Friday, October 28, 2011


Now we know what MF stands for!

MF Global’s debt rating was cut last night by both Fitch & Moody’s. This begs a few questions:

Do we still listen to the ratings agencies?

The better question to ask is Why do we still listen to the ratings agencies?

I would think the only reason is because most investors just sit around all day with their hands in their pants waiting for someone else to do all of the hard analysis. The stock analysts do the same thing waiting and hoping that some other poor schmuck has done the work for them. Its an incredible circle jerk of idiocy.

What happened from the time MF Global blew up Tuesday till last night made Fitch & Moody’s wake up?

Does the fact that MF is an out of control debt and leverage machine just dawn on them while watching that riveting Game 6 of the World Series last night?

Does anybody on this planet actually do any credit analysis other than skim the headlines on Twitter?
One only has to look at MF Globals financials and filings to show the incredibly stupid 33 to 1 leverage that MF and Corzine built up since his hiring.

All of the analysts had this puppy wrong. Every one of them even after Tuesday’s implosion had this wrong. The simple fact that counterparty risk was more of an issue then the European Sovereign Debt per the analyst community was ludicrous. The idea that $6.3B in ESD was not an issue in the implosion is bottomline lazy analysis. Its easy to say counterparty and ratings risk. Its not easy to analize. It takes hard work running the figures.

One of the reasons counterparties today are not trading with MF is the fact that they were downgraded last night. The other reason is that they are tapped out via the REPO Market.

When companies catch a ratings downgrade they immediately have higher cost of capital. Counterparties demand more capital via collateral calls and demand larger haircuts/funding in the REPO market. Both of these are major MF Global problems at the moment. This was exactly what happened to AIG.

Back to the downgrades.

Why the downgrade from Fitch & Moody’s?

EUROPEAN SOVEREIGN DEBT Exposure! This was and is the problem but listening to the analyst community it wasn’t a factor in MF’s problems. MF Global owned $6.3B in face value ESD. Most of this debt was probably held on margin - leveraged to the hilt via the over night Repo Market.

I can here it now. MF Global and Dexia are isolated cases Its not a big deal. Buy the banks! Buy the financials!

This is just one of many implosions we will likely see over the coming months as obviously the lessens from Lehman/Bear/AIG/Wamu/Wachovia were never learned. Why learn from mistakes when Socialism and bailouts are public policy in market circles?

First Rule: Dont listen to sell side analysts.

Second Rule: It’s always the debt that matters.

Third Rule:   Leverage is like sex. When its good its great. When its bad lets get out of town.

Fourth Rule: Lose Repo Funding - Call the undertaker.

Fifith Rule:   If you are stupid enough to forget/break the first four rules make sure you drag enough people into the abyss with you.

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