MF Global filed for bankruptcy protection today. Its flagship management had an impressive resume, headed by John Corzine, the former governor of New Jersey and past co-chairman of Goldman Sachs.
Just as in Bear Stearns day, credulous markets did not see it coming. If there was ever any doubt about the inability of markets to see the future, just read this, from Bloomberg:
MF Global’s 6.25 percent notes due 2016, which traded at 43 cents on the dollar earlier today, fell to 35 cents after the bankruptcy filing, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds traded as high as 104 cents as of Sept. 7.
Get that? Its bonds were trading above par as recently as September 7th.
MF Global, like Lehman Brothers before it, had its roots in commodities trading, founded as a sugar brokerage by James Man in 1793. It was another of the vast network of brokerages that arose with imperial capitalism in the age of British Empire, that are now plying the same waters as investment bankers. It’s most recent major acquisition was the failed commodities brokerage Refco, Inc.
When Bear Stearns rapidly collapsed early in 2008, very few sensed that it was just a spark to what would become a raging inferno. Panic didn’t truly set in until Lehman Brothers fell about six months later.
MF Global’s failure is considered the first casualty of the European debt crisis. It held some $6.3 billion in sovereign debt from the likes of Italian, Spanish, Belgian, Portuguese and Irish debt. Notice the absence of Greece from the list.
The first inklings of Bear Stearn’s precarious financial condition were revealed by the failure of two subprime mortgage funds holding collateral debt obligations in mid-2007.
MF Global had designs on becoming a mid-level investment bank, sort of like Bear Stearns had designs on becoming something more than an also-ran in the big five of the US investment banking community. Bear Stearns was much larger than MF Global at the time of their respective collapses, but the drive to power always yields excessive leverage. Bear Stearns was at roughly 35:1 before its collapse.
History doesn’t repeat. But it is cyclical, not linear and progressive. This may be the first of the failures as history cycles back to a financial crisis, or it may be an isolated incident, for now.
But it does reveal what will likely be the source of the next crisis in confidence–sovereign debt. Subprime mortgages specifically, and residential mortgages generally, will not be the arena of battle the next time around. Government insolvencies, in the US and the Continent and even Japan, will be the source of the pain next time. That’s what happens when private risk-taking enjoys public underwriting, and if the first stage of the crisis stood for anything, it stood for the idea that the public holds the bag for the poor risk management of the investment bankers standing on the vanguards of the West’s capitalist impulses.
The financial crisis is not going away until there is a complete reordering of world power away from rich, stagnant and dying economic systems to young, vibrant and ascendant economic systems. The financial system is just, for now, the focal point for the gradual power accretion and deletion. It’s no accident that the EU went hat in hand to China in order to fund their new fantasy stability fund.
The Chinese have a long memory, stretching back much further than European and American colonialism at the turn of the twentieth century, when the colonial powers took advantage of the collapsing Qing dynasty to carve out areas of influence, colonies really, along its coasts and waterways (e.g., Hong Kong, Macau). If China saves Europe, there can be no doubt that it will do so at a steep cost to European, and likewise American, status and influence.