Published On: Thu, Nov 17th, 2011

A Bet for Bullard: The MF Global Debacle Will Yet Prove to be a Problem for the Markets

James Bullard (St, Louis Fed head) was on TV this morning. He said a number of things that I thought were off base. The biggest was his comment on the collapse of MF Global.

 

 

 

Bullard was pretty smirky about the ending for MFG. He was “pleased” with the outcome. He actually smiled.

I understand why Bullard thinks this is a story with a happy ending. Here we are, three weeks since the demise of the firm and as of yet there has been no crisis that has befallen the markets. Bullard made clear that there has been no bailout of a financial firm this time around and that the system is working as it should.

Okay Mr. Bullard I’ll make you a wager. A six pack of your favorite beer. Give the MFG story another month and it will be a problem. It will undermine markets. It will impact confidence in our financial system. It will impact liquidity. As those things occur it will force both Treasury and the Fed to take actions. While those actions may not take the form of any direct bailout of MFG and/or its customers there will be a significant cost to the broader economy.

I would have agreed with Mr. B if it were not for the problem of $600mm of missing client money. There has been a massive effort by forensic accountants and the FBI to locate the loot. As of last night, no one has been able to find it. Three weeks into this and no one can find it? I would call that a crisis in and of itself.

It is now clear that something has happened that should never have happened. Seg. Account money has been lost. This matter is far from over as Bullard suggests. There will be ripple effects.

I’m amazed that there has not been a market consequence to the MFG affair. It’s possible the larger issue of the ongoing collapse in Europe has, so far, masked the importance of this event.

I’m amazed that the Treasury Deportment has not spoken out after three weeks. Everyone who operates in markets understands risk. But in my mind (and in many others) I went to sleep every night knowing that the money I had had in a trading account was segregated and therefore safe. It’s not possible to do that any longer. That’s a very significant change.

I’m amazed that there has not yet been any evidence of money moving out of second tier brokerage accounts. Should we get a confirmation that money is moving, it’s likely that contagion will occur.

I have no doubt that money in seg. accounts at the likes of Merrill and Morgan Stanley is safe. That does not matter. The cheapest thing one could do is put cash outside of seg. accounts. The most expensive thing one could do is leave it there and face a loss of principal. It’s a very lopsided risk and reward.

Are we on Mr. Bullard?

About the Author

- Bruce Krasting has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work. In January 2009, he started writing his blog, Bruce Krasting. From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments.They expressed their views in global bonds, currencies, stocks, commodities and derivatives. He closed the fund and retired in 1995. Bruce has also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp. He hold a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY. We are very happy that Bruce has allowed us to post his articles here on These New Times, and we think you'll agree that his insights are detailed and often brilliant and he has a easy, readable style. You can read his blog everyday here

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  1. paulejb says:

    It turns out that MF Global was Jon Corzine’s private sector version of Obama’s Stimulus Version 1.0. At least that’s how Joe Biden tells it.

    http://www.youtube.com/watch?v=buRO9TSlScQ&feature=player_embedded#!

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