A pretty serious bankruptcy. The ‘firm’ was large. Corzine, you would have thought, after his ‘experiences’ watching and losing money in Long Term Capital Management’ in 1998 would have seen the similarities. LTCM placed massive leveraged bets on the Russian rouble just before Russia defaulted…sovereigns never default right?

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.

However, that happened to a bunch of people today with the bankruptcy of MF Global ($MF). Traders couldn’t access their accounts and the trading MF did was liquidation only, meaning closing positions. I feel bad for the employees of MF Global. They didn’t have a hand in running the company into the ground.

This dislocation is only a short term operational problem. Money in clearing firms is segregated away from the assets of the firm itself. Traders don’t worry about that. But when assets get frozen up and you need to post margin on positions it’s a royal pain in the you know what.

The market decline today wasn’t about MF Global. It was about continued worry in Europe. The Europeans papered over their problems by throwing more money at it. Do you really think the Italians can continue to auction of debt at 6% interest rates and pay for it? Not a chance. The broader market isn’t affected by one futures firm. The only reason it’s a big story is they are led by a former Goldman CEO, and former government official (Senator, Governor) that was rumored to become a Treasury secretary.

MF Global went bankrupt for the same reason a lot of clearing firms go under. They chase yield. All the guys like me that have excess money in their account after their positions are margined give firms a chance at some cash flow. The firms that go bankrupt use that money to buy overnight treasuries and earn some interest on it. The problem today, no one is paying any overnight interest so that cash flow stinks.

When you are an operation like MF Global, you might do some financial budgeting based on earning a certain return on assets. When you don’t earn that return, you need to bump up the risk you take to earn more yield. In MF’s case, instead of buying US Treasuries, they decided to buy European securities. What could go wrong?

A haircut that’s what.

Boom went their balance sheet. Now they are done. Refco and MF Global followed a similar strategy. They rolled up IB’s and then tried to sell a lot of value add products and generate cash flow from deposits and commissions. In Refco’s case, fraud brought them down. MF just made some really poor business decisions.

Those of us in the know in the futures industry never thought MF was a particularly clean house anyway. My friend Dan Dicker from New York can tell you chapter and verse about their reputation on the NYMEX/COMEX floor. It wasn’t very good.

I mean, what did you expect? Their CEO ran the state of New Jersey into the ground. His claim to fame was front running customer business at Goldman before he became a US Senator. All you have to do is read “When Genius Failed”. Goldman downloaded the positions of LTCM before they lent them the money, then pressed the positions and caused them to go bankrupt. They took the other side as they blew out and made a ton of dough. Karma sucks. What did Corzine run better? MF or NJ?