Posted: 05 Jun 2012 08:05 AM PDT
The report Giddens released Monday is thorough and confirms many of the observations made in journalistic accounts of the firm’s collapse, particularly regarding inadequate risk and accounting controls, JP Morgan’s aggressive posture greatly increasing the liquidity squeeze. It also makes clear that this is an interim report, and unlike the trustee’s report on Lehman, says that reaches no conclusion regarding legal strategies, including whether prosecutions are warranted.John Giddens, the bankruptcy trustee in MF Global, garnered headlines Monday by saying that he will decide in the next 60 days whether to filing suits against Jon Corzine and other officers for breach of fiduciary duty and negligence and against JP Morgan if he is unable to come to a settlement. JP Morgan so far has returned roughly $518 million in MF Global assets and $89 million in customer monies, a meager recovery relative to $1.6 billion in missing customer funds.
But a stunning revelation that comes early in the account and is central to the failure of the firm does not get the emphasis that it warrants.
What is not surprising but nevertheless important is the way the document depicts MF Global as a train wreck waiting to happen. Ironically, the firm is a casualty of ZIRP. MF Global historically had gotten most of its income from low risk activities, such as interest on customer margin. Its net interest income from those sources fell by $3.5 billion from 2007 to 2011. Corzine had embarked on a strategy of turning the firm into a full service investment bank, an approach we deemed doomed to fail. To get there, Corzine took an approach that was similar to the one of Lehman and Bear, who were vastly less behind the industry leaders than MF Global was: putting lots of their chips in high risk, high profit potential activities (for Bear and Lehman, real estate; for MF Global, prop trading, specifically, Corzine’s Eurobond trade) in the hope that they could grow more rapidly than the top firms and thus close the gap with them.
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