In the aftermath of what looks like Enron all over again, the pundits on CNBC are asking “How, in the face of the high risk of Euro Zone debt could he think of taking a $6 billion unhedged risk position in Europe.” Read carefully to understand that it isn’t a financial risk that Jon Corzine was betting on, it was political risk from the process that President Obama, Timothy Geithner and Ben Bernanke started to avert Chinese saber rattling on currency and trade; and prop up a badly drunken sailor, our European counterparts. It’s that simple. Despite the simplicity of it, the financials for MF bear looking into for the depths of depravity. So here’s a snap shot of the victim before the car was driven off the cliff. And how apropos that we don’t need midnight for smashed pumpkins on Halloween. 

As I am treated to this morning’s news of MF Global in the BK broiler, I can’t help but focus on the acronym – MF. As I recall, before he was taken by leave for better service to the city of Chicago, Rahm Emanuel, the former White House Chief of Staff, was constantly chided by the President for using this neo-classical urban term of art that calls on the same acronym – MF. It’s probably been uttered a few billion times today in the Windy City by the thousands of former employees of Mr. Corzine’s pig trough when their CBOT electronic swipe cards failed. You know the words. Everybody knows them and has used them at one time or another. And so another MF’er bites the dust. But not before the great swirling tornado of puke and ponzi mania made its impact on unsuspecting tuna buyers who stepped up to buy the scraps after all the fine fatty toro was stealthily hewn from the big eye giant. 

Just a side note, before getting into the Halloween spirit, MF Global Ltd. filed its F-1 Registration statement with the SEC in 2007, a relatively new entity. Here’s how they described themselves. 

“We are the leading broker of exchange-listed futures and options in the world. We provide execution and clearing services for exchange-traded and over-the-counter, or OTC, derivative products, as well as for non-derivative foreign exchange products and securities in the cash market. We provide our clients with access to many of the largest and fastest growing financial markets throughout the world. We believe that we are the largest “specialty” broker operating in our markets.”  “For the three months ended March 31, 2007, based on data provided by the respective exchanges and based on the volume of executed or cleared transactions, we ranked first on the Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange, Commodity Exchange, Inc., a division of the New York Mercantile Exchange, Euronext.Liffe and Eurex.” 

It’s beginning to sound a lot like Enron. Isn’t it? 

Apparently not to Jeffries & Co. In August 2011, Jeffries, the well known investment bank, underwrote more vomit for this modern day Enron called MF to the tune of short run securities totaling $325 million with a coupon of 6.25% due 2016. We all know now that the money was used to pay bills and reserve Mr. Corzine’s $100 million parachute to 1500 Pennsylvania Avenue NW, just down the block from 1600. We’ll that isn’t going to happen now. I mean the appointment. The parachute will probably work for the money though. 

As for the deal of the century, completely subordinated pari passu to other vomit on the balance sheet, unsecured, no guarantees, subject to rate adjustment on ratings adjustments and loaded with 101% repo terms on change of control. We’ll here’s a news flash. They’ve become a debtor in possession in the U.S. Bankruptcy Court Southern District of New York. Does that qualify? 

How about the use of proceeds? I’ve heard of public bailouts like TARP for private companies like GM, but you have to really love the kinsmanship among megalodons like Richard Handler, Chairman and CEO of Jeffries and Jon Corzine. Jeffries underwrote MF’s last vomit of primordial slag with a use of proceeds to “repay outstanding indebtnedness under its [our] liquidity facility.”  

So, in other words, credit lines and liquidity facilities are only confident when the borrower is solvent and are generally called when there’s trouble. Is there any other way to read this disaster?  Or better yet, the conflicts of interest on the cover which purport that: 

“Affiliates of certain of the underwriters of this offering may receive 5% or more of the net proceeds of this offering by reason of the repayment of outstanding indebtedness under our liquidity facility. Accordingly, those underwriters may have a “conflict of interest” within the meaning of FINRA Rule 5121, and this offering will be conducted pursuant to the requirements of that rule.” 

How about, they shouldn’t have the ability to offer the securities period.

Who Moved The Zuccotti Cheese?    

But to a mouse or a rat, “Thy wee-bit housie, too, in ruin!” Or yet by another “For all sad words of tongue or pen, the saddest are these: ‘It might have been.’” Burns or Whittier, take your pick. 

As for the MF mouse’s house, 3,200 1%’er MF employees now in the 99% in the Windy City. This morning, the exchange officials of the CBOT barred MF employees, mind you risk traders that are responsible for trading out of the vomit trough. Another ingenious idea. Freeze them out in the cold until they get picked up roadside like starving Mexican day laborers. Not to worry, Jeffries and Interactive Brokers will take the pick of the litter and leave the rest to join the lines of the unemployed in Zuccotti Park or some other carnival square looking for a barrage of tear gas canisters and rubber bullets. 

Speaking of rubber, here’s a nice look at MF (and let’s emphasize Rahm Emanuel’s version of the urban assault vernacular) Global Holdings Ltd. rubber financial statements and debt. MF is a company who’s sequential annual revenues, mostly made up of commissions from trades had steadily declined from $2 billion in 2008 to $1.38 billion in 2010, without the proverbial uptick from the drop in 2009 for all financial entities across the board. Compensation remained at a frothy $668 million for 2010 despite the 30% decline in revenues from 2008. And only as a fixture of a percentage of revenue would speak to such sickness, in 2010 it was approximately 49% of revenue versus the 44% during their hay day. Talk about your 1% disasters of the universe! As for their last tranche of crap, who in their right mind would buy such rotten tuna? Jeffries and all the other cohorts of course. 

The Real Rats of Zuccotti Park 

In the supplement to MFs prospectus originally dated February 24, 2010, which supplement was filed August 3, 2011, the sole book running manager Jeffries, along with, co-managers, BofA Merrill Lynch, BMO Capital Markets, COMMERZBANK, Nataxis, Lebenthal & Co., LLC, Sandler O’Neill + Partners, L.P. and U.S. Bancorp all stepped up to drill investors to the tune of $325 million in 6.25% Senior Notes due 2016.  Jeffries taking the whopping $284 million for their feeding trough pigs. This pool ranks equal in right to payment and repayment of current and future (there’s a laugher) senior unsecured and unsubordinated indebtedness. 

Here’s the balance of their other debt:

1.875% Convertible Senior Notes due 2016 - $288 million 

9.00% Convertible Senior Notes due 2038 – 188 million

3.375% Convertible Senior Notes due 2018 –  $325 million

On top of which, MF Global carried $96 million of 6% Cumulative Convertible Preferred Stock and $34 million of 9.75% Non-Cumulative Convertible Preferred Stock. The debt service and dividends alone are enough to choke the Giant of Thermopylae and the Kraken all at once. 

Hey Jon, Bernard Madoff ain’t got nothing on you pal. Eat your heart out Bernie. At least these colossal schemers at MF had the sense to actually make a losing trade out of leverage. One thing is for certain, everybody loves a consistent loser like that high brow Corzine. It makes laying off the junk so much easier. And that is exactly what J.P. Morgan did with their $1.2 billion in unsecured paper. If Jon Corzine wasn’t so connected to the idiots in Washington DC, I’d say he wins the prize for The Cooler. Just watch what he does and do the opposite. 

JP Morgan sold off all but $100 million of its $1.2 billion to a syndicate. Smart guys over at JP Morgan. They used MF Global for a day trade and swaps. On that note, there won’t be any Nick Leeson lessons or Jerome Kerviel SoGen follies or Kweku Adoboli currency confetti canons to speak of at JP this week. No, this week, it’s Jon Corzine. If it was Con Jorzine, he’d be in handcuffs right now. 

The Mouse that Roared 

In this post-Lehman world of saber rattling and political demagoguery fired at the likes of Wall Street, it is purely an insane proposition to note that as close as Jon Corzine is to President Obama and Timothy Geithner, that MF (again using Rahm Emanuel’s favorite term), has done exactly what this Administration and Government has decried insane. They leveraged beyond their ability to pay. Worse, every firm that underwrote their crap essentially violated FINRA NTM 10-22 regarding due diligence and the qualified independent opinion that is required in delivering a prospectus. “Lose all your money” risk factors be damned. Everybody uses it the catch all, but not everybody gets to play master of the collapsing universe leveraging the notional and booking it under FASB 159 “Fair Value Option”. Give me a break. And just so I can make a few more enemies here, let Bernie Madoff out of jail as well while you’re at it. Then perhaps all of this insanity will finally make sense, once and for all.

All this from a company sporting on June 30, 2011 total assets of $46 billion of which $11.5 billion were listed as securities owned, $4.9 billion of securities borrowed, $12 billion of securities purchased under repo agreements (there’s that nasty little game that Lehman played on the Repo 105), leaving $709 million in cash and cash equivalents and $11 billion in restricted cash. An idiot can see the leverage here on assets. Now let’s look at the liabilities. $44 billion, including $13.5 billion in customer accounts and another $18 billion in fails to deliver (securities sold under agreements to repurchase – here they are only upside down by $6 billion with only $709 million in cash to cover. 

Here’s the meltdown… bet the Euro zone long… but not long enough for time to be relevant.  

MF Collateral… Damage 

The captions in quotations are excerpts taken from MF’s last 10-Q FPE June 30, 2011. 

“The Company enters into collateralized financing transactions and matched book positions principally through the use of repurchase agreements and securities lending agreements. In these transactions, the Company receives cash or securities in exchange for other securities, including U.S. and European governments, government sponsored entity and federal agency obligations, corporate debt and other debt obligations, and equities. The Company records assets it has pledged as collateral in collateralized borrowings and other arrangements on the consolidated balance sheets when the Company is the creditor as defined in accordance with the accounting standard for transfers and servicing of financial assets. The Company obtains securities as collateral principally through the use of resale agreements, securities borrowing agreements, customer margin loans and other collateralized financing activities to facilitate its matched book arrangements, inventory positions, customer needs and settlement requirements. In many cases, the Company is permitted to sell or repledge securities held as collateral. These securities may be used to collateralize repurchase agreements, to enter into securities lending agreements or to cover short positions. As of June 30 and March 31, 2011, the fair value of securities received as collateral by the Company, excluding collateral received under resale agreements, that it was permitted to sell or repledge was $12,044,793,000 and $9,932,017,000, respectively. The Company sold or repledged securities aggregating $13,385,394,000 and $13,090,024,000, respectively. Counterparties have the right to sell or repledge these securities. See Note 3 for a description of the collateral received and pledged in connection with agreements to resell or repurchase securities.” 

So, in other words, it borrows from Peter to pay Paul until the music stops. I thought only the Federal Reserve could do that into perpetuity. Look at these numbers. All from his holiness’ holy name, Jon Corzine.  He could probably convince Nigerians to give up the 419 scam if they knew a little bit about the notional leverage scam. New Jersey residents hate this guy. Now I know why. Not that I care for Henry Paulson at any length, but I suspect Hank Paulson reviled this magnanimous turd. 

Collateralized Financing Transactions 

“Certain of the Company’s securities borrowed and securities loaned transactions are accounted for as collateralized financing transactions and are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions facilitate the settlement process and require the Company to deposit cash or other collateral with the lender. In securities loaned transactions, the Company receives cash or other collateral in an amount generally in excess of the market value of the applicable securities loaned. The Company monitors the market value of securities borrowed or loaned on a daily basis, with additional collateral obtained or refunded as necessary. Generally, securities borrowed are collateralized with U.S. Treasury and agency securities, mortgage backed securities, equities, and investment grade corporate bonds. In securities borrowed transactions, credit counterparties are central clearers, banks, broker-dealers and can also include insurance companies and pension funds.” 

The Company monitors billions of dollars of potentially toxic and systemic risk? What a relief!!! 

“Credit risk can arise from collateralized financing transactions when the collateral value falls below the value of the receivables and counterparties fail to provide additional collateral. As of June 30, 2011 and 2010, no provision has been recorded against resale agreements or securities borrowed transactions, as amounts were deemed collectible.”

REALLY?!?!, what fiction of the trough of PIIGS, PIBS or other EURO animal acronyms have been deemed collectible by virtue of the CDS spreads denoting sovereign going concern. 

“As of June 30, 2011, the market value of collateral received under resale agreements was $56,999,296,000 of which $516,646,000 was deposited as margin with clearing organizations. As of March 31, 2011, the market value of collateral received under resale agreements was $48,665,649,000 of which $256,288,000 was deposited as margin with clearing organizations. The collateral is valued daily and the Company may require counterparties to deposit additional collateral or return collateral pledged, as appropriate. As of June 30 and March 31, 2011, the market value of collateral pledged under repurchase agreements was $68,404,867,000 and $61,088,346,000 respectively. As of June 30 and March 31, 2011, there were no amounts at risk under repurchase agreements or resale agreements that are accounted for as collateralized financing transactions with a counterparty greater than 10% of Equity.”

What a farce, 10% of equity? What the hell is concentration of risk when there’s negative equity? By the way, look at these numbers, $68 billion in risky assets.

“Resale and repurchase transactions that are accounted for as collateralized financing transactions are presented on a net-by-counterparty basis when the requirements for balance sheet offsetting are satisfied. As of June 30 and March 31, 2011, the Company had securities purchased under agreements to resell of $12,057,793,000 and $9,499,768,000 respectively, which includes the impact of netting for resale agreements classified within segregated securities. Segregated securities are presented on a gross basis on the consolidated balance sheets.”

Look at these insane numbers! 

“The Company also enters into certain resale and repurchase transactions that mature on the same date as the underlying collateral (“reverse repo-to-maturity” and “repo-to-maturity” transactions, respectively). These transactions are accounted for as sales and purchases and accordingly the Company de-recognizes the related assets and liabilities from the consolidated balance sheets, recognizes a gain or loss on the sale/purchase of the collateral assets, and records a forward repurchase or forward resale commitment at fair value, in accordance with the accounting standard for transfers and servicing. For these specific repurchase transactions that are accounted for as sales and are de-recognized from the consolidated balance sheets, the Company maintains the exposure to the risk of default of the issuer of the underlying collateral assets, such as U.S. government securities or European sovereign debt. The forward repurchase commitment represents the fair value of this exposure and is accounted for as a derivative. The value of the derivative is subject to mark to market movements which may cause volatility in the Company’s financial results until maturity of the underlying collateral at which point these instruments will be redeemed at par. At June 30 and March 31, 2011, securities purchased under agreements to resell of $5,233,156,000 and $1,495,682,000 respectively, at contract value, were de-recognized, of which 94.2% and 72.0%, respectively, were collateralized with European sovereign debt, consisting of Italy, Spain, Belgium, Portugal and Ireland. At June 30 and March 31 2011, securities sold under agreements to repurchase of $16,548,450,000 and $14,520,341,000 respectively, at contract value, were de-recognized, of which 69.3% and 52.6%, respectively, were collateralized with European sovereign debt, consisting of Italy, Spain, Belgium, Portugal and Ireland.”

Somebody ought to re-make the movie Repo Man, and call it Reverse Repo Man, a movie about the post-apocalyptic era of blowing through the U.S. dollar like shit through a giant 150 foot tall radio active goose. Also note the term of de-recognizes regarding cork screw reverse repos and books according to fair value – Lehman be damned again. 

“Certain of the Company’s resale and repurchase agreements are carried at fair value as a result of the Company’s fair value election. The Company elects the fair value option for those resale and repurchase agreements that do not settle overnight or do not have an open settlement date, based on the original maturity term stated in the contract, or that are not accounted for as purchase or sale agreements. The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. Changes in the fair value of these transactions are recorded in Principal transactions in the consolidated statement of operations. The Company has not specifically elected the fair value option for certain resale and repurchase agreements that are settled on an overnight or demand basis as these are carried at contract value, which approximates fair value. At June 30, 2011, the fair value of these resale and repurchase agreements was $11,974,402,000 and $8,667,980,000 respectively. At March 31, 2011, the fair value of these resale and repurchase agreements was $11,898,502,000 and $7,232,434,000 respectively. Changes in the fair value of these transactions are recorded in Principal transactions in the consolidated statement of operations. During the three months ended June 30, 2011, the amount of losses and gains related to resale and repurchase agreements were ($2,335) and $3,099, respectively. During the three months ended June 30, 2010, the amount of gains and losses related to resale and repurchase agreements were $4,854 and ($1,902), respectively.”

But here again is the big grand daddy of the grape juice manufacturing factory… the fair value option in full force and effect. Look at the marginal gains and losses on these classifications. It’s as if there is nothing going on other than humongous over leverage with very little re-pricing or valuation or marking to the market of these securities based on observable inputs. If the gains and losses were so little, why the bankruptcy then? 

But What’s the Real Deal Here?

Is it about making bad ideological bets, buying villas in Lake Como or saving the mold infected Blarney Stone or the Acrapolis (yes, the a-crap-o-lis)? Not from my perspective. Just like Enron, hubris is just a catalyst to make certain the train runs off the tracks. As Dr. Hannibal Lechter quipped, to Agent Starling’s wrong response of what makes Buffalo Bill chose his victims, “No, that is incidental. What does he covet, Clarice?” 

From my perspective the centerpiece of MF-BK it isn’t about Con Jorzine or Jon Corzine or the 50% write down in Greece last week that became the nail in the coffin for this Obamanite’s worst nightmare. Nor is it the nightmare to any trader thinking they can rely on a CDS market, including the empty promises of the ISDA. For what is truly a default?  Its about Jon Corzine, Treasury Secretary and keeping Tim Geithner and Ben Bernacke’s Euro Rescue Mission alive and well in the face of Chinese saber rattling. It isn’t arms for hostages, but its close. Using the already broken American capital markets system to hoist more bad business on a burning heap of unemployment and horrendous risk modeling, the academic economists of the beltway still have their claws in major Wall Street players like Con Jorzine. He will be well rewarded for his efforts and he will get a job in Washington, DC very, very soon and you can bet the farm on that one. 

So, here’s the real dope here on MF and Jon Corzine. As for me, I connect the dots and say, well, let’s follow Jon’s best friend Tim Geithner as he muddled through the Euro Zone panic with Ben Bernanke’s printing press, saving one bank at a time with U.S. taxpayer supported funds from the Fed.  Now let’s look at Jon Corzine’s rationale. He said on CNBC almost a year ago that he believed in the Euro Zone success despite the alarming warning signs and continued to buy sovereign debt nevertheless. But that’s too much to believe. Especially from a guy who used to co-chair Goldman Sachs with of all people, Henry Paulson. And let’s say that Jon Corzine’s mantra for going long the Euro Zone, in the blatant face of default, is as hard to believe that any reasonable person could or even would stake his or her entire career and reputation on such tomfoolery. Let’s go even further and say that such person is responsible for making that bet in the land of vomiting, rioting and debt loads exceeding GDP by orders of magnitude over the norm. Just what was Jon Corzine thinking as he walked the room of Damocles?  I’ll tell you what he was thinking. The same thing the Administration and Tim Geithner is thinking, keep the broken carousel spinning and make sure nobody touches our failures because we’re bigger than TARP, Solyndra, Fannie Mae, Sallie Mae, Lehman, Merrill, BofA, MF Global and all the other MFing scandals that are just waiting to come to light through the newly formed Super Committee on Global Financial Disasters. 

What Jon Corzine was thinking was a spot as Secretary of Treasury. Corzine for Geithner? Before this disaster, and in concert with the Key Man risk outlined in the $325 million MF pig vomit, Jon Corzine was rumored to replace Tim Geithner. And why not? President Obama recruited Corzine to raise funding for his RE-ELECTION campaign from where? From the 1%’ers of the banking industry. According to Bob Holt of New Jersey News Room, Jon Corzine had met with Barack Obama secretly, on and off over the last few months. Does this coincide with Tim Geithner’s wife and son hightailing it back to New York City for the benefit of family and schooling of the younger Mr. Geithner? Possibly. 

According to the revised Prospectus on MFs last tranche of pig vomit, “[T]he interest rate applicable to the notes will be subject to an increase of 1.00% upon the departure of Mr. Corzine as our full time chief executive officer due to his appointment to a federal position by the President of the United States and confirmation of that appointment by the United States Senate prior to July 1, 2013.” 

Here’s one final thought that ought to get Dylan Ratigan out of his chair again regarding the concomitant ills of mixing politics and capital markets. In May 2010, Elise Young reported for NJ.com regarding Jon Corzine’s campaign contributions, “[T]hat The former governor also stopped contributions to candidates in 13 congressional districts facing Election Day in November. A spokesman said that Corzine, defeated for re-election in November after spending $27 million of his personal fortune, is researching whether the pay-to-play orders he signed as governor could conflict with his new role as CEO of MF Global Holdings, which may have business ties to New Jersey government. ‘He hasn’t taken his wallet and gone home,’ spokesman Josh Zeitz said. ‘MF Global is a large firm that has a huge list of clients. We need to make sure that we aren’t somehow bound up with a client who does business with the state. We need to make sure there’s no relationship, for instance, between the pension fund and any of our clients.’” 

I have two words for this kind of crap, Adverse Selection. It is a virus that has invaded the United States all the way back to Affirmative Action and has found its way into our financial markets. Dylan Ratigan and Jimmy Williams have said it best. Get money out of politics any way you can. It is and has become the anathema to our very way of life. Don’t believe me? Just ask 3,200 newly unemployed MF’ers in Chicago who will be heading straight to Zuccotti Park without their swipe cards, ready to join the ranks of the 99’ers.