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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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!

Bartanist's picture

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

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!!!

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.

Zero_Sum's picture

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

pelican's picture

Lemonheads, Nachos and my Dad's boat.

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.

azusgm's picture

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

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

Cangoroo's picture

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

High Plains Drifter's picture

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

Miss Expectations's picture

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

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.......

Sudden Debt's picture

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

 

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!!!!

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

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!

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.

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?

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.

Ricky Bobby's picture

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

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.

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/

 

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.

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.