MF Global’s collapse isn’t Lehman II

 
Allister Heath
IT is hard not to feel a sense of deja vu after yesterday’s bankruptcy of MF Global, a major US financial institution, as a result of an unlucky bet on European government bonds. The firm employed just 2,870 people – including 730 in Canary Wharf, whose jobs are now sadly at risk – yet this is the eighth biggest bankruptcy in US history by balance sheet size, larger even than Chrysler’s.

The good news, if we can call it that, is that this failure will be contained; this is not another Lehman Brothers. Shareholders, creditors and staff will suffer; but there will be no domino effect; the sums involved are too small and the creditors dispersed. Far more worrying for the global economy is the decision by the Greek prime minister to hold a referendum on the Eurozone bailout and austerity measures; if the Greeks reject the deal (despite the fact that they are being bailed out by taxpayers in other countries) the Eurozone will be plunged in an even greater crisis.

The original, irrational post-deal euphoria has now turned into renewed worry, especially with yields on Italian debt at elevated levels again. There is also growing scepticism about Europe’s ability to get Chinese investors to bankroll the bailout fund, which looks ever more like a cross between a dodgy CDO and a doomed monoline insurer.

Several important points emerge from MF Global’s demise, however. The first is that this firm is rightly being allowed to go bust, even though it was one of 22 primary dealers allowed to conduct bond trading business directly with the US government. There was no talk of a bailout – and quite right. That is progress. Even more encouragingly, the Financial Services Authority has confirmed that MF Global UK has entered the UK’s brand new special administration regime, which was adopted in February to resolve and unwind in a managed fashion large and complex wholesale financial institutions. This new, revolutionary form of bankruptcy is designed to allow even the largest firms to fail while preventing the kind of chaos seen after Lehman. This is its first test; we shall soon find out whether it works. Its advantage over ordinary corporate administration is that it sets special objectives for the administrator, including the swift return of client assets.

A second important point is that MF Global’s demise illustrates just how many financial firms are suffering right now. This is insufficiently well understood; it is still wrongly believed in many quarters (including among the proto-Marxists both inside and outside St Paul’s) that the City is booming. Yet level of bonuses in 2011-12 will be the lowest for nine years, according to the Centre for Economics and Business Research (CEBR); the City will shed more than 26,000 jobs this year, the think-tank is also predicting.

Last but not least, while MF Global is not a new Lehman it is nevertheless the second large financial institution to have been destroyed by the Eurozone debt crisis in the past couple of weeks. The first was the Franco-Belgium bank Dexia. There will be more. Large institutions inevitably convince themselves that they are free of exposure prior to sovereign debt crises – and just as inevitably many end up getting sucked in. The Eurozone’s “leaders” were meant to have sorted all of this out last week, of course. Their abject failure is becoming more apparent by the day.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath