This Sunday’s New York Times Business Section carried an interesting column (“Sad Proof of Europe’s Fallout.”) It essentially claims that MF Global “was felled by over-the-top leverage and bad derivative bets on debt-weakened European countries.” It goes on to say that one of the lessons of MF Global’s failure was that when Euro-shocks “reach our shores, they usually ride in on a wave of derivatives.”
Pretty compelling stuff.
Except that it’s not true.
MF Global did not use derivatives to make its bets on European sovereign debt. As the company stated in its third-quarter earnings release on October 25th:
“As of September 30, 2011, MF Global maintained a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity), including Belgium, Italy, Spain, Portugal and Ireland.”
So it seems clear that MF’s European sovereign debt holdings were just that, bond positions financed via repo transactions. Repos, of course, are NOT OTC derivatives. (They’re also not listed derivatives.) They are basic tools of corporate finance commonly used to finance cash bond positions.
We would have thought that, with a little checking, this point would be pretty obvious to one and all. We would have also thought that reporters (and consultants who are used as expert sources on financial matters) would know that because MF Global was an SEC registered Broker-Dealer and CFTC registered Futures Commission Merchant, regulators at all times had full transparency into the nature and extent of MF Global’s trading and risk positions.
In short, there were no derivatives, no opaque financial instruments and no hidden risks in the story of MF Global’s downfall. There were, though, a lot of inaccuracies in the way that story was told.