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Presenting The Bond That Blew Up MF Global

Tyler Durden's picture





 

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 (of which MF held 91% of its ITA exposure in), 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.

Perhaps the largest lesson, and one that Mr. Barroso, Van-Rompuy, Draghi et al. should bear in mind is just how quickly a levered (firm not instrument) position supporting risky sovereign debt can go against you - but then today's EFSF issue demand perhaps makes that discussion moot.

Chart: Bloomberg

 


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Mon, 10/31/2011 - 13:20 | Link to Comment Mongo
Mongo's picture

Blame the Bunga!

Mon, 10/31/2011 - 13:27 | Link to Comment redpill
redpill's picture

 

If you're gonna go out, you might as well go out big.  And boy did they exceed expectations.

 

This story coming soon to a French bank near you.

 

Mon, 10/31/2011 - 13:34 | Link to Comment MillionDollarBonus_
MillionDollarBonus_'s picture

I hope this teaches European politicians a valuable lesson about the dangers of indecisive economic policy. The delayed EFSF expansion may just have caused the BANKRUPTCY of a primary dealer institution. It's time for European officials to get organized and start pushing for decisive and coordinated fiscal policy so that we do not have to witness a tragedy like this in the future. Politicians need to stop worrying about populist referendums and start showing some LEADERSHIP. I and many others with financial equity portfolios are counting on them.

Mon, 10/31/2011 - 13:35 | Link to Comment redpill
redpill's picture

Good point MDB.  I wish they would stop allowing people to experience pain and just start printing in earnest.  Let's get this party started!

Mon, 10/31/2011 - 13:59 | Link to Comment Miss Expectations
Miss Expectations's picture

Just a guess, but I bet you laugh out loud while you're typing.

Tue, 11/01/2011 - 04:17 | Link to Comment Bollixed
Bollixed's picture

True dat. He's gotta be a junk collector and loving every minute of it. Funny stuff.

Mon, 10/31/2011 - 14:00 | Link to Comment Alvaro de Esteban
Alvaro de Esteban's picture

Hey MDB it´s great that an slovakian earning 900 USD/month  has to pay to ensure your financial equity portfolio.

I would be willing to pay the plane ticket to that slovakian to allow him to discuss the issue "face to face" with you.

Hope Obamacare covers your hospital bill

Mon, 10/31/2011 - 13:58 | Link to Comment Another Texan
Another Texan's picture

But, i thought Timmy G said the Euro cluster would not come to our shores???  WTF?

Mon, 10/31/2011 - 14:03 | Link to Comment max2205
max2205's picture

Naked long the Italy 1 year... got to be more to it TD

Mon, 10/31/2011 - 17:12 | Link to Comment Hedge Fund of One
Hedge Fund of One's picture

Well, apparently, even if they were hedged with CDS, they were effectively naked as illustrated by worthless Greek CDS. 

Mon, 10/31/2011 - 15:01 | Link to Comment FinHits
FinHits's picture

Very useful benchmark to see if there will be "a Lehman event" from this to MF counterparties.

I wonder how many rotten American asset schemes will be blowing up? I guess the MBS investors and funds will be next. Will the US Government bail any of them out? I guess yields will explode in risk assets again.

Mon, 10/31/2011 - 19:21 | Link to Comment Buck Johnson
Buck Johnson's picture

The one CNBC anchor said this afternoon that Corzine's decisions where akin to hailmary passes.  The problem is if you do throw those you have to make them, pure and simple.

Tue, 11/01/2011 - 01:55 | Link to Comment honestann
honestann's picture

Then I guess this was an interception on the 1 yard line plus a 99 yard runback.  Good going, Corzine.

Mon, 10/31/2011 - 13:22 | Link to Comment The Deleuzian
The Deleuzian's picture

Who's next coming up to bat?  There has to be someone on deck or the game can't continue...

Mon, 10/31/2011 - 13:22 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Great job there Corzine.

Mon, 10/31/2011 - 13:41 | Link to Comment Snidley Whipsnae
Snidley Whipsnae's picture

Whats up DCRB? I'm still stacking. :)

This one is for Corzine...

"People of privilege will always risk their complete destruction rather than surrender any material part of their advantage."

John Kenneth Galbraith

 

Mon, 10/31/2011 - 14:01 | Link to Comment Schmuck Raker
Schmuck Raker's picture

"People of privilege will always risk their complete destruction rather than surrender any material part of their advantage."

So I got that going for me...which is nice.

Mon, 10/31/2011 - 14:38 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

@ snidley

Doing alright, thanks.  I hope you are too.

Nice quotation from Galbraith, looks very true for Corzine, who has had multiple opportunities to show what a complete POS he is.  The world's worst?

Drop me a gmail at my name if you would like to visit my blog.

EDIT:

Still stackin'

Tue, 11/01/2011 - 03:26 | Link to Comment Bwahaha WAGFDSMB
Bwahaha WAGFDSMB's picture

+1

Nice quote there

Mon, 10/31/2011 - 15:03 | Link to Comment pelican
pelican's picture

Smuck.  First he screwed NJ now he is moving into screwing up the remainder of the economy. 

Mon, 10/31/2011 - 15:19 | Link to Comment pelican
pelican's picture

I am a beginner when it comes to the economy, however doesn't this mean a bunch of CDS come into play, thus dragging other shitty firms down?

 

Corzine is such a jackass, yet he is still going to make a bundle.

 

The market has only dropped 200 today.  I am surprised this hasn't caused a massive crash.

Mon, 10/31/2011 - 13:24 | Link to Comment Duke of Con Dao
Duke of Con Dao's picture

'He was simply early and will be proved correct'

heard the very same words spoken about John Merriwether. 'if only they had more capital to withstand that August battering...'

Mon, 10/31/2011 - 14:37 | Link to Comment Cplus
Cplus's picture

 

There's a lot more to the LTCM comparison.

If you rememeber, it was Meriwether's investment in BTP Italian bonds financed with Lira repo and hedged with Lira Interest rate swaps that blew them up.

Of course there was also a tax dodge thrown in, in the form of a spurious withholding exemption, all being funded by a carry trade.

 

plus ça change...

Mon, 10/31/2011 - 13:24 | Link to Comment Deadpool
Deadpool's picture

Based on MF Global’s disclosed assets in its bankruptcy filing, it is likely to slot in just ahead of Chrysler as the eighth-largest U.S. bankruptcy.

1) Lehman Brothers Holdings, September 2008: $691 billion in assets

2) Washington Mutual, September 2008: $327.9 billion

3) WorldCom, July 2002: $103.9 billion

4) General Motors, June 2009: $91 billion

5) CIT Group, November 2009: $80.4 billion

6) Enron, 2001: $65.5 billion

7) Conseco, 2002: $61.4 billion

MF Global: $41 billion (as of Sept. 30)

8) Chrysler April, 2009: $39.3 billion

9) Thornburg Mortgage May, 2009: $36.5 billion

10) Pacific Gas & Electric Co., 2001: $36.15 billion

Source: BankruptcyData.com; SEC filings for MF Global asset size

Mon, 10/31/2011 - 13:27 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

In a quarter or two they'll be out of the top 10.

Mon, 10/31/2011 - 14:34 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

I wish I could give you 5 greens for that.  LOL...  Uh, I guess...

Mon, 10/31/2011 - 14:44 | Link to Comment Forgiven
Forgiven's picture

Exactly...JPM, BofA, GS, WFC...don't forget DB, CS, BNP...when this crisis comes to an end the top ten will be measured in how many TRILLIONS they lost in BK.

Bankers should bring brown slacks back in fashion!

Mon, 10/31/2011 - 13:30 | Link to Comment silver500
silver500's picture

JPM top creditor again.  Well done JPM!!

Mon, 10/31/2011 - 13:38 | Link to Comment dwdollar
dwdollar's picture

Haha... 41B is nothing. The US prints that in a fucking day. The only reason the monkey in chief won't bail them out is because the signing of the paperwork would interfere with tee time.

Mon, 10/31/2011 - 13:56 | Link to Comment azusgm
azusgm's picture

Stop the bailing!

Mon, 10/31/2011 - 13:24 | Link to Comment Zero_Sum
Zero_Sum's picture

I hope all the OWS folks are moving over to Corzine's place to protest his $12.1M severance package. I wonder how much the MF Global analysts who warned him that this was a bad idea are going to be compensated when they get sent packing.

Mon, 10/31/2011 - 13:25 | Link to Comment Piranhanoia
Piranhanoia's picture

So let's postulate for a mo.  If one of the 22 dealers has failed due to obvious incompetence, ignorance and stupidity....

Is there even a chance the remaining 21 are not insolvent as well?

Mon, 10/31/2011 - 13:40 | Link to Comment old naughty
old naughty's picture

A very good question. Hummmmmmmmmmmm.

Mon, 10/31/2011 - 13:49 | Link to Comment earleflorida
earleflorida's picture

levered-up @ 40:1 ,... i'm sure the 'others/them', are levitating or better said, straddling -- 25/50:1    

oops,... there goes another rubber-tree plant

Mon, 10/31/2011 - 14:01 | Link to Comment Rynak
Rynak's picture

There's a reason why they're called the "american zombie banks".

Mon, 10/31/2011 - 14:52 | Link to Comment vote_libertaria...
vote_libertarian_party's picture

When you see asset price movement correlation of 0.999999999999999999999999 it does make you wonder.

Mon, 10/31/2011 - 13:25 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

Eurozone blow-up of MF Global will be first of many.

Mon, 10/31/2011 - 13:25 | Link to Comment lolmao500
lolmao500's picture

Now if only he could go as head of Goldman Sachs or JPMorgue to blow them all to hell it would be nice.

Mon, 10/31/2011 - 13:35 | Link to Comment Dr. Engali
Dr. Engali's picture

I'm sure there is a spot at treasury for him.

Mon, 10/31/2011 - 14:35 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

K St.

Mon, 10/31/2011 - 14:53 | Link to Comment css1971
css1971's picture

Treasury?

 

Clearly presidential material! Eh MDB?

 

Mon, 10/31/2011 - 14:10 | Link to Comment Rockfish
Rockfish's picture

He'll be back on CNBC.

Mon, 10/31/2011 - 13:27 | Link to Comment mfoste1
mfoste1's picture

im just waiting for the sec investigation.....

Mon, 10/31/2011 - 13:31 | Link to Comment pauhana
pauhana's picture

Right . . . like that will ever happen.

Mon, 10/31/2011 - 13:52 | Link to Comment earleflorida
earleflorida's picture

start shooting-up some , hopium

Mon, 10/31/2011 - 13:28 | Link to Comment Surly Bear
Surly Bear's picture

Be first, be smarter, or cheat (pick two).

Mon, 10/31/2011 - 13:29 | Link to Comment halflink123
halflink123's picture

I think it was less so this 1 individual bond or another 1 individual security and more the fact that they were levered 40 to 1. Just my 2 cents.

Mon, 10/31/2011 - 13:38 | Link to Comment NotApplicable
NotApplicable's picture

You think the rest of them aren't levered up?

I'd say you're looking at two sides of the same coin. Makes me wonder how many other single issue "trip-wires" lie unseen.

Tue, 11/01/2011 - 03:48 | Link to Comment Bwahaha WAGFDSMB
Bwahaha WAGFDSMB's picture

It's the combination of 40:1 leverage and making bad investments that causes things to blow up.  Leverage is great if your investments only go up.  I am captain obvious.

Mon, 10/31/2011 - 13:31 | Link to Comment The Deleuzian
The Deleuzian's picture

John Corzine would be wise to 'get the hell out a dodge'...I don't know how many 'political friends' he has left in either NYC or DC!

Mon, 10/31/2011 - 13:34 | Link to Comment Bartanist
Bartanist's picture

Hopefully a LOT of his political and financial friends invested with him.

Mon, 10/31/2011 - 13:58 | Link to Comment The Deleuzian
The Deleuzian's picture

We all know the PPT monkeys are on overtime already...Anytime 'dead-debt' rises to the surface, the ringfence/firewall meme comes out swinging!!!

Mon, 10/31/2011 - 13:37 | Link to Comment devo
devo's picture

I mean, I have no hedge fund managing experience, but I could have told you those yields were not going to work out...

Who in their right mind would invest in a fund called "MF Global" led by John Corzine. I mean...seriously...that must have been a lot of senile old lady money.

Mon, 10/31/2011 - 13:51 | Link to Comment Zero_Sum
Zero_Sum's picture

I heard Rod Blagojevich was starting a fund called "Prestige World Wide". I'm in. Boats and Ho's, Bitchez!

Mon, 10/31/2011 - 14:37 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

That was very fuuny.

Mon, 10/31/2011 - 15:09 | Link to Comment pelican
pelican's picture

Lemonheads, Nachos and my Dad's boat.

Mon, 10/31/2011 - 13:40 | Link to Comment NotApplicable
NotApplicable's picture

Well, after Madoff shut down, you know that money had to go "somewhere." I'm wondering how much NJ (and other gov) money got sucked in.

Mon, 10/31/2011 - 14:03 | Link to Comment azusgm
azusgm's picture

What money? That was the problem. There wasn't enough money to keep the game going.

Mon, 10/31/2011 - 13:38 | Link to Comment gratefultraveller
gratefultraveller's picture

Jeebus... those 55 billion € found at HRE's bad bank? Talk about lifting one corner of the carpet

'The controling agency declare for it's defense that important parts of the invoicing process of (HRE's) bad bank had been outsourced to an "external service provider". The explosive aspect: According to an insider this service company is HRE itself.'

http://de.reuters.com/article/companiesNews/idDEBEE79U0AG20111031

Mon, 10/31/2011 - 13:48 | Link to Comment Cangoroo
Cangoroo's picture

Mark to market valuation is no longer necessary according to German GAAP. Models are allowed instead.

Mon, 10/31/2011 - 13:50 | Link to Comment High Plains Drifter
High Plains Drifter's picture

once a member of squid , always a member of squid.....

Mon, 10/31/2011 - 14:05 | Link to Comment tickhound
tickhound's picture

Calamari fritti?

Mon, 10/31/2011 - 14:14 | Link to Comment Miss Expectations
Miss Expectations's picture

That doesn't mean they were still talking to him.  Once an asshole, always an asshole. 

Mon, 10/31/2011 - 13:59 | Link to Comment High Plains Drifter
High Plains Drifter's picture

since it appears that price waterhouse is up to its eyeballs in this mess, if i were working there, i would already be looking for me another job.......

Mon, 10/31/2011 - 14:51 | Link to Comment lolmao500
lolmao500's picture

TD waterhouse?

Mon, 10/31/2011 - 14:01 | Link to Comment Sudden Debt
Sudden Debt's picture

ONCE YOU GO ITALIAN, YOU'RE PEPERONI'D !

 

Mon, 10/31/2011 - 14:37 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

LOL...  Very good!  + 1

Mon, 10/31/2011 - 14:08 | Link to Comment The Deleuzian
The Deleuzian's picture

Bloomberg is going 110% on why this is no big deal...Not even close to the bankruptcies of Lehman, WC, or Enron!!!  Don't worry!  it's all contained!  Kim Kardashian!!!!

Mon, 10/31/2011 - 14:17 | Link to Comment bernorange
bernorange's picture

The "smartest men in the room" aren't learning any lessons.  If they are, they are not aiming for the same outcomes as the world-wide rabble.

www.pmbug.com

Mon, 10/31/2011 - 14:51 | Link to Comment ivars
ivars's picture

All my prediction charts are now in one place without unnecesary text:

http://www.tfmetalsreport.com/forum/2814/ivars-charts

Please visit!

Mon, 10/31/2011 - 15:08 | Link to Comment ItsDanger
ItsDanger's picture

One of the more easier trades recently, shorting Italian bonds when the yield dropped to around 5% recently.  Just shows you how incompetent some managers are even today.

Mon, 10/31/2011 - 15:17 | Link to Comment gatorengineer
gatorengineer's picture

Serious question with US accounting rules, why did they have to mark it to mark it?  Couldnt they consider the euro crisis transitory and mark it at face?

Mon, 10/31/2011 - 16:37 | Link to Comment prophet
prophet's picture

It was borrowed money from people who borrowed the money that was lent out.  Leveraged lending requires a constant assessment of who will lose the most if it collapses.  As you point out, it takes a whole chain of patience to make it work. 

ZH points out that only CBs have deep enough pockets to wait it out - not true - non-levered participants can often afford it.

Mon, 10/31/2011 - 16:02 | Link to Comment Ricky Bobby
Ricky Bobby's picture

All your upside are belong to us. All your downside are belong to taxpayer.

Mon, 10/31/2011 - 16:30 | Link to Comment prophet
prophet's picture

Short duration - is there a cure for that? 

If enough holders of sov's go under will this help allieviate the debt load problems? 

It was a typo, I meant bone crushing trade not bond crushing.

Mon, 10/31/2011 - 20:05 | Link to Comment steelrules
steelrules's picture

Just read that 100's of millions missing from MF Global accounts.

http://dealbook.nytimes.com/2011/10/31/regulators-investigating-mf-global/

 

Mon, 10/31/2011 - 21:17 | Link to Comment azusgm
azusgm's picture

"While the investigation is in its early days, it raises the specter that regulators could sanction the firm or the employees responsible."

Could sanction the firm? What firm? It is BK. Bwahahahahahahahaha!

Then again...the SEC just might do that.

Mon, 10/31/2011 - 20:15 | Link to Comment riley martini
riley martini's picture

 Last week MF Global sold $340,000,000 in bonds rated investment grade by S&P and Moodys . One week before Bankruptcy. Ratings you can count on to be a fraud.

Do NOT follow this link or you will be banned from the site!