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The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It’s Potential Ramifications of Lehman 2.0!!!

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Forthose who do not know, I was a real estate investor between 2000 and2006. By 2006, I came to the realization that there were no longerprofitable deals to be had on a sound risk/reward basis, and the entirePonzi scheme looked to be ready to do the Humpty Dumpty thing. So, Itook a year off to raise my brand new baby girl, and came back to pursueplans to start a hedge fund that focused on shorting the FIRE sectorand European banks – basically any and everybody who ever did businesswith me and my colleagues in real estate – the writing was evidently onthe wall for anyone who bothered to look at walls.

Those who have followed me for a few years know my mantra, and for those that don’t, review my early thoughts and calls on Europe and the global FIRE sector.

At a fundraiser that MF Global threw in Rockefeller Center’s rollingskating rink, I sat down with the then CEO of MF Global and his wife andinformed them of my plans. They sincerely wished me luck and told me tolet them know when I got started (I would speak to them on and offannually at the skating rink event or over lunch). I said nothing then,but I was highly suspect of the firms prospects going into what I sawwas a risky asset firestorm of a correction. As it turned out, itappears I may have had a point. Even more interesting is the fact that Iwas the only one that I knew of who proclaimed that Fed ZIRP policy wastruly poison laced in Myrrh. Contrary to that espoused by ink stainedivory towers of academia and those who so often correct in the SellSide, ZIRP is killing the banks while regulatory capture is hiding themetastizing tumors. I also now a few who used to work in the riskdepartments of MF (yes, they did have one) and they said thatGoldman/governer guy was the one that ran MF into the ground.Accordingly, MF was a good brokerage, but he came in and tried to makethem bankers and traders, which they were not (at least they weren’tgood ones, anyway). By forcing the firm to carry inexperiencedproprietary risk, he doomed the firm (according to this insider).

Hmmmm… Up is down, and down is up, I bendeth you over if you spilleth my cup! Again, as excerpted from There’s Something Fishy at the House of Morgan“:

Again,I have warned of this occurrence as well. See my interview with MaxKeiser below where I explained how the Fed’s ZIRP policy is literallystarving the banks it was designed to save. Listen to what was a highlycontrarian perspective last year, but proven fact this year!


Provisionsand charge-offs: I have been warning about the over-exuberant releaseof provisions to pad accounting earnings since late 2009!

Declinesin provision was one of the major contributors to bottom line. JPMorganreduced its provision for loan losses to $1.2bn (0.7% of loans) in Q12011 from $7.0bn (4.2% of loans) in Q1 2010 and from $3.0bn (1.8% ofloans) in Q4 2010 while charge-offs declined to $3.7bn (2.2% of loans)in Q1 2011 from $7.9bn (4.4% of loans) in Q1 2010 and from $5.1bn (2.9%of loans) in Q4 2010. Although banks delinquency and charge-off rate hasdeclined, the extent of decline in provisions is unwarranted comparedto decline in charge-off rates. As a result of higher decline inprovisions compared to charge-offs, total reserve for loan losses havedecreased to 4.3% in Q1 from 5.3% in Q1 2010 and 4.7% in Q4 2010. At theend of Q1 the banks allowances to loan losses is lowest since 2009.

Althoughthe reduction in provisions has helped the banks to improve itsprofitability it has seriously undermined the banks’ ability to absorblosses, if economic conditions worsen. As a result of under provisioningfor the past five quarters, the banks Eyles test, a measure of banks’ability to absorb losses, has turned to a negative 7.7% in Q1 2011compared with +6.4% in Q1 2010. A negative Eyles test has seriousimplications to shareholders – the losses from banks could not onlydrain entire allowances for loan losses which are inadequate but canalso wipe off c7.7% of shareholder’s equity capital. The negative valueof 7.7% for JPM’s Eyles is the lowest in this downturn.

MF Global Files for Bankruptcy; Shares Remain Halted

MF Global Holdings filed for Chapter 11 bankruptcy protection in New Yorkon Monday morning, after an effort to sell itself to Interactive BrokersGroup failed.

MFGlobal [MF 1.20 — UNCH ] had a tentative deal to sell assets toInteractive Brokers [IBKR 15.55 0.33 (+2.17%) ] as of late Sunday, butthe agreement fell apart as talks continued overnight, said peoplefamiliar with the matter. Discussions ended around 5 a.m. ET, one ofthese people said.

MFGlobal had been considering filing just its holding company forbankruptcy protection and then executing the sale. That plan is now offthe table, one of the people said.

Thisperson said MF Global’s parent company would be included in thebankruptcy filing. Voluntary bankruptcy petitions for MF Global Holdingsand MF Global Finance USA hit the docket in a U.S. bankruptcy court inManhattan mid-morning on Monday.

TheChicago Mercantile Exchange said on Monday that customers ofbroker-dealer MF Global were limited to liquidating their positions. Theexchange, which owns the Chicago Board of Trade, said it would nolonger recognize MF Global, which has filed for Chapter 11 bankruptcyprotection, as a guarantor for floor trading.

…”It was quite difficult to get our money out on Friday, because theyhad a lot of redemption calls,” a trader, whose firm used MF Global as abrokerage said. “The company is not initiating any new position. Theyare trying to close down positions that they already have with clientsthat are open.”

At MF Global’s London office, in Canary Wharf, staff were coming and going from the office as normal at Monday lunchtime.

There was a tense atmosphere and most declined to speak to

“We’re not allowed to speak to you; so you can probably read into that what you will,” one MF Global worker told

Thelast set of statements are teiling, indeed. MF Global is a mini-Lehman,and while many may not be taking MF Global’s demise as seriously, itdefinitely is. They died from the same disease that afflicts much ofWall Street, and most of European banking. They are smaller, that’s theonly real difference – and the asset management company that they werespun off is doing just as bad. I said it before, and I’ll say it again,Europe is housing Lehman Brothers x 4!

From ZeroHedge: Presenting The Bond That Blew Up MF Global

Reaching for yield (and prospectively capital appreciation) while shorteningduration had become the new ‘smart money’ trade as we saw HY creditcurves steepen earlier in the year (only to become the pain trade veryquickly). The attraction of those incredible yields on short-datedsovereigns was an obvious place for momentum monkeys to chase and itseems that was the undoing of MF Global. The Dec 2012 Italian bonds (inwhich MF held 91% of its ITA exposure), as highlighted in today’sBloomberg Chart-of-the-day, appears to be the capital-sucking instrumentof doom for the now-stricken MF. As if we need to remind readers, thereis a reason why yields are high – there is no free lunch – and whilesome have already leaped to the defense of the bet-on-black Corzine riskmanagement process with comments such as ‘He was simply early and willbe proved correct’ should remember that only the central banks havebottomless non-mark-to-market pockets to withstand the vol. It also setsup a rather useful lesson for those pushing for EFSF leverage to buy risky sovereign debt – but given today’s issue demand, perhaps that is moot.

Hmmmm!I remember over the summer, when MF probably put these trades on, Iwarned about Italy sparking France while NEARLY EVERYONE ELSE was stillfocusing on Greece! Reference the following excerpt from Wednesday, 03August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

Incase the hint was strong enough, I explicitly state that although thesell side and the media are looking at Greece sparking Italy, it isFrance and french banks in particular that risk bringing theFranco-Italia make-believe capitalism session, aka the French leveragedItalian sector of the Euro ponzi scheme down, on its head.

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

So, how accurate was I? Well, we’ll see in a few… In this morning’s headlines:

So, What’s the Next Shoe To Drop? Read on…

Forthose who claim I may be Euro bashing, rest assured – I am not. Just aweek or two later, I released research on a big US bank that will quitepossibly catch Franco-Italiano Ponzi Collapse fever, with the prodocument containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers,be sure to be prepared. Puts are already quite costly, but there areother methods if you haven’t taken your positions when the research wasfirst released. For those who wish to subscribe, click here.

Now, let’s refresh the output from And The European Bank Run Continues…and more importantly BoomBustBlog BNP Paribas “Run On The Bank” Models (they range from free up to institutional, I strongly urge those who haven’t to click upon said link and download your intellectual weapon of choice!) where I modeled Greek losses on BNP.  Below is sample output from the professional level model (BNP Exposures – Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail…(Click to enlarge to printer quality)This scenario was run BEFORE the Greek bonds dropped even further in price…

Using more recent market inputs (you know, assuming this stuff was Level 1), we get the following…

Noticehere the base case TEC impairment is now approaching the adverse casefrom just a few weeks ago – and this is using market pricing, not somepie in the sky model!

Ihave not recalculated the adverse scenario in this example, but you cansimply use your imagination, or download the model and run it foryourself.

A Greek default with haircuts somewhat inline with market prices willwipe out 13% of BNP TEC, with a more severe cut (quite likely) takingout nearly 20%. This is not even glancing upon the many problems wediscussed in our forensice reports ( French Bank Run Forensic Thoughts – Retail Valuation Note – For retail subscribers, Bank Run Liquidity Candidate Forensic Opinion – A full forensic note for professional and institutional subscribers).

Now,if the ZH referenced report above is accurate (and I believe it is) thebanks are going to try to delever by selling assets in the open markets(all at the same time, selling the same assets to the same pool ofpotential buyers at the same bad times). This means that the prices usedto populate this model are probably still too optmistic. Even if theyweren’t, look at the capital short fall the Greek default will leave BNPwith assuming our institutional bank run thesis holds true and they seea slight withdrawal of liquidity of 10% this year and 15% next (knowingfull well the numbers for Lehmand and Bear were much, much higher thanthat before they collapsed). First, a refesher on our European bank runtheory expoused 5 months ago…

    1. Let’s Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
    2. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
  1. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
    1. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

And the BNP results????


Halftrillion euros here, half trillion euros there… Sooner or later,we’ll be talking about some real money! Since the problems have not beencured, they’re literally guaranteed to come back and bite ass.Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas “Run On The Bank” Models (they range from free up to institutional).

On Derivatives Implosions and Debt Destruction…

Just like the US banks and EU leaders have somehow gamed (or at least triedto game) the CDS market into a sham, they look to do the same in thediscorporation of those entities who have been destroyed by the highlydeflationary forces taking hold. To wit: MF Global Creditors Led By JPMorgan

The following are MF Global Holdings’ largest unsecured creditors and shareholders, according to the company’s bankruptcy filing and related court papers submitted today in U.S. Bankruptcy Court in Manhattan.

Unsecuredcreditors rank behind secured lenders in getting repaid in abankruptcy, and are ahead of preferred and common shareholders.

Unsecured Creditors:

JPMorgan Chase & Co. (JPM)’s JPMorgan Chase Bank, bondholder trustee, $1.2 billion.

Deutsche Bank AG, trustee for $1.02 billion in bonds:

Deutsche Bank Trust Co., bondholder trustee for 6.25% notes, $325 millionbondholder trustee for 3.375% notes, $325 million bondholder trustee for1.875% notes, $287.5 million bondholder trustee for 9% notes, $78.6million.

From ZeroHedge, we are sourced the ISDA “determinations committee“:

Americas Voting Dealers Bank of America / Merrill Lynch Barclays Citibank Credit Suisse Deutsche Bank Goldman Sachs JPMorgan Chase Bank, N.A. Morgan Stanley Société Générale UBS


Voting Dealers Bank of America / Merrill Lynch Barclays BNP Paribas Credit Suisse Deutsche Bank Goldman Sachs JPMorgan Chase Bank, N.A. Morgan Stanley Société Générale UBS

To suscribe to our research services, click here. This will be a very, very profitable quarter!

More from Reggie Middleton…

The Street’s Most Intellectually Aggressive Analysis: We’ve Found What Bank of America Hid In Your Bank Account!

This Bank Is Much Worse Than the Rest and the (Guaranteed?) Bust Will Probably Be Funded Right Out Of Your Bank Account!

French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good ‘Ole Lehman Collapse Days!

The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It’s Potential Ramifications of Lehman 2.0!!!

[Zero Hedge]

Did Bernanke Permanently Cripple the Butterfly That Is US Housing?

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by Reggie Middleton

Note: Tune into Bloomberg TV at 1:12 pm EST to see me discuss the ins and outs of real estate Hopium on the “Fast Forward With Lisa Murphy” segment.

Struggle is not only Good it is necessary for a healthy, functional market! The Market Wants to Fly on its own!

Let’s start this post off with a popular parable.

Once an academic and self proclaimed (albeit not necessarily mistaken) intellectual was playing outdoors and found a most exquisite caterpillar whose colors and patterns gave it a most fantastic presence. He carefully picked it up and took it home to show his colleagues and peers. Together, they studied this caterpillar and wrote papers and hyper-intellectual dissertations on it. They even went so far as to name it. They called it, “Keynesian!” and vowed to each other that they would take great care of it.

The intellectual spent the considerable resources available to him as the chairman of the most powerful hedge fund cum central bank in the world to cater to, and study this Creature called Keynesian. Every day he watched the caterpillar and brought it new plants to eat. One day the caterpillar climbed up the stick and started acting strangely. The academic worriedly called international colleagues and together they came to the understanding that the caterpillar was creating a cocoon. The academic explained to his colleagues how the caterpillar was going to go through a metamorphosis and to become a butterfly.

The cadre of central banking colleagues were thrilled to hear about the changes this caterpillar known as Keynesian would go through. They watched every day, waiting for the butterfly to emerge. One day it happened, a small hole appeared in the cocoon and the butterfly started to struggle to come out [for those who are not following, thing bubble bust at this point]. At first the academic was excited, but soon he became quite concerned. “Keynesian” was struggling so very hard to get out! It looked like it couldn’t break free for its chrysalis! It looked desperate! It looked like it was making no progress whatsoever! As a matter of fact, to many academics, it looked as if it may actually fail.

The academic was so concerned he decided to help. He ran to his lab and pulled out (with assistant from his colleagues in the Treasury) an alphabet soup tools (see 10 Ways to say No, the Banks Have Not Paid Back Their Bailout and Buried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!) to cut the cocoon to make the hole bigger and the butterfly quickly emerged! As a matter of fact, it emerged 100% quicker than any other butterfly that has been observed. As the butterfly came out the academic was shocked at the result. “Keynesian” had a swollen body and small, shriveled, non-functional wings. The academic continued to watch the butterfly, theorizing and expecting that, at any moment, the wings would dry out, enlarge and expand to support the swollen body. He just knew that in time the body would shrink and the butterfly’s wings would expand.

Well, guess what? Neither hypothetical actually occurred! “Keynesian” the hobbled butterfly, spent the rest of its life crawling around with a swollen body and shriveled wings. It never was able to fly on its own…

As the academic tried to figure out what had gone wrong, Reggie Middleton suggested he consult with the owners of a healthy adroit butterfly named “Austrian”. That butterfly’s caretakers, with the assistance of Reggie, explained that the butterfly was SUPPOSED to struggle. In fact, the butterfly’s struggle to push its way through the tiny opening of the cocoon pushes the fluid out of its body and into its wings. Without the struggle, the butterfly was doomed to never, ever fly. The academic’s good intentions severely, and most likely permanently, damaged the butterfly called “Keynesian”.

Remember, in the Circle of Economic Life, struggling is an important part of any growth experience. In fact, it is the struggle that causes you to develop your ability to fly.

As excerpted from Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!, Bernanke et. al. have snipped the chrysalis of the US markets and economy one too many times. He has interrupted the circle of life…

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the “Peak” phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality…

The result of this “Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference

The Inevitability of Another Bank Crisis

while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”.

A snapshot of the housing picture as of now, before the release of the latest Case Shiller numbers

The latest shadow inventory calculations are now available to subscribers online. Here are a few observations that we have made regarding the March data. The last quarter of 2010 and portions of the first quarter of 2011 have seen a significant drop in foreclosure activity due to allegations and blatant discoveries of fraudulent practices in the mortgage industry.


  • A Glimpse of the Wikileaks’ Smoking Gun Emails Show Bank of America Falsifying Loan Information Monday, March 14th, 2011
  • Re: B of A – With Banks Being Forced To Admit The Inevitable Truth, How Long Will It Be Before Fundamentals Rule The Day Again? Friday, January 21st, 2011
  • JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now Wednesday, March 2nd, 2011

This near cessation of foreclosure activity has materially dropped the shadow inventory numbers, but has done so in a way that is quite misleading. Those foreclosures either will happen and become REOs or distressed property sales that are currently averaging a discount of ~25% to conventional retail sales (thus further pressuring sales prices), or will result in the properties being put directly on the market at steep discount (again, further pressuring sale prices). Basically, the foreclosure backlog is simply accumulating in the background and will print a very sharp spike upwards one way or another once the foreclosure and fraud issues of the banks are sorted out – even if they are sorted out to the detriment of the banks. Despite this reprieve in foreclosures, the ratio of shadow inventory to home sales is not decreasing. This is a double negative, for shadow inventory is decreasing (albeit for very artificial and temporary reasons). The reason for the lack of movement in this very key figure is that housing sales are actually declining both on a seasonally adjusted and non-adjusted basis – and if these figures were to be adjusted for “true” inflation, would look much worse. This leaves the ratio of delinquent and foreclosure activity to sales relatively static. One can surmise what happens when the foreclosure backlog that was caused by the bank’s myriad legal issues clear up.

The most valuable chart in the study just released to subscribers,

Shadow Inventory Update — March 2011 shows how quickly one can expect the shadow inventory to be consumed by the sale of homes. To make a long story short, we still have quite a ways to go before we reach the pre-bubble levels, and that is without taking into consideration the foreclosure moratoriums. Keep in mind that these numbers do not include the pent up shadow inventory that is being hidden by the foreclosure crisis. That additional inventory on top of a slowing housing sales metric can easily tack one to 4 years onto the inventory numbers.

As you can see, the credit (delinquency measures) metrics are actually moderating slightly over the last few quarters, but have increased over the last two. This is a negative sign considering all of the efforts that have been made by the government and the banks to reduce that figure. The foreclosure inventory, although lulled somewhat, is still slightly on the rise. This lull is synthetic and temporary, a by-product of congressional pressure and legal issues pressing the banks to undergo voluntary and involuntary moratoriums on foreclosure activity. The consequent movement to be expected as these moratoriums are lifted, the banks work out their legal issues, and the properties move one way or the other will cause a very dramatic spike in the shadow inventory numbers. This spike will occur on top of slowing housing sales, dramatically reduced housing prices metrics and potentially deteriorating credit metrics (if the most recent trend continues). If that is not enough good news for you, the Goldilocks scenario of the perfect interest rate environment for real estate needs to (and probably will in the near to medium term) come to an end. See The True Cause Of The 2008 Market Crash Looks Like It’s About To Rear Its Ugly Head Again, With A Vengeance Friday, March 11th, 2011. Our calculations available ot subscribers show a very bleak outlook for housing. It is not as if there is no precedence for such. Take a look at the Japanese situation, and this is not taking into consideration the recent issues of the earthquake, tsunami and radiation poisoning and nuclear meltdown. Few things are as detrimental to property values as radiation poisoning!

A lesson to be learned: Beware for when a true black swan event occurs…

Further reading:

  1. Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate Friday, February 25th, 2011
  2. In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011
  3. Further Proof Of The Worsening Of The Real Estate Depression Thursday, February 24th, 2011
  4. You’ve Been Had! You’ve Been Took! Hoodwinked! Bamboozled! Led Astray! Run Amok! This Is What They Do! Monday, February 28th, 2011
  5. FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!! Wednesday, February 9th, 2011
  6. As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The “New” Tobacco Companies Thursday, January 6th, 2011
  7. The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium Monday, February 7th, 2011
  8. As Clearly Forecasted On BoomBustBlog, Housing Prices Commence Their Downward Price Movement In Search Of Equilibrium Scraping Depression Levels Tuesday, December 28th, 2010

Did Bernanke Permanently Cripple the Butterfly That Is US Housing? The Answer Is More Obvious Than Many Want To Believe

[Reggie Middleton’s Boom Bust Blog]

Written by testudoetlepus

March 28th, 2011 at 2:55 pm