As Repeatedly Warned, Quarter End Window Dressing Key Factor In MF Global's Demise

Tyler Durden's picture

Was it just two weeks ago when we penned "Another Quarter, Another Blatant Window Dressing By The Primary Dealer Banks To Make Their Balance Sheets Seem Strong", the same post in which we said, "We have made it clear time and again, that this chart [see below] demonstrates nothing short of the end of quarter window dressing, when PDs convert their asset holdings into cash to make their Tier 1 Capital much more robust than it truly is. After all, none other than JPM and Citi were praising just how prepared for Basel III they are with their "sterling" capitalization ratios... which were only sterling courtesy of precisely the highlighted window dressing which occurs each and every quarter. We expect nothing less from Bank of America and Morgan Stanley when they report their own numbers in the coming days. We also expect the regulators to do absolutely nothing to prevent this blatant abuse of fiduciary duty which has no other purpose than to hide the true sad state of America's banking system." Ironically, we have just found out that had regulators not only listened to us over the two years we have been pointing this out, but also done something on it, MF Global would likely not have filed for bankruptcy. Here is the WSJ, confirming all our worst fears: "For the past two years, MF Global Holdings Ltd. may have disguised its debt levels to investors by temporarily slashing the debt it was carrying before publicly reporting its finances each quarter, according to an analysis by The Wall Street Journal. The activity, referred to in the financial industry as "window dressing," suggests that the troubled financial firm was shouldering more risk and using more borrowed funds to facilitate its trading than investors could easily detect from the firm's regulatory filings. And scene: but wait, there's more. As we have shown over and over and over, this has continued for 8 quarters in a row since Lehman first exposed this criminal activity. Sure enough, another company just went bankrupt because of the SEC's gross and criminal negligence, incompetence, and overall corruption.

For the visual learners, here is what we charted and wrote two weeks ago, before virtually anyone had heard of MF Global.

Chart 1: cumulative Primary Dealers assets by week. The red line demonstrates the end of quarter asset holdings, and the arrow shows the Q3 end position. What is of note is that not only the PDs close Q3 with the smallest non-cash asset position in the entire quarter, but that their total asset holdings dropped from $291 billion on August 24 to $202 billion on September 28, a massive window dressing drop of nearly one third. What is also very notable is just how long the window dressing practice has been going on for. Naturally, the first week following the EOQ window dressing has seen the PDs promptly ramp up their asset holdings by a good $24 billion from the Q3 minimum of $202 billion to $226 billion. We expect this number to grow to nearly $300 billion in the coming weeks.

Chart 2: this chart removes any noise (and doubt) and shows just the minimum, maximum and end of quarter position of PD assets. There is absolutely no mistaking what is going on. Beginning in Q1 2008, with just one exception (Q3 2008, when Lehman blew up and killed the whole window dressing practice as PDs then had other more pressing concerns on their hands), every quarter PD asset holdings have closed their quarterly books with disclosed assets at or just near the quarterly minima, with min to max swings as large as $126 billion (Q4 2010). The past quarter saw the PD community liquidate assets into the quarter end to the tune of $93 billion from the intraquarter highs of $295 billion hit on July 27, 2011. If there was any Evidence A to be presented in a court of law, this would be it.

And here is where the Journal comes in:

In each of the past seven quarters, from late 2009 to mid-2011, MF Global's quarter-end borrowings were an average 16% lower than the quarterly average, according to the Journal's analysis. The quarter-end numbers were lower than the peak for each quarter by an average of 24%, according to the analysis.


For example, in 2010's third quarter, MF's short-term borrowings were listed as $18.7 billion when it reported to shareholders. During the quarter, however, those borrowings peaked at $28.4 billion—34% higher—and averaged $24.4 billion during the three-month period, according to the Journal analysis. Short-term borrowing typically pumps up risk-taking, allowing banks to make bigger trading bets.


Window dressing isn't illegal, but it can mask a financial institution's true levels of borrowing and risk-taking. That is an issue of particular concern with MF Global, where borrowings fueled large trades on European sovereign debt that helped lead to the firm's demise.


"Every quarter, seven quarters in a row, it's always lower," said Charles Mulford, an accounting professor at the Georgia Institute of Technology. "It sounds like they are actively managing their [borrowing] to see that the level is lower when they report to shareholders."

And so on.

Yet despite this persistent evidence presented by Zero Hedge, we are confident that the regulators will do nothing, and we are even more confident that another small to medium Primary Dealer will, as a result of this "enabling" behavior, file for bankruptcy within the next 3 to 6 months.

Thank you Mary Shapiro and thank uber-regulator, Ben Bernanke.

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Goldtoothchimp09's picture

false quotes are supposed to be illegal - false trading to create volume is supposed to be illegal

False finacial statements via window dressing and other schemes is A-ok.  Just don't do more than 5 day trades within a 3 day window.  They'll close down your account!

sqz's picture

Nice article! This is the reason why I read ZH.

Thank you again for all your hard work.

Michael's picture

Thank God the SEC doesn't enforce any regulations. Keeping those scumbags on a stable footing is not in my best interest.

Mauibrad's picture

"Window dressing" isn't near as bad as what's indicated here: 

Congress and the commentators are scurrying all over the place without focus.  MFG and their Custodian are probably appreciating the lack of focus.

Dr. Engali's picture

What I don't understand is why there isn't even a market blip on this news. You would think people would be saying get me the fuck out and give me my cash.

JLee2027's picture

Wait till tomorrow's customer liquidation.

ViewfromUndertheBridge's picture

You've answered your own knows, s.o.p.

Zer0henge's picture

So is JEF in the same stinkhole, and will that CNBC pissant David Faber call back that ratin agency guy and question him again for downgrading JEF by implying that the rating agency is comitting some kind of ratings game against JEF?  Faber maks me almost as sick as that fat, dead and rotting corpse Haines did.

firerx's picture

God's gonna get ya for that LOL :P

Mohan's picture

"We also expect the regulators to do absolutely nothing" As Bill Black would say - there are no more regulators in US.

lolmao500's picture

Margin call biatches!

MF Global Clients Face Day of Reckoning as Margins Call

Call it the mother of all margin calls: Up to 50,000 former customers of bankrupt broker MF Global must find some $1 billion in additional collateral almost overnight, or be forced out of their trades.

Come Friday, with the mass transfer of commodity trading accounts from Jon Corzine's fallen firm to six of its erstwhile rivals, margin clerks will be wrapping up a reckoning of how much additional money is needed to cover millions of positions. Clients who can't quickly meet their margin will have to liquidate, making for a tumultuous day's trade.

JLee2027's picture

Customers will be shafted and markets will be impacted. Oh yes, the CFTC approved this.  Crooks.

Schmuck Raker's picture

And this, which I'm holding between my thumb and index finger, is the World's Smallest Violin...

Smithovsky's picture

Great story, thanks for pasting the link.

This, along with NFP should make for a pretty wild Friday.  

Milton Waddams's picture

Given that regulators seem disinterested in the operation, it seems like a value-added strategic decision to obfuscate risk.  Similar to trolling the SEC's enforcement website to see what the 'dog catchers' are on the look out for...

Bolweevil's picture

Lost is the idea of "investment". Happily replaced by gaming. Prey on weakness, oversight and neglect instead of backing a winner.

Missiondweller's picture

I'm always amazed how much I learn on this blog. Thank you Tyler.

Caviar Emptor's picture

Yesterday I "window-dressed" my checking account so I could sign a big ticket lease on an expensive car. That afternoon I "window-dressed" some credit applications, tax returns and my medical history. It's a common practice, but it needs to be done well. 

Dr. Engali's picture

I window dressed myself yesterday and the neighbor called to complain. Go figure.

Caviar Emptor's picture

Are you a "Cross-window dresser"? 

Sequitur's picture

Tylers one and all: well done.

slewie the pi-rat's picture

yes;  this is excellent publishing!

even the wsj can understand

Josh Randall's picture

Occupy the SEC (not the football conference)

DarkestPhoenix's picture

While we're at it, occupy that football conference, too.  Pumped up and inflated by the ESPN MSM!!!  They're sooooooooo good, yeah, right, like Florida playing in the Orange Bowl isn't a home game for them.  While other major conferences have almost an equal winning percentage traveling halfway across the country!  There's a reason why you never see a home-and-home between Arizona and Michigan that isn't the first game of the year.  No way does any warm-weather team want to travel north of the Mason-Dixon past September.  Just look at the Cowboys' win percentage anywhere in the north in November for evidence of this phenomena.

slewie the pi-rat's picture

how much is that dog-shit in the window?

mberry8870's picture

And therein lies the problem; soveriegn immunity. You can't touch these incompetent fools. The SEC and CFTC will always contniue on with their feckless ways because they can and will. Simply, completely pathic. This is exactly what got Bennet 12 yrs. at Refco for essentially doing the same thing. History may not repeat itself but it certainly does rythme. 

Schmuck Raker's picture

'Atta boy Tyler. Keep up the good work.

lolmao500's picture

All that won't matter if Israel attacks Iran and oil goes to $150+ a barrel. What was left of the world economy will blow up.

Cursive's picture

What more evidence does the public need? The FIRE industries are but a leach upon productive labor. The rent seekers have sucked the life blood from us all. Submit or throw off this yoke once and for all.

El Gordo's picture

No do you really thing to government regulators are going to do anything to expose their master's major donors and bundlers?

honestann's picture

SEC's gross and criminal negligence, incompetence, and overall corruption

The SEC is indeed gross, criminal, negligent and corrupt.  However, since its purpose is to aid the corruption of large financial firms, the SEC is not incompetent.  After all, the SEC has made it possible for dozens of financial mega-firms to be utterly and completely corrupt without suffering negative consequences.  To put it another way, the SEC is utterly captured.

oldman's picture

Tyler, please--------

Does anyone believe that the 'regulators' knew nothing of this? It was probably their collusive idea in the first place. There is no capital with this amount of leverage--it is the sub-prime debacle all over again in SPADES

We have been pointing out nothing that was not known to all              thanks for your work         om

Out9922's picture

What a great article, ZH.  Thank You

Element's picture

You just got to learn to look the other way in this whirld ... all is well citizens ... go on about your business ...


Zodiac's picture

Doesn't Sarbanes-Oxley have a little provision about executives that sign fraudulent financial statements?  Isn't that what these 'window-dressed' financial statements are?

Chippewa Partners's picture

You guys and girls need to look at the market and only read ZH.  Don't you see the bullish news here?   To the moon boys and girls!!!   

Bolweevil's picture

So, all the dumb fuckers in the mainstream financial media need to do is troll ZH to get ideas an voila! Why don't one a yous Tylers goes and get a real job?

merizobeach's picture

"the SEC's gross and criminal negligence, incompetence, and overall corruption."


Indictments, bitchez!  The Court of ZH might not have jurisdiction over the Gov, but nevertheless, the latter has been tried and found guilty.

midgetrannyporn's picture

De fraud, it stinks.

chinaboy's picture

Note that only China fired its regulators ( My own take is that it is just a gesture). The point here is that western nations from the U.S. to Europe still hide their heads in the sand with regards to regulation.


Regulation is a sham. PDs are adicted to leverage. Disaster is matter of time.

karzai_luver's picture

I saw a bankster dressed as a regulator, so what..............


dcb's picture

yes I was wondering why folks weren't talking about end of quarter window dressing along with the trading, it was the main reason i expected a good october. without the QE this stuff has to happen to drive merket up, of course it's a different story if you can leverage 40/ 1


great to know primary dealers are allowed to lever up so much, wonder about that fed oversight (not)

dcb's picture

it's why I am always short heading into end of quarter, esp last two weeks.