MF Global Shines A Light On Monetarism's Incapacity To Enhance The Real Economy

The temptation to compare any financial institution’s failure to those that preceded the 2008 crisis and panic are reasonable.  It is easy to classify MF Global as 2011’s “Lehman” event, just as it was to use the same term to describe Dexia a few weeks ago.  The use of the term “this year’s Lehman” is somewhat misplaced simply because its users are looking for an event that kicks off another crisis or panic.  Instead of using “Lehman” to describe a potential inflection point that propels the crisis into panic, it might be better to see MF Global as AIG.

The comparison to AIG is not to say that MF Global was as interconnected, that its failure will be as devastating, or that it is the straw that breaks the European camel’s back.  The urge to see the past in the present is historically valid, but it will never be exactly alike (Mark Twain had this right).  Rather I think the comparison is useful in that AIG taught the wider world what was really rotten at the core of modern finance, namely hidden risks that were shockingly existential.  MF Global’s failure importantly shows that none of the lessons have been heeded in the days since, providing a somewhat unique window into the real dangers that still lurk hidden in the shadows.  More than that, though, MF Global demonstrates an obvious shortcoming of the financial system as it relates to the real economy.

ZeroHedge posted the bankruptcy affidavit of MF Global’s President and Chief Operating Officer Bradley I. Abelow, drawing attention to Section E, item 33 on page 13.  Mr. Abelow makes the following statement under oath:

“On September 1, 2011, MF Holdings announced that FINRA informed it that its regulated U.S. operating subsidiary, MFGI, was required to modify its capital treatment of certain repurchase transactions to maturity collateralized with European sovereign debt and thus increase its required net capital pursuant to SEC Rule 15c3-1.” [emphasis added]

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