Congressional inquiries

  • 30 Jan 2012 at 6:25 PM
  • Credit

MF Global Was Doing Great Until It Wasn’t

“Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone,” but every banker also seems to forget the modern corollary, which is that, if you have to prove you are worthy of credit, however good may be your arguments, don’t do it over email. Here’s someone who forgot that and does it surprise you to find his name in the same sentence as “House Financial Services Subcommittee on Oversight and Investigations”?:

A week before MF Global Holdings Ltd. collapsed, its chief financial officer told Standard & Poor’s in an e-mail that the futures broker had “never been stronger.”

S&P provided the House Financial Services Subcommittee on Oversight and Investigations with an excerpt of the e-mail from MF Global CFO Henri Steenkamp. S&P also informed the panel that Jon Corzine, then MF Global’s chief executive officer, met with its analysts on Oct. 20 to reassure them that his $6.3 billion bet on European sovereign debt was no threat to the firm, according to a Jan. 17 letter obtained by Bloomberg News.

U.S. lawmakers will turn their attention to the role of the ratings companies in the failure of MF Global at a Feb. 2 hearing after summoning Corzine, the former governor of New Jersey and Goldman Sachs Group Inc. co-chairman, to two hearings in December. S&P ranked MF Global as investment grade until its failure, while Moody’s downgraded it to junk status four days earlier.

“MF Global is in its strongest position ever,” Steenkamp told S&P on Oct. 24, according to the letter to Representative Randy Neugebauer, a Texas Republican, from Craig Parmelee, a managing director at S&P in New York.

Who can understand the workings of an MF Global? Not me. Apparently they had a money vaporizing device, which in its final days was being manned by employees not wholly familiar with its proper operation, and which caused some unpleasantness when it was aimed at clients’ money. Still to a first approximation it seems reasonable to think that poor foolish-sounding Steenkamp was basically right. MF Global had some assets and some liabilities and its assets exceeded its liabilities. It had a short-term reasonably safe bet on some European government bonds that proved reasonably profitable, and that bet was funded with matched-maturity funding that was reasonably stable until it wasn’t. Then everything went south, that matched-maturity funding was pulled, MF Global needed to sell assets and post more collateral to remain in business, and in the confusion someone accidentally turned on the vaporizer. Read more »