Monday, 31 October 2011 18:32

The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications Featured

Time Sensitive Note: All paying subscribers are strongly urged to review the "Latest Subscription Documents" section in the right hand margin of the home page. This is strategic time to reinstitute positions while IV has been crushed and underlying prices have increased against the fundamentals and the macro backdrop. New subscription content will be added withing 24 hours.

For those who do not know, I was a real estate investor between 2000 and 2006. By 2006, I came to the realization that there were no longer profitable deals to be had on a sound risk/reward basis, and the entire Ponzi scheme looked to be ready to do the Humpty Dumpty thing. So, I took a year off to raise my brand new baby girl, and came back to pursue plans to start a hedge fund that focused on shorting the FIRE sector and European banks - basically any and everybody who ever did business with me and my colleagues in real estate - the writing was evidently on the wall for anyone who bothered to look at walls.

Those who have followed me for a few years know my mantra, and for those that don't, review my early thoughts and calls on Europe and the global FIRE sector. At a fundraiser that MF Global threw in Rockefeller Center's rolling skating rink, I sat down with the then CEO of MF Global and his wife and informed them of my plans. They sincerely wished me luck and told me to let them know when I got started (I would speak to them on and off annually at the skating rink event or over lunch). I said nothing then, but I was highly suspect of the firms prospects going into what I saw was a risky asset firestorm of a correction. As it turned out, it appears I may have had a point. Even more interesting is the fact that I was the only one that I knew of who proclaimed that Fed ZIRP policy was truly poison laced in Myrrh. Contrary to that espoused by ink stained ivory towers of academia and those who so often correct in the Sell Side, ZIRP is killing the banks while regulatory capture is hiding the metastizing tumors. I also now a few who used to work in the risk departments of MF (yes, they did have one) and they said that Goldman/governer guy was the one that ran MF into the ground. Accordingly, MF was a good brokerage, but he came in and tried to make them bankers and traders, which they were not (at least they weren't good ones, anyway). By forcing the firm to carry inexperienced proprietary risk, he doomed the firm (according to this insider).

Hmmmm... Up is down, and down is up, I bendeth you over if you spilleth my cup! Again, as excerpted from There’s Something Fishy at the House of Morgan":

Again, I have warned of this occurrence as well. See my interview with Max Keiser below where I explained how the Fed's ZIRP policy is literally starving the banks it was designed to save. Listen to what was a highly contrarian perspective last year, but proven fact this year!



Provisions and charge-offs: I have been warning about the over-exuberant release of provisions to pad accounting earnings since late 2009!

Declines in provision was one of the major contributors to bottom line. JPMorgan reduced its provision for loan losses to $1.2bn (0.7% of loans) in Q1 2011 from $7.0bn (4.2% of loans) in Q1 2010 and from $3.0bn (1.8% of loans) in Q4 2010 while charge-offs declined to $3.7bn (2.2% of loans) in Q1 2011 from $7.9bn (4.4% of loans) in Q1 2010 and from $5.1bn (2.9% of loans) in Q4 2010. Although banks delinquency and charge-off rate has declined, the extent of decline in provisions is unwarranted compared to decline in charge-off rates. As a result of higher decline in provisions compared to charge-offs, total reserve for loan losses have decreased to 4.3% in Q1 from 5.3% in Q1 2010 and 4.7% in Q4 2010. At the end of Q1 the banks allowances to loan losses is lowest since 2009.

Although the reduction in provisions has helped the banks to improve its profitability it has seriously undermined the banks’ ability to absorb losses, if economic conditions worsen. As a result of under provisioning for the past five quarters, the banks Eyles test, a measure of banks’ ability to absorb losses, has turned to a negative 7.7% in Q1 2011 compared with +6.4% in Q1 2010. A negative Eyles test has serious implications to shareholders – the losses from banks could not only drain entire allowances for loan losses which are inadequate but can also wipe off c7.7% of shareholder’s equity capital. The negative value of 7.7% for JPM’s Eyles is the lowest in this downturn.

MF Global Files for Bankruptcy; Shares Remain Halted

MF Global Holdings filed for Chapter 11 bankruptcy protection in New York on Monday morning, after an effort to sell itself to Interactive Brokers Group failed.

MF Global [MF 1.20 --- UNCH ] had a tentative deal to sell assets to Interactive Brokers [IBKR 15.55 0.33 (+2.17%) ] as of late Sunday, but the agreement fell apart as talks continued overnight, said people familiar with the matter. Discussions ended around 5 a.m. ET, one of these people said.

MF Global had been considering filing just its holding company for bankruptcy protection and then executing the sale. That plan is now off the table, one of the people said.

This person said MF Global's parent company would be included in the bankruptcy filing. Voluntary bankruptcy petitions for MF Global Holdings and MF Global Finance USA hit the docket in a U.S. bankruptcy court in Manhattan mid-morning on Monday.

The Chicago Mercantile Exchange said on Monday that customers of broker-dealer MF Global were limited to liquidating their positions. The exchange, which owns the Chicago Board of Trade, said it would no longer recognize MF Global, which has filed for Chapter 11 bankruptcy protection, as a guarantor for floor trading.

... "It was quite difficult to get our money out on Friday, because they had a lot of redemption calls," a trader, whose firm used MF Global as a brokerage said. "The company is not initiating any new position. They are trying to close down positions that they already have with clients that are open."

At MF Global's London office, in Canary Wharf, staff were coming and going from the office as normal at Monday lunchtime.

There was a tense atmosphere and most declined to speak to

"We're not allowed to speak to you; so you can probably read into that what you will," one MF Global worker told

The last set of statements are teiling, indeed. MF Global is a mini-Lehman, and while many may not be taking MF Global's demise as seriously, it definitely is. They died from the same disease that afflicts much of Wall Street, and most of European banking. They are smaller, that's the only real difference - and the asset management company that they were spun off is doing just as bad. I said it before, and I'll say it again, Europe is housing Lehman Brothers x 4!

From ZeroHedge: Presenting The Bond That Blew Up MF Global

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 (in which MF held 91% of its ITA exposure), 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. It also sets up a rather useful lesson for those pushing for EFSF leverage to buy risky sovereign debt - but given today's issue demand, perhaps that is moot.

Hmmmm! I remember over the summer, when MF probably put these trades on, I warned about Italy sparking France while NEARLY EVERYONE ELSE was still focusing on Greece! Reference the following excerpt from Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head.

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

So, how accurate was I? Well, we'll see in a few... In this morning's headlines:

So, What's the Next Shoe To Drop? Read on...

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

Now, let's refresh the output from And The European Bank Run Continues...and more importantly BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional, I strongly urge those who haven't to click upon said link and download your intellectual weapon of choice!) where I modeled Greek losses on BNP.  Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)This scenario was run BEFORE the Greek bonds dropped even further in price...


Using more recent market inputs (you know, assuming this stuff was Level 1), we get the following...


Notice here the base case TEC impairment is now approaching the adverse case from just a few weeks ago - and this is using market pricing, not some pie in the sky model!

I have not recalculated the adverse scenario in this example, but you can simply use your imagination, or download the model and run it for yourself.

A Greek default with haircuts somewhat inline with market prices will wipe out 13% of BNP TEC, with a more severe cut (quite likely) taking out nearly 20%. This is not even glancing upon the many problems we discussed in our forensice reports (File Icon French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers,File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers).

Now, if the ZH referenced report above is accurate (and I believe it is) the banks are going to try to delever by selling assets in the open markets (all at the same time, selling the same assets to the same pool of potential buyers at the same bad times). This means that the prices used to populate this model are probably still too optmistic. Even if they weren't, look at the capital short fall the Greek default will leave BNP with assuming our institutional bank run thesis holds true and they see a slight withdrawal of liquidity of 10% this year and 15% next (knowing full well the numbers for Lehmand and Bear were much, much higher than that before they collapsed). First, a refesher on our European bank run theory expoused 5 months ago...

    1. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
    2. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
  1. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
    1. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

And the BNP results????


Half trillion euros here, half trillion euros there... Sooner or later, we'll be talking about some real money! Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional).

On Derivatives Implosions and Debt Destruction...

Just like the US banks and EU leaders have somehow gamed (or at least tried to game) the CDS market into a sham, they look to do the same in the discorporation of those entities who have been destroyed by the highly deflationary forces taking hold. To wit: MF Global Creditors Led By JPMorgan

The following are MF Global Holdings’ largest unsecured creditors and shareholders, according to the company’s bankruptcy filing and related court papers submitted today in U.S. Bankruptcy Court in Manhattan.

Unsecured creditors rank behind secured lenders in getting repaid in a bankruptcy, and are ahead of preferred and common shareholders.

Unsecured Creditors:

JPMorgan Chase & Co. (JPM)’s JPMorgan Chase Bank, bondholder trustee, $1.2 billion.

Deutsche Bank AG, trustee for $1.02 billion in bonds:

Deutsche Bank Trust Co., bondholder trustee for 6.25% notes, $325 million bondholder trustee for 3.375% notes, $325 million bondholder trustee for 1.875% notes, $287.5 million bondholder trustee for 9% notes, $78.6 million.

From ZeroHedge, we are sourced the ISDA "determinations committee":

Americas Voting Dealers
Bank of America / Merrill Lynch
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Société Générale


Voting Dealers
Bank of America / Merrill Lynch
BNP Paribas
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Société Générale


More from Reggie Middleton...

The Street's Most Intellectually Aggressive Analysis: We've Found What Bank of America Hid In Your Bank Account!

This Bank Is Much Worse Than the Rest and the (Guaranteed?) Bust Will Probably Be Funded Right Out Of Your Bank Account!

Last modified on Tuesday, 01 November 2011 12:06 | This email address is being protected from spambots. You need JavaScript enabled to view it.