The big story yesterday was the bankruptcy filing of MF Global. The news angles to this story include Corzine's reputation, possible disruptions in trading, other firms with possible counter party risk to MF, the bonds the company floated during the summer and a bad trade.
There is no shortage of coverage of all aspects of the news but of most interest to me is the trade made by going long, in some form, debt from several of the PIIGS and Belgium. As I write this there appears to be some question as to the leverage to put the trades on but the notional exposure appears to be $6.3 billion.
The reason the trade is interesting is because of the repeat of one of the most common behaviors that does people in time and again which not simply being wrong but being wrong combined with a grossly oversized bet.
This is something I've written about many times over the years and I always include the fact that this will continue to happen forever. I don't know exactly why participants take on deathblow risk with their trades but they do and every so often it ends very loudly as is the case now with MF.
Zooming out a little bit, an actively managed portfolio is a combination of decisions. No one gets every decision correct. No matter the investor, some number of decisions will be incorrect--this is guaranteed. If you know as a fact that some of your decisions will be wrong and there is no escaping this. And if you know ahead of time you will be wrong some times and obviously you can't know ahead of time which decisions will be wrong then the important thing becomes not letting one of these incorrect decisions sink you.
As obvious as this sounds Corzine is evidence that these types of bets still get made. The trade itself could have worked (per one CNBC report the trade might end up working but on someone else's P&L) it just so happens it didn't which didn't have to be a big deal but for the leverage and what appears to be an unwillingness to take a loss earlier on.
Several years ago a reader was kind enough to share his having put 25% of his portfolio into a biotech stock that went on to have deathblow news from the FDA. This anecdote is much closer to the type of damage someone can inflict on themselves as opposed to levering up several times their equity (there are some exceptions) and then wiping out completely.
This type of wipeout is unnecessary but it happens every so often and will happen again. It is a great example to learn from.
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6 comments:
Without good insider information, acess to hudge amount of capital/Leverage has caused hudge losses for many firms. But with well connected policital connections tax payers will cover these one way or the other.Some minor ones will be sacrificed to mollify the public.
John Corzine made tens of millions at Goldman Sachs. He then went on to be a big spending Senator followed by Governor of New Jersey. As Governor he nearly destroyed New Jersey by making it one of the costliest states to live in with huge property taxes, etc. Not satisfied with almost destroying the State, he now has driven MG Global into bankruptcy. Who has been hurt by all of this?? certainly not John Corzine. A quick check on the internet will find numerous sources which estimate his net worth at 300 million dollars.
That should help soothe his wounded ego. People like Corzine are all about telling everyone else how their money should be spent by the Government because they know that nothing they ever propose will have any impact on THEIR lifestyle.
Gee, that rant felt good this morning! Now for a nice relaxing walk in the woods.
he's a one percenter! heheh.
Roger I hope its OK to post these.
great comments from Brent Arends on Corzine
"We are all Marxists now
But no, I’m not talking about Karl Marx. I’m talking about Groucho: He’s the guy who really predicted how the modern economy would evolve.
MF Global says that it employs about 3,000 people. And these were good — meaning high-paying— jobs. According to the latest filings, the average MF Global employee earned about $46,000 last quarter — or $184,000 a year.
That’s the average. Account for the support staff and so on, and the traders and risk-takers were pocketing serious coin.
It’s pretty much the same across Wall Street. But what are they actually doing? They’re just playing poker against each other. They’re engaged in an “industry” that produces neither iPhones nor brain scans nor pizzas. There is no output. There is no wider social purpose. They just trade paper against one another. Like most of Wall Street, it’s just a zero sum game.
Hard to believe, but there are actual people — lots of people — who think that what the U.S. economy needs is more MF Globals to trade against one another. Then our employment problem would be solved!
Former Fed Chairman Alan Greenspan once told a crowd in Boston that America should pretty much leave manufacturing to China and concentrate on our “core competence” of running financial firms. Like MF Global, no doubt. Or Lehman Brothers.
Me? It just reminds me of the opening sequence of the Marx Brothers classic, “A Night At The Opera.” It was filmed in 1934, at another time when jobs were in desperately short supply.
Margaret Dumont, playing a rich, social-climbing widow, is rebuking Grouch Marx, who plays an adventurer called Otis B. Driftwood. “Mr. Driftwood,” she says severely, “Three months ago you promised to put me in ‘society.’ In all that time, you have done nothing but draw a very handsome salary!”
Grouch looks at her in astonishment. “You call that nothing?”
Let it be said of MF Global: They created nothing and added nothing. But up until today 3,000 employees drew a very handsome salary. Paging Otis B. Driftwood! Your time has arrived.
Some economy
For more check out
...http://www.marketwatch.com/Story/story/print?guid=7541917E-03E4-11E1-B7EF-002128040CF6
I wonder if Bernie Madoff has room in his cell for Jon Corzine? What a POS. 700 million in investors money is missing and the big money boys on Wall Street wonder where are all of the retail investors. The game is rigged.
Oh WOW, Oh WOW, Oh WOW
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