick") and Bryan McBlaine ("McBlaine"), speak with Bolan about MFGH's earnings release and Moody's downgrade. MFGH's net losses reported were $192M. The CME employees ask about MFGH's liquidity resources. Bolan confirms that any further downgrades will only trigger covenants related to interest rates. Bolan also confirms the firm is well-capitalized and states that MFGI has not seen customers looking to transfer.
  • 7 p.m.: At this point, CME is taking the following steps to monitor the situation:
    • (1) keeping MFGI on daily financial reporting;
    • (2) monitoring MFGI's positions, exposure, and customer transfer/segregated funds balance changes for signs of a significant loss of customer confidence;
    • (3) drafting a "good standing" press release to have ready if necessary;
    • (4) establishing a process to ensure customers looking for information get answers to their questions;
    •  (5) establishing an industry call process to ensure information flows to other affected clearing houses and regulators; and
    • (6)  considering whether other financial measures are in order, in coordination with other regulatory bodies.

October 26, 2011

  • 4 p.m.: CME arranges an industry call regarding the MFG situation.   
  • 6 p.m.: Taylor, Bagan, Tim Doar ("Doar") and possibly other CME personnel participate in a conference call with Ferber and Henri Steenkamp ("Steenkamp"), the CFO of MFGH. Ferber and Steenkamp give Taylor and Doar the sense that MFGI is actively engaged in conversations with their customers in an attempt to preserve the business.
  • 7:45 p.m.: Taylor emails Ferber regarding CME helping "to ensure a good outcome for MF and your customers. You and your clients are important to us, and the clients' continued protection is paramount."

October 27, 2011

  • MFGI and MFGH are downgraded to junk this day.
    Members of CME's Risk Department — Michaels and Suzanne Sprague ("Sprague") — as well as Scott Malcolm ("Malcolm") from CME's Audit Department — meet with MFGI in New York (planned earlier in the week) to do a risk review, the purpose of which is to talk with the firm about their liquidity and assess the situation. At the time, CME is starting to have concerns that MFGI's liquidity is drying up.
    Michaels, Sprague, and Malcolm meet with a number of individuals from MFGI, including Stephen Hood ("Hood"), MFGI's Market Risk Manager, Dennis Klejna, MFGI's Compliance Officer, the CRO Michael Stockman, and the CFO (Steenkamp). Edith O'Brien ("O'Brien"), MFGI's treasurer, may have been on the phone.
  • At the conclusion of the meeting, CME- continued to have concerns regarding MFGI's liquidity and the ability of the company to continue normal operations without a sale of all or part of the business, notwithstanding MFGI's assurances.
  • 10 a.m.: Procajlo emails Bolan, who is at MFGI in New York, for a copy of the liquidity analysis being prepared by MFGI's broker-dealer side. Bolan responds saying the analysis will be ready later that day. Procajlo never receives the analysis.
  • 1 p.m.: CME decides to send members of the Audit Department out to MFGI in Chicago. Silmar Ramirez ("Ramirez") and Jason Guch ("Guch") arrive at MFGI and request documents to tie out the Daily Statement of Segregation Requirement and Funds in Segregation for Customers Trading on U.S. Commodity Exchanges ("seg. statement") for the close of business as of 10/26. They start working on tying out the 10/26 seg. statement, which shows excess segregated funds of $116,164,132.

    In addition to tying out the 10/26 seg. statement, another purpose of their presence is to have CME people at MFGI to assist in obtaining information quickly if necessary.

    The CFTC — Melissa Hendrickson ("Hendrickson"), Lisa Marlow ("Marlow"), and Tamara Durvin (phonetic) ("Durvin") — is already present on site at MFGI when CME arrives.

    CME begins making contingency plans for transferring MFG customer accounts to other FCMs.

  • 2 p.m.: Individuals from MFGH and CME communicate via email to set up a conference call to discuss a number of items including: (1) MFGI's liquidity; (2) repo counterparties update; (3) any issues with transfers of customers to other FCMs; (4) margin calls resulting from downgrades; (5) amount of segregated assets not currently pledged to a DCO; (6) contingency plans.
  • 2:50 pm: Taylor communicates with Ananda Radhalcrishnan ("Radhakrishnan"), Director, Division of Clearing and Risk, at the CFTC regarding an FCM that has the capacity to take on some portion of MF Global's business. CME President Phupinder Gill ("Gill") also communicates with Radhakrishnan via email throughout the day.
  • 3:53 pm: Procaljo emails a letter to Christine Serwinski ("Serwinski"), the CFO of MFGI, Ferber and Bolan stating "Effective immediately, any equity withdrawals from MF Global Inc. must be approved in writing by CME Group's Audit Department."
  • 4 p.m.: CME arranges an industry call regarding the MF Global situation.
  • 5:30 p.m.: Ramirez and Guch leave MFGI for the night, having completed work on documents and information supplied by MFGI as of that time.

    Evening: Procajlo, Taylor, Doar, Gill and others participate in a call with Ferber and Steenkamp, who are in New York. Ferber and Steenkamp provide assurances that MFGI has appropriate liquidity and also that MFGI is taking steps to reduce its securities inventory (not on the FCM side).

    Additionally, CME encourages MFG to pursue a strategic solution for the company. Ferber provides comfort that MFG is aggressively pursuing a transaction.

October 28, 2011

  • 7:30 a.m.: Ramirez and Guch arrive at MFGI and continue trying to tie out the 10/26 seg. statement. They still have not received all of the documents they requested from MFGI and that they need to complete their tie out. They are also working on tying out the Daily Statement of Secured Amounts and Funds Held in Separate Accounts for Foreign Futures and Foreign Options Customers Pursuant to Commission Regulation 30.7 ("secured statement"). CME and CFTC are in communication throughout the day about MFGI's 30.7 secured computations and MFGI topping up the 30.7 secured assets.   

    The CFTC — Hendrickson, Marlow, and Durvin — is again present on site at MFGI in Chicago and appears to also be working on tying out MFGI's seg. statement.

    Morning: Duffy receives a call from Radhakrishnan and Gensler. Radhalcrishnan and Gensler tell Duffy that the CFTC has concerns about MFG and ask him about CME's thoughts with respect to MFG. Duffy tells them that he does not have the information they seek, and suggests they speak with CME Clearing House personnel. Radhakrishnan speaks with Gill later that day.

    Procajlo and senior management at CME have another call with MFGH, including Steenkamp and Ferber, who assure CME that they have drawn down all or substantially all of their line of credit — which has a limit of approximately $1.2 billion — but are not yet using the money.

    They confirm that MFGH believes finding a buyer is the best option at this point.

  • 3:54 p.m.: MFGI submits its 10/27 seg. statement showing excess segregated funds of $200,178,912.
  • 4 p.m.: CME arranges an industry call regarding the MF Global situation.
  • 6 p.m.: Ramirez and Guch leave MFGI, expecting to come back Monday and finish tying out the 10/26 seg. statement. At this time, Ramirez and Guch do not yet have all of the documents necessary to tie out the 10/26 seg. statement. Based on their review of the documents they have received, they have no reason to believe that the segregated account is out of compliance as of 10/26 close of business.
  • 8:25 p.m.: Taylor emails Radhakrishnan at the CFTC to relay information she received from Ferber. MFGI has a "very motivated buyer" and needs to obtain approvals from the SEC, F1NRA, and CFTC.

October 29, 2011

  • Procajlo is in communication with Hendrickson of the CFTC via phone about a potential sale of MFGI's FCM business.
  • 2:30 p.m.: Taylor speaks with Radhakrishnan regarding a potential asset sale of MFGI's assets. The CFTC is concerned with a transfer because of the CFTC's rules on bulk transfers, though note that they will waive the rule if an asset sale works out.
  • 3:40 p.m.: Taylor forwards to Radhalcrishnan a Bloomberg News report stating that MFGH's Board of Directors will be meeting later that day regarding options to sell the company.
  • 4:30 p.m.: Taylor speaks with Radhakrishnan, who states that the SEC told him the FSA in the UK may be starting to panic. Radhakrishnan says he is going to call the FSA to share insights into his thinking and learn FSA's thinking. Taylor and Radhakrishnan also discuss additional details regarding a potential sale.
  • 7:50 p.m.: Radhakrishnan forwards to Taylor an email chain between Ferber and Radhakrishnan regarding a meeting of MFGH's Board.
  • 11 p.m.: Interactive Brokers ("IB") is the leading candidate, looking to buy either the entire business, or possibly just the FCM.

October 30, 2011

  • 8:30 a.m.: Taylor speaks with Paul Brody ("Brody") at IB regarding details of the potential transaction.
  • 8:45 a.m.: CME is making contingency plans in case the proposed sale falls through.
  • 12:30 p.m.: Taylor receives email correspondence from Radhakrishnan indicating that the CFTC is concerned about having a  contingency plan for MFGI if the IB deal falls though.
  • 1 p.m.: Conference call between CME and IB regarding operations issues in the event the sale is completed.
  • Approx. 1 p.m. - 2 p.m..: Taylor participates in a conference call with the CFTC, SEC, and MF Global.
  • Approx. 2 p.m.: Taylor, Procajlo and others arrive at CME offices to work on matters that need to be addressed to facilitate the MFGI transaction.
  • Approx. 2 p.m.: Hendrickson, who is present at MFGI in Chicago, calls Procajlo and tells him that she has seen a draft of the 10/28 seg. statement and it shows a deficiency in the segregated funds.
  • After 2 p.m.: Ramirez and Guch are sent to MFGI's Chicago office. Malcolm is sent to MFGrs New York office.
  • 4 p.m.: CME arranges an industry call regarding the MFG situation.
  • 4:18 p.m.: Bolan responds to an email from Procajlo, in which Procajlo had indicated that Malcolm is on his way to MFGI's office in New York, by stating that MFGI has been working with Hendrickson at the CFTC and that he will update Procajlo later.

    Late afternoon or evening: Taylor briefs the CME Emergency Financial Committee concerning MFGI's status. The CME Emergency Financial Committee is composed of Donohue, Duffy, Taylor, Gill, and CME Clearing House Risk Committee Co-Chairs James Oliff and Howard Siegel.

    6 p.m.: MFGI forwards to CME a draft press release announcing deal with IB.

  • Approx. 6 p.m. and into the evening: Procajlo and Taylor engage in a series of phone calls with Ferber, Bolan and/or O'Brien.  Initially, Ferber and Bolan explain that there is an apparent deficiency, which they believe is an accounting error. At some point, MFG representatives state that they believe they found the error and it is on the liability side.

    Procajlo calls Ramirez and Ouch, who are at MFGI's offices in Chicago, to confirm that the accounting error has been identified.  Ramirez and Ouch inform Procajlo that MFGI has not found the error.

    Procajlo asks Bolan to explain what the error is in an in-person meeting with Malcolm (CME) and Jerry Nudge (CFTC), who are in MFGI's New York office.

  • 30 minutes or so later, Malcolm calls Procajlo and tells him that Bolan says the accounting error is based on a $450M mis-posting. The error Bolan described to Malcolm is not on the liability side.

    Procajlo again calls Ramirez and Guch to confirm that the accounting error has been identified. Ramirez and Guch again inform Procajlo that they are with MFGI individuals working on the reconciliation, and they are not aware of anyone having found the error.

    Taylor and others at CME have calls with O'Brien regarding the potential error.

  • Approx. 6 p.m. - 7 p.m.: O'Brien, MFGI's treasurer, calls a meeting with the CFTC, CME, and MFGI employees present at MFGI's Chicago office and confirms that MFGI has a potentially huge deficiency in the segregated account due to what MFGI states is an unidentified accounting mistake, such as a mis-booking.

    Later that evening, while at MFGI, CFTC's Marlow gives Guch and Ramirez a disc containing documents the CFTC received from MFGI supporting the 10/26 seg. statement. At this time, however, Ramirez and Guch are assisting with trying to locate the accounting error and therefore do not look at the documents to tie out the rest of the 10/26 seg. statement at this time.

  • 8:30 p.m.: Radhakrishnan talks to Gill.
  • 8:40 p.m.: Procajlo sends an email to Bagan and Debbie Kokal ("Kokal") stating that MFGI's "explanation of the $900 million  shortfall proved to be unsubstantiated."
  • 8 p.m. - 9 p.m.: Procajlo arrives at MFGI. He speaks to CFTC's Hendrickson and gets a status update.
  • Christine Serwinski arrives at MFGI.
  • 9 p.m. - 10 p.m.: Procajlo speaks with Serwinski and O'Brien, who repeat the explanation that the deficiency must be an accounting error and make statements to the effect that it is too big to be anything else.
  • 10 p.m.: Procajlo meets with Serwinski and O'Brien again and asks if MFGI has tried to locate funds MFGI can transfer into segregation first thing in the morning as a contingency in the event that they cannot locate the accounting error.
  • 10:50 p.m.: CME requests via email that "MF not add any further exposure to your house account." CME does not request MFGI to "liquidate the positions that you have in place, but that you not add to them at this point."
  • 11:30 p.m.: The CFTC leaves MFGI's Chicago offices.
  • 11:40 p.m.: Procajlo emails Bagan and Kokal, stating that he is now at MFGI's offices and the shortfall, of approximately $950 million in segregation, is still a "huge issue." No one has found the error, but the belief is still that there is an error. Serwinski is looking into coming up with additional funds to transfer into segregation as a contingency in the event that they cannot locate the accounting error.
  • Procajlo also states that he understands IB is now aware of the potential shortfall.

October 31, 2011

  • 12 a.m.: Ferber emails Taylor, stating only: "we may have it."
  • Approx. 12:30 a.m.: At this time: (1) The IB deal is ready to go — apparently including regulatory signoffs; (2) there is still a $900M apparent segregation shortfall and MFGI says it is an accounting error; (3) the transfer cannot happen until it is clear there is no segregation shortfall; (4) MFGI is starting to identify sources of funds available to top up segregation — and the latest report from MFGI is that they may have sufficient funds; (5) IB and MFGI have spoken to CME and both seem aligned on the importance of the transfer occurring promptly, and state they are open to the suggestion of having MFGI top up segregation and TB making corresponding adjustments to the deal economics.
  • Approx. 1 a.m. —2 a.m.: CME learns the deficiency is real: Serwinski and O'Brien call Procajlo into Serwinski's office and tell him there is an actual shortfall; about $700M was moved to the broker-dealer side of the business to meet liquidity issues in a series of transactions on Thursday, Friday, and possibly Wednesday. Additionally, Procajlo is told there was a loan of $175M of segregated funds to MF UK.
  • CME stops its efforts to look for the accounting error. CME understands that MFGI is attempting to find available funds and get Fedwire to open early so they can start transferring money into the segregated account.
  • 2 a.m.: Taylor emails the FSA and CFTC to let them know that IB has gone home to get some sleep, but may still be interested in the transaction.
  • 2 a.m.: Procajlo communicates via email with Thelma Diaz from the CFTC Washington D.C. office, who is on a regulatory call at the time, and discusses whether Fedwire can open early so MFGI can start transferring funds into segregation.
  • 3 a.m.: Ramirez and Guch leave MFGI for the night. Procajlo stays until 8 p.m. the following day.

    During the night, Procaljo also participated in a phone call with senior MFG employees wherein one employee indicated that Corzine knew about loans that had been made from the customer segregated accounts. CME Group has provided information about this call and related conversations, and the names of the individuals who participated, to the Department of Justice and the CFTC who are investigating these matters.

  • 4 a.m.: Taylor and Gill participate in a call with MF Global and the regulators.
  • 4:37 a.m.: Procajlo emails others at CME with a list of potential assets MFGI has identified that it could move into segregation.
  • The deal with IB to buy MFGI collapses.
  • 6:45 a.m.: Taylor emails CME senior management to inform them that the deal has collapsed, the shortfall is real, and there will likely be a bankruptcy.
  • 7:30 a.m.: Procajlo, Ramirez and Guch are on site at MFGI while MFGI attempts to make transfers of funds back into segregation. The CFTC is also present.
  • 8:30 a.m.: Taylor and Radhalcrishnan communicate via email regarding MFGI bulk transfers.
  • 9 a.m.: MFGH files for bankruptcy.
  • 10 a.m.: Taylor and Radhakrishnan communicate via email regarding the amount of shortfall.
  • 10:30 a.m.: CME's Emergency Financial Committee orders that all trading of MFGI and its customers be for liquidation only. Taylor's assistant emails a letter from Taylor to Dennis Klejna ("Klejna"), Assistant General Counsel of MFGI, stating the Committee's order. The letter further states that CME will no longer permit floor trading to be guaranteed by MF Global, and that CME will process account transfers at the Friday settlement price but that customers will need to re-margin transferred positions.

    Moody's further downgrades MFGI.

    S&P and Fitch downgrade MFGH to default following MFGH's filing for bankruptcy protection.

  • 11 a.m.: A SEPA proceeding is filed for the liquidation of MFGI and a SIPC Trustee is appointed.
  • 12:15 p.m.: CME's Emergency Financial Committee orders that MFGI liquidate its house proprietary positions. Taylor's assistant  subsequently emails a letter to this effect to Klejna and Serwinski. The Committee also authorizes CME to liquidate securities held as house and customer collateral under the control of the Clearing House to cash.

    Throughout the day, Ramirez and CME staff— Guch, Jared Jarvis ("Jarvis"), Procajlo, and Mudassir Arby ("Arby") — attempt to tie out the 10/28 seg. statement.

  • 7 p.m.: CME's Emergency Financial Committee approves a rule change releasing members qualified by MFGI, such that those members could become qualified and guaranteed by another clearing member in order to resume trading.
  • 7:46 p.m.: CME receives the amended MFGI seg. statement for 10/27 showing a segregation deficiency of $213,062,967.
  • 7:55 p.m.: CME's Emergency Financial Committee (i) authorizes the Clearing House to conduct an auction of MFGI's house positions in order to transfer the positions to another clearing member, and (ii) authorizes the Clearing House to accept certain deliveries from MFGI customers through Friday November 4 in order to minimize disruption to the markets.
  • 8 p.m.: CME notifies MFGI that it is suspended as a clearing member on all CME Group exchanges. Taylor's assistant subsequently emails a letter from Taylor to Klejna and Serwinski confirming the suspension.
  • 8:06 p.m.: CME receives MFGI's seg. statement for 10/28 showing a segregation deficiency of $891,465,650.

Source: CME

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seek's picture

Not to mention sending CME and CFTC on a wild goose chase for an error. Everyone who touched that particular lie should be looking a federal pound-me-in-the-ass prison. The timeline makes it pretty clear we had multiple participants in fraudulent representation to regulators. I have to wonder if some 2nd or 3rd level management hasn't figured out they've been set up and are heading to Paraguay.

The thing I'm trying to puzzle out is that I'm quite convinced the conspiracy theory that the COMEX would be busted is true, and how one weaves that into this? Perhaps they knew MFG was over-leveraged and someone back-channel suggested the downgrade, creating the opportunity to liquidate? Had the IB deal gone down in time, the contracts wouldn't have been liquidated and the COMEX would go boom.

This is an interesting puzzle, like 90% of the pieces are there, but all the crucial details are in the 10% thats missing.

Oracle of Kypseli's picture

Yea. the guy that emailed: "We may have it" without giving explanation. Rouse to gain time and transfer the loot.

masterinchancery's picture

Note the repeated lies and fraudulent assurances from Laurie Ferber, GC, and other MFG officers and employees, and that Corzine actively participated in the illegal use of customers' funds and collateral. These alone are felonies.

falak pema's picture

  • 8:06 p.m.: CME receives MFGI's seg. statement for 10/28 showing a segregation deficiency of $891,465,650.

Now that is deficient to a point where efficiency becomes irrelevant. Humpty Dumpty time, all the king's horses and all the king's men...

No wonder Corzine suffers from Amnesia. I would for a hundreth of that amount. .9 billion/100 = 9 million. That's enough to give me amnesia. I'l buy that with chardonnay on ice please.

Wakanda's picture

9 mill for ??????

I forgot allready!!!

Al Gorerhythm's picture

Cool, as long as it's not hypothicated.

Zero Govt's picture

What a cracking Christmas present for fleeced MF'ing Global customers

just watched the Senate Hearing with 6 Turkeys (US Regulators) lined up for questioning and pretending to be on the ball ...should have been shooting... there's still time to stuff and cook them you know!

Wakanda's picture

Don't serve that rotten meat.

WestVillageIdiot's picture

One's opinion of regulators can only be truly formed after seeing them in action.  It is a fucking disgrace.  It is part political correctness, part affirmative action, part confusion and a huge dash of incompetence sprinkled on the top.



redpill's picture

Don't forget the corruption cream filling.

WestVillageIdiot's picture

No wonder my souffle collapsed.  I forgot to add corruption into the recipe.  Thank you for correcting that.  I will not make the same mistake again. 

DeadFred's picture

Souffle??? Real men make quiche.

Oracle of Kypseli's picture

Try ordering quiche wearing a red speedo in an Alabama beach.

TheSilverJournal's picture

The people are only concerned about inflation because the largest burden of inflation is on those who receive the newly created money last. The true deflation concern is assets deflating enough in value to cause the banks to go bankrupt.

What is all of This Concern about deflation?

disabledvet's picture

interesting theory. "we had the inflation first" now come's the collapse. the government stats have lied about it....witha quality follow on from the real estate clowns. now that the tax cut is going to be paid for by Fannie and Fred "the game is up." Uncle Salami is truly "broke" in the sense that their is no "peace dividend." I'll skip with the DC stuff cuz it's over this site's head...suffice to say do not be surprised to see European calamity spill into US debt markets leading to total financial mayhem. AVOID COMMODITIES RIGHT NOW. The government has to do it's thing first...and what that "it" is will define just what in the famous words of Bill Clinton "what the meaning of"

TheSilverJournal's picture

The US debt markets are leading to calamity on their own. The US is in fundamentally worse shape than the Euro. For example, if the ECB gets together and prints Eurobonds and kicks the can down the road, the US has much less road than the Euro. But if any large European country defaults, then yes..the calamity would spread everywhere and the world fiat ponzi would crumble.

Commodities, in particular the money commodities is what you want to buy because currency is being destroyed. The only way to postpone the ponzi collapse longer is to print massively greater amounts of currency.

flattrader's picture

The sovereign who collapses last "wins."

TheSilverJournal's picture

Those who get out of the ponzi earliest, get out best. That goes for every level from the individual to the sovereign and everything in between. The longer the sovereigns stay involved in the ponzi, the worse the imbalances become.

Americans are suffering because artificially cheap money is destroying productivity. Mis-pricing money causes resources to flow into unproductive areas. The return of market-priced money will expose the malinvestments that have been created by artificially cheap money being pumped into the economy and cause short-term pain, but will also cause a boom in productivity because resources will once again be allocated much more efficiently.

Postponing the pain by providing more artificially cheap money only causes more malinvestments and therefore even greater pain in the future. Bankers and politicians enjoy their control over the printing press and do not want to be blamed for the pain, which is why the pain will likely be delayed until so much artificially cheap money is created that the USD becomes worthless.

omniversling's picture

Help please for a non-trader...could someone please explain how the leverage:asset value equation works? Am I right in understanding that in an deflationary period it's the reduction in (on the book?) asset values that can tip heavily leveraged entities to go under?

I read regularly that an entity with leverage of 50:1 only needs a drop in asset values of 2% to go 'flatline', or a leverage of 25:1 going sameway with a 4% drop in asset values. Could someone flesh that principle out for me?

And who decides 'asset values' (is that something like being 'marked to market' -ie agreed or certified value- as opposed to the 'claimed' value of an asset?).

Presumably that's the kind of info or data that auditors or rating agencies use to decide if a company/instituion/bank is solvent?

And isn't this all profoundly theoretical if there is so much 'off books' derivative and rehypothecation action happening, where 'assets' may in fact already be liabilities?

Thanks ZHeads

TheSilverJournal's picture

Our currency system itself is profoundly theoretical. The only thing that's behind the world's currencies is faith. If people lose faith, then the currency is finished. If the amount of currency that's being printed heads towards infinite, then the currency is finished. If the US defaults, then all currencies will collapse because the USD is the world's reserve currency.

Doomer's picture

Let's say you borrow $50 million to buy $50 million in assets, using $1 million in assets you aleady have as collateral.  If the asset value drops by 2%, then it is only worth $49 million, and your $1 million in collateral is no longer yours.  If you don't have another $1 million to pledge as collateral, you have to pay back the loan, and you are broke.  What's worse is if your collateral also dropped in value; then you are really fucked.

plubans580's picture

A simple example:

You have $100 that you want to invest, and you decide you want to invest on margin (i.e., using leverage).  So, you borrow $1000 from your broker and post your $100 as collateral for that loan. You buy $1000 of some asset from your broker using that borrowed money.  You have $1000 of assets for your $100 of capital. You are leveraged 10x or 10:1 (depending on what notation you prefer).

Assume that the asset drops in value by 10%. You decide you think it's going to drop further, so you sell it for $900.  Your broker still expects that you will pay them back the full $1000 loan, so you give them the $100 in collateral and the $900 from the sale.  You now have $0: 100% of your capital was wiped out by a 10% drop in the value of the investment.

Deflation/inflation don't have anything to do with this, except in an indirect way - the central issue is the rise and fall of asset prices.


The mark-to-market vs mark-to-model issue is especially relevant for bonds because of the interplay between the effects of both credit risk and interest rates on the price of bonds.

Assume that a particular company wants to raise some money and so they issue a bond.  You decide that you want to loan them $1000 and that you want to be paid 1% per year as compensation.  So you now own a 10 year bond that yields 1% per year.  

How do interest rates have an effect?

Assume that one year later - due to external circumstances - interest rates everywhere have gone up.  As a result, that same company is now issuing 10 year bonds that pay 2% per year.  If you want to sell your 1% bond, no one is going to buy it from your for $1000, since they can put that same $1000 towards a 2% bond that will pay them more over the life of the bond.  So if you want to sell it, then you will need to offer a discount so that at the sale price, the buyer will get a cash flow comparable to that of the 2% bond ( for details).

How does credit risk have an effect?

Assume that one year later, the company is nearing bankruptcy, and it does not look likely that they will be able to pay back the bond at all. There might still be some people willing to lend to the company, but they won't charge them 1% anymore - it will be a much higher rate.  In this case, if you want to sell you bond, you will again need to discount it heavily so that the buyer feels like they are getting a much higher interest rate.

So when does mark-to-market get applied?

If you are an active bond-trader and you never plan on holding any bonds to maturity, then you will want to value your portfolio on a mark-to-market basis since your intend to profit based on your ability to predict the price fluctuations that occur as a result of changes in interest rates and credit risk.  

If you are a hold-to-maturity, long-term investor, then you probably won't want to use mark-to-market accounting, because you don't care about the price fluctuations: all you care about is that you're going to get your $1000 back at maturity, and you're going to get your 1% per year in the meantime.  However, if your $1000 bond is trading at $300 because people think the issuer is going bankrupt (and thus won't pay back the bond), then it seems wrong to claim that you own an asset that's worth $1000. At least in this case, investors can express their frustration by selling the stock. This is why many banks are currently trading at a price-to-book value of less than one: investors don't believe that each dollar worth of assets claimed on the balance sheet is acually worth a whole dollar.

The solvency question is less complicated. If a bank owes someone money, and the bank can't pay it, they are insolvent. If they can pay, they are not insolvent. So solvency isn't really a judgement, it's more of a state of reality.

PianoRacer's picture

If we've already taken personal posession of all of our capital and thus have no counterparty risk, can we still read the article?
Somebody tell me what it says. 

The Fonz's picture

Loosely translated it says "Put your shit in your safe".

bilejones's picture

I too am fully diversified, some's under the mattress the rest is buried in the yard.

Thisson's picture

It's amazing that it only took 3 days from the downgrade to the collapse of the entire firm.

trav7777's picture

things happen quick...leverage is like that.

tmosley's picture

But you'll be able to catch it before it happens, right Trav?


Chicken_Little's picture

I hate to break into such a great comment area, but the US Embassy just sent me this and I have no idea what it's about. I'm a registered Ex-Pat  in Pattaya.

This message is to alert you that on Friday, December 16th, a large group-possibly as many as 1200 people-will gather in front of the U.S. Embassy on Wireless Road. The exact time of the demonstration is unknown, but most of the demonstrators are expected to arrive between 1300 and 1600 hours. Although this gathering is expected to be peaceful, if you plan to be in the vicinity, you should be mindful that any large gathering holds the possibility of risk, and that traffic around the Embassy will be impacted. It is also possible that access to the Embassy will be restricted. Demonstrations are unpredictable and can turn violent without warning. For this reason, we encourage you to monitor local media for information about possible demonstrations and to avoid the vicinity of demonstrations. Information about the demonstration may also be available on our website as well as through Facebook and Twitter.

Tyler(s), please get on this. Thx much :)
Oracle of Kypseli's picture

Pataya is dangerous place to start with. Fun for middle aged men, but don't forget to use protection. My advice: Get over to Phuket and Phi Phi islands for a while.

Bringin It's picture

Oracle - please stop with the advice before you hit something idyllic.

JPM Hater001's picture

Somewhere in the middle there Lucifer stopped by for a quick meeting.

Sycophant comes to mind here.  "Yes John.  The Rothchilds sent me personally to tell you what a star you have become."

Legolas's picture

7 p.m.: CME's Emergency Financial Committee approves a rule change releasing members qualified by MFGI, such that those members could become qualified and guaranteed by another clearing member in order to resume trading.

Unbelievable.  Absolutely unbelievable.  Who does CME report to?

Why would they do that? 

Mr Lennon Hendrix's picture

CME is a corporation which is regulated by fascist parties such as the SEC.

Occams Aftershave's picture

are we to believe that in the entire chronology, which never once includes the word 'corzine', that he was absent and not involved in any of this final death rattle?

NotApplicable's picture

CME folks got his phone number, but can't remember if they called him.


Infinite QE's picture

its the golden rule of GS, LDL. Lets Discuss Live.

trav7777's picture

I know people who were sent to federal prison for bribery...caught due to wiretaps.

NOBODY in this business ever puts anything in writing.

Manthong's picture

This is all so last month... can't we just get on with the Christmas rally?

toadold's picture

Does anybody else get the feeling that Corzine not only screwed the customers but also has messed it up for his fellow predators?

Papasmurf's picture

When only a few bankers remain, it not much matters who eats who last.  We are in the end game for vulter capatilsim.

Bringin It's picture

Who is giving you the 2 red arrows??  and why??

NotApplicable's picture

I think we've gone beyond the phase of caring about anything, as it's apparently show time.

Congress Critters have passed the Enabling Act, so we're just a signature away from the official police-state.

What's funny is that this showed up not in headline, world, national, or political news, but as the last item in the business news.

nmewn's picture

Yeah, I'm eagerly awaiting the GW admonishment for O'Bama not to sign it.

What a red herring show that'll be ;-)

Mr Lennon Hendrix's picture

Given the Super Class' history, I would guess a false flag is coming next year.