There's been an interesting twist in the fallout from Jon Corzine's "mismanagement" at MF Global. Corzine is the former Democratic governor of New Jersey who, after losing his re-election bid to Republican Chris Christy, took over as CEO at MF Global. Eighteen months later MF Global declared bankruptcy, reporting a "material shortfall" in client funds. The shortfall may be as much a $1.2 billion.
Regulators currently suspect that MF Global — at the time run by Jon S. Corzine, the former Democratic governor of New Jersey — improperly used customer money for its own purposes in the days before filing for Chapter 11 protection on Oct. 31.
Investigators are considering two possible situations. One is that MF Global used the money to meet trading partners’ demands for extra cash, which could come back. The other is that it was used to cover trading losses, which would mean that the money cannot be recovered.
MF Global’s management, however, has maintained that some of the money is still sitting at clearinghouses and banks, according to a person close to the company. Though they have not disputed that some of the money is gone, these executives think that other funds were trapped after the firm rapidly unwound more than half of its trading book as it was collapsing.
No one at MF Global, including its former chief executive, Mr. Corzine, has been accused of wrongdoing.
I can't say I'd be surprised if it turns out no one accused of anything. But I digress. The MF Global collapse illustrates that derivatives are actually quite useful in the real world, and they affect people far away from Wall Street. The MF Global bankruptcy filing has client funds tied up, and Kansas cattle rancher Tim Rietzke is livid.
"I would be hedging some feeder cattle right now, but I'm not going to do it. I'm leaving them exposed to the cash market and I don't like that," Rietzke said.
Rietzke may reside far from the trading pit in Chicago, but he and thousands of other ranchers and farmers across the country are at the heart of futures trading.
With billions of their dollars locked up by MF Global's October 31 bankruptcy filing, they are a key voice in determining if and when the futures business regains its poise and reputation.
"I have no confidence in the market, because it could happen at any other brokerage," Rietzke told Reuters from his 8,000 acre ranch near the southwest Kansas town of Coldwater.
"Derivative" is a dirty word these days. There's a lot of political hay that can be made disparaging derivatives and vilifying traders who deal in them.
Though these often-risky bets were blamed by many for helping fuel the credit crunch and the downfall of Lehman Brothers and AIG, it seems that Wall Street has yet to learn its lesson.
U.S. commercial banks earned $5.2 billion trading derivatives in the second quarter of 2009, a 225 percent increase from the same period last year, according to the Treasury Department.
But for farmers and ranchers, and others on Main Street, derivatives are a way of mitigating risk.
I'm reminded of the Steinbeck novel, East of Eden, that was made into a movie starring James Dean in 1955. It's the story of Cain and Able set in California with Dean playing the part of Cain, renamed Caleb in Steinbeck's yarn. Caleb is not his father's favorite, but he tries. His most ambitiuous scheme to win his father's love involved a investment partnership in which he hoped to make enough money to cover business losses that his father had incurred.
Caleb's plan is to make his father's money back, capitalizing on World War I by selling beans grown in the Salinas Valley to nations in Europe for a considerable premium. He succeeds beyond his wildest expectations and wraps up a gift of $15,000 in cash which he plans to give Adam Trask at Thanksgiving.
Aaron returns from Stanford for the holiday. There is tension in the air, because Aaron has not yet told their father that he intends to drop out of college. Rather than let Aaron steal the moment, Caleb gives Adam the money at dinner, expecting his father to be proud of him.
But Adam refuses to accept it. Instead, he tells Caleb to give it back to the poor farmers he exploited. Adam explains by saying,
I would have been so happy if you could have given me — well, what your brother has — pride in the thing he's doing, gladness in his progress. Money, even clean money, doesn't stack up with that.
How very Hollywood. Guaranteeing farmers a predictable return on their crops is OK so long as you don't make too much money on it. It's a popular narrative for today's Democrats too, one they hope they will deflect another electoral drubbing like the one they suffered in 2010. In fact they're so invested in it that they've gone and thrown their lot in with Occupy Wall Street, and now almost anybody that makes any money is part of the contemptible "1%" — the ones Democrats reflexively accuse of welshing on their fair share in taxes.
Democrats and the Occupiers are embodied in Adam, Caleb's father. In Adam's eyes Caleb robbed the farmers of a big payday when he gambled on the future price of beans and won. But in real life most farmers, ranchers, and many investors are willing to give up the colossal upside in exchange for protection against loss. It's what options (derivatives) are all about.
For instance, there is a fairly common options hedging strategy that protects against a ruinous drop in the price of a stock or a commodity. You buy a "put" option with a strike price at a level that is as low as you are willing to let your investment to fall. Buying the put option gives you a guaranteed minimum price and protects you if the stock price goes below it. If the price of your stock takes a plunge, you exercise the option.
But options cost money. Buying put options will eat into your investment, so you offset the cost of the put by selling a "call." The call option will have a strike price that provides a reasonable but not astronomical gain. Setting the call strike price too high won't get you enough to substantially offset the cost of your put. When the price of your stock takes off, the buyer of the call exercises his option and buys your stock at the strike price, giving you a reasonable but limited return on your investment. The caller gets the colossal upside if there is one. But then, he paid for it.
When Jon Corzine left the governor's mansion New Jersey was in a fiscal crisis. Enter Chris Christy who took on the public sector unions, drastically cut state spending, and began setting New Jersey's fiscal house in order. We see now that Corzine has left quite a trail. After eighteen months with Corzine at the helm MF Global has declared bankruptcy. They can't find $1.2 billion in client funds, and that's even having impact on the agricultural sector.
Corzine is a poster boy for the Democrats. It's his sad misfortune to have graduated from governorship of New Jersey to MF Global, instead of going back to national Democratic politics where mismanagement is hardly ever punished. The politically inclined Corzine bet the firm on European government bonds to the tune of $11.5 billion.
At multiple meetings, Corzine reassured directors that the trades would work out, said the person, who asked not to be identified because the discussions were private. Corzine said the European countries he selected wouldn’t default before the bonds matured, and that the market was mis-pricing the debt, according to the person. Underpinning Corzine’s view was the euro zone’s European Financial Stability Facility, which could backstop government short-term debt through June 30, 2013.
It might have worked had Corzine invested only the MF Global funds, but he went for the leverage and made his bets on margin. In other words, he borrowed the money to invest.
The deal began to unravel in August when the Financial Industry Regulatory Authority told MF Global to add capital to its U.S. brokerage to back the trades. Then on Oct. 24, Moody’s Investors Service downgraded MF Global to one level above junk status, citing its ongoing inability to meet earnings targets and concern that it wasn’t sufficiently managing risk. The next day, MF Global reported its worst-ever quarterly loss.
...
“If MF Global had bought the same trade without leverage, there would have been no issue,” Galper said in an interview.
If client funds can't be located there may be other consequences in store. How very much like our Democratic friends in congress, and the president too. Spending money they don't have is not only not a problem, they'll tell you that it's downright patriotic. They say they are creating jobs, but so far the only jobs created have been in reliably Democratic constituencies. Non-union and non-green need not apply.
Just as Corzine's highly leveraged bet was intended to reverse the sinking fortunes of MF Global, Obama and the Democrats went on a spending binge, betting that it would lock in progressive majorities for a generation and restore the sinking fortunes of the Democratic party.
At least the Democrats can claim they have a solution: Tax the rich. Too bad there aren't enough rich to go around. No such luck for Corzine. He has to locate the $1 billion-plus in still missing client funds.
Um, no.
In other words, he "borrowed" the money to invest.
There. Fixed it for ya'.
Couldn't figure out why you changed the Twain quote.
Ahhh, NOW I get it.
By the way, what's the differance between "insider information" and
"legislated manipulation"? Cuz' EVERYBODY KNOWS that the cost of energy HAS to be artificially inflated, and GE CFL's (mfd. in China/with "rebate") are WICKED expensive. Thank goodness I can still set back my
old school mercury thermostat if the price of MY un-subsidised heating oil
goes up, ...you know...on pre-election pipeline "decision" spec.
Can I STILL get a gub'mint "reimbursement" on a hoveround, a (GE/Pickens)windmill, or a Chevy Volt?
Posted by: CaptDMO | December 02, 2011 at 12:16 PM
Gee I don't now if you can get reimbursed for your windmill, but just think Cap. If Cap and Trade had passed (no pun intended), Solyndra might have been a great investment. I guess that was the plan.
Of course, it was still a great investment for the Democratic party. The administration subordinated the taxpayers' interest in Solyndra to those of that venture capitalist who bankrolls the Obama campaign. No matter what happens, they'll get theirs.
Neat trick, eh?
Posted by: Tom Bowler | December 02, 2011 at 09:16 PM
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Posted by: xmedia | December 31, 2011 at 04:19 AM