MF autopsy

Scott Skyrm's new book the The Money Noose is a fascinating read (at least for those who enjoy finance related topics) detailing the events which led up to the 2011 demise of broker MF Global. 

A brief review of the story:  in 2010 Jon Corzine was named the CEO of broker MF Global.  At the time MF was struggling due to high costs and low interest rates and was in danger of being downgraded by the ratings agencies.  Corzine was uniquely positioned for this role as he had previously served as the managing partner at Goldman Sachs (prior to being elected as Senator and later Governor of NJ).  His plan was to transform the mid sized broker-centric MF into a full service investment bank modeled on Goldman.  However he was in a race to avoid the ratings agencies downgrading MF to non-investment grade.  An event which would preclude MF from becoming a first tier financial firm.

In an effort to boost MF's revenues until his proposed changes could be effected Corzine and a small trading team effected larger and larger trades using MFs money.  The trades that they engaged in consisted of buying distressed European debt (from Portugal, Italy, Ireland, and Spain - four of the PIIGS) with the understanding that the EU had effectively insured this debt.  Corzine's team purchased substantially more distressed debt than MF had funds to pay for.  They did this by borrowing money from other brokers and then collateralizing the loans using the debt that they had just purchased.  It is actually a bit more complicated than this - but that is the idea. While in theory the debt that MF purchased was insured against default - MF nevertheless fell prey to it. 

In 2011 the markets became nervous about the PIIGS possibly defaulting and the prices of the bonds that MF had purchased fell (even if they were effectively insured).  MF was forced to post more and more of their own funds as additional collateral to guarantee the broker loans.  Eventually these collateral requirements strained MFs ability to raise cash.  With MF struggling both with revenues and overextended on this trade they became victim to what amounts to a bank run - as their counterparties began reduce lending lines to MF and increased collateral requirements on them.  When the ratings agencies finally downgraded them the wheels came off and MF was in a life struggle to raise cash to keep going.

In the last days of MF as they fought to keep themselves afloat funds were taken from customer accounts and used to cover MFs obligations.  Whether this was done intentionally or not and who was involved in authorizing and moving the funds is still an open question.  When MF finally declared bankruptcy it was discovered that their customer accounts were missing approximately USD 891 MM.

Skyrm is well suited to tell this story as in his previous employment at Newedge he headed a fixed income / repo desk - so he knows the market well.  Overall I found the book fascinating with the most interesting portion being the few weeks before the blow up - seeing what was effectively a slow motion bank run.   If you liked When Genius Failed (about Long Term Capital Management) then you will like this story as well.  Interestingly Corzine shows up in both books.

My one criticism is this.  In telling the story Skyrm was faced with a bit of a dilemma.  The exact mechanics of the trades in question and some of the accounting issues which would eventually bite MF are a bit complex.  Should he explain the mechanics in detail so the reader has a full understanding - but at the risk of losing some readers?  Or should he try to simplify the story somewhat for the lay reader?  I would have preferred that he leaned a little harder in the first direction.  I think he simplified a bit too much.  But that is a small criticism.  I recommend this book.

* In the interests of transparency I previously worked with Skyrm and a few of the characters in the book at Fimat / Newedge.  I don't know him that well but we did have some interactions.