There are those who say that markets are smart, and that the people who run trading companies are among the smartest of them.  And very often, we see that they're wrong and smart people and companies do incredibly stupid things.

One of the reasons why so many companies just about imploded in the fall of 2008 was leverage.  You had companies like Lehman, Bear Stearns, and AIG levered up 30 to 40 to one.  At a 30 to one leverage ratio, a decline of a little over three percent would wipe out all equity.  At a 40 to one ratio, a 2.5 percent decline would do the same thing.

So you would think that smart people running smart companies would have learned their lesson.

You'd be wrong.

MF Global, which touts itself as a company that "helps clients discover and capitalize on market opportunities by providing actionable insight, market expertise, and deep liquidity" is in big trouble.  It's run by the former head of Goldman Sachs, Jon Corzine.  Corzine was also the former governor of New Jersey and was a senator from that state before he won the governor's seat.

We'll set aside whether politicians are smart for a minute.  But it's clear that MF Global touts itself as a smart company, and with his experience at the top of Goldman, Corzine's no dummy.

Then why, less than three years after the financial crisis of 2008, did MF Global make the same mistakes that Bear Stearns, Lehman Brothers, and AIG made?

MF Global is a company that's likely in its death throes.  The stock has flirted with the ten dollar mark, and in August, it was trading at around $7.50 a share.  Today, it closed at $1.70 a share.  When a stock price gets this low, it's next move is typically to zero.

Why the plunge?  For the same reason that AIG, Bear Stearns, and Lehman Brothers saw their stock price plunge.  MF Global is overleveraged.  According to Bloomberg, it has a leverage ratio of around 40 to one.  And guess what some of the assets MF Global has invested in?

The equivalent of the subprime mortgages that brought down Bear Stearns and Lehman Brothers -- European sovereign debt.

So, another supposedly smart company did exactly the same things as supposedly smart companies did in 2008.  They overleveraged themselves and they bought risky assets with the money they borrowed.  The losses in those risky assets may wipe out all of their equity.

Hopefully, this time, the government won't have to bail them out.  But the situation with MF Global should provide those who call for deregulation a pause.  The concept behind deregulating companies is that smart companies run by smart people know better than government bureaucrats. 

MF Global shows that's not always true.  Even more disturbing is that they are doing the same things that brought about the financial crisis less than three years later.


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