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Kai Ryssdal: What could actually have been a scary day in the financial markets to start the week passed with barely a hiccup. A company called MF Global filed for Chapter 11 bankruptcy this morning. Nothing unusual about all that. Happens all the time.
Except this particular filing for this particular firm turned on miscalculations about European debt, a healthy dose of Wall Street hubris and the expectation that somebody’d be there to bail ’em out when the time came.
For the details, we’ve got our New York bureau chief Heidi Moore on the line. Hey Heidi.
Heidi Moore Hey Kai.
Ryssdal: So first of all, I suppose the nuts and bolts: What was it that this company did?
Moore: Well a lot of people wouldn’t have heard of it. MF Global trades commodities: wheat futures, pork bellies, that kind of thing. And it usually helps institutions do that, so regular people don’t do business with it. But the only reason anyone would have heard of this who’s not in finance is that it’s run by Jon Corzine, who’s the former CEO of Goldman Sachs, former governor of New Jersey. And what’s interesting about this as well is that MF Global has a history of getting into trouble. In fact, back in 2008, they had a rogue trader — they lost $141 million on wheat futures. They survived, but clearly, they didn’t learn the lesson.
Ryssdal: Well, so get us to today. What happened that they came to such woes?
Moore: What they did was they took too much exposure to European government debt. And you know everyone’s been suspicious about that when it comes to big banks, like Bank of America or Morgan Stanley or JPMorgan. But no one thinks about how that affects smaller firms, like MF Global. So MF Global managed to accumulate $6.3 billion of European government bonds, which is really impressive considering that at its biggest this year, MF Global was worth, as a firm, $1.3 billion. So five times their size, they piled this stuff on, and the basic thing they said to investors was, ‘Hey don’t worry. Europe’s going to get a bailout; we’re going to be fine. No way can this go wrong.’
Ryssdal: Key point, right? They borrowed to buy this debt that is in bad shape, and then said to the people who are buying their own bonds, we’re going to get bailed out, don’t worry about it.
Moore: Right. And investors said, we’ve seen this movie before. In fact, they’ve probably seen “Margin Call,” the movie, which is exactly this plot, and they said no way. And they started backing away. Research analysts started to take notice; Moody’s cut MF Global’s debt to junk last week. And after that, it was just an orderly unwind. It was like the weekend of Lehman Brothers — if no one had panicked.
Ryssdal: It is, one can say, MF Global was small enough to fail, not too big to fail?
Moore: That’s exactly right. And in many ways, it’s a very satisfying morality tale. We’re in this time of Occupy Wall Street, a lot of people are already dissatisfied with Wall Street in general, and this is moral hazard — excessive risk-taking. Here, the firm fails, it happens in an orderly way, it doesn’t take down the financial system and everyone feels that this is the way things are supposed to work. We’re not supposed to stop financial firms from failing, but if they must fail — due to their own actions — shouldn’t it be this way? In a way that doesn’t hurt too many other people?
Ryssdal: Yeah, here’s the unknowable, though: We don’t know how many other MF Globals are out there.
Moore: Right. We have absolutely no idea. Think about how long it took for people to realize that MF Global had picked up a bet that was five times its own size. Or think about Dexia, the French bank that no one saw in trouble until the last minute. There are a lot of these bets that happen in the financial system that don’t come to light until it is at the point of just a massive crisis for that firm. And you have to believe, just by the numbers, that there’s more of this out there than we know about.
Ryssdal: Heidi Moore in New York on the MF Global story for us. Heidi, thanks a lot.
Moore: Thank you, Kai.