Leveraged Up the Wazoo, Corzine Gets His Come to Jesus Moment

Nov 1, 2011
J. Webster
Comments Off on Leveraged Up the Wazoo, Corzine Gets His Come to Jesus Moment

Why is it so terribly interesting to read about the downfall of a firm on Wall Street?

In this terribly good story in DealBook about the collapse of MF Global, we learn how incredibly leveraged up MF Global was on risky European debt and how Jon Corzine thought he could manage those come to Jesus moments when things go bad.

“Until you’ve actually traded and had to deal with one of those come-to-Jesus moments with a bad position,” he said, “and you have to make the decisions about whether to eliminate it, hold it, reduce it — those kind of existential moments involving the people you work with and your firm, those are the kinds of things that really get your attention.”

Turns out he couldn’t handle the Jesus moment after all, obviously. Fortunately, however, MF Global wasn’t nearly as large a firm as Lehman Brothers. Unfortunately, however, MF Global was motherfu#$%*$ leveraged more than even Goldman Sachs.

And while most Wall Street firms sharply ratcheted down their use of leverage, MF Global continued to pile on large amounts of debt. On the eve of its collapse, it had about $34 of debt for each $1 of capital it held, according to data from Keefe, Bruyette & Woods. By contrast, Goldman Sachs’ leverage ratio is $13.50 for every $1.

The combination of potential losses on the European debt and the MF Global’s thin capital cushion is what spooked investors, setting off the crisis. MF Global’s demise was the eighth largest bankruptcy in the country’s history, but with $41 billion in assets it was considerably smaller than Lehman which had assets of $691 billion.

What’s amazing though, is how after Lehman Brothers, after the gigantic, almost world changing financial collapse of 2008, a Wall Street firm could even think of taking such risky bets and be so leveraged up – did they learn anything. This is what’s wrong with Wall Street. This is why all those brave and now very cold souls are occupying Wall Street. Somebody has to stop this. Right?

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