http://www.zerohedge.com/news/2017-01-12/week-later-they%E2%80%99re-dead-fomc-transcripts-reveal-collapse-mf-global-seen-fed
As you know, MF Global experienced a rapid deterioration that led the firm, and the U.S. broker–dealer subsidiary that is a primary dealer, into bankruptcy. In short, investors became skeptical about the viability of the firm given the size of its exposures to European sovereign debt markets, its weak earnings for the third quarter, and the associated downgrades of the firm by several rating agencies. With these events, the firm found itself unable to sustain sufficient financing, even as it attempted to rapidly sell parts of its business and shed assets.
The path of MF Global serves as an example of the vulnerability of firms that are heavily reliant on short-term wholesale funding. As shown in the bottom-right panel, the firm had a narrow equity buffer, and its liability structure was relatively unstable. Indeed, the firm had little longer-term unsecured debt and, since it was not a bank, no retail deposits. Instead, the firm had 61 percent of its liabilities in the form of repo transactions and other trading liabilities.
This structure left the firm very susceptible to a liquidity run in response to any emerging questions about its capital adequacy. Of course, this is the same issue that I noted earlier in the discussion of investor concerns about Morgan Stanley and Goldman Sachs. However, as can be seen in the table, Morgan Stanley has a much larger share of long-term debt as well as some retail deposits. The table also shows the figures for JP Morgan to offer a comparison to an institution with a larger banking operation.
The problems experienced by MF Global raised risks to the Federal Reserve through our counterparty relationship with the firm. Our potential exposures were associated with MF Global’s participation in our securities lending operations, in our operations in Treasury securities, and in our operations in agency mortgage-backed securities. The Desk began to exclude MF Global from some operations last Wednesday and from all operations last Thursday. Yesterday, the Federal Reserve Bank of New York announced that it had terminated its primary dealer relationship with MF Global.
Heading into the market open yesterday, our only exposure to the firm was from seven unsettled MBS purchase transactions. These transactions, which totaled about $950 million, were due to settle as far out as mid-January. To limit the risk to the Federal Reserve from these transactions, on Friday we established a special arrangement for the firm to post collateral to us on a daily basis. Based on yesterday’s events, we exercised our legal authority to terminate the seven trades, and we conducted trades with other counterparties to reestablish the same positions, using the collateral that had been posted by MF Global to cover the additional expense of those replacement trades. Given these steps, we do not expect to realize any losses from our counterparty exposures to MF Global.
MR. FISHER. I would add a fourth factor, which is humility versus arrogance and balanced risk. The principals involved here were extremely arrogant, taking the positions that they had, and were imbalanced in terms of their judiciousness of risks, and I think the markets are well aware of that.
Comments