Corzine Got One Thing Right Before The MF Global Collapse

Jonathan Weil explains the logic behind Jon Corzine’s bad bets in his column, “Here’s One Big Thing MF And Jon Corzine Got Right:”

If you were stranded on a desert island the past two months and upon your return to civilization tried to learn why MF Global Holdings Ltd. had collapsed, you might find that some of the standard explanations don’t make much sense.

One scenario is that a catastrophic bet on some European government bonds killed the commodities and derivatives broker. Another story line has it that investors were slow to realize MF had made such a big leveraged wager, and their concerns evolved into fear, leading to a run on the firm.

Neither version of events is satisfactory. None of the bonds went into default. The sovereign-debt trades were profitable, by all official accounts, even as the company filed for bankruptcy six weeks ago. MF disclosed the stakes as far back as May, though perhaps it should have done so sooner and with more detail. Investors usually don’t panic over losses that haven’t happened, on trades that are a matter of public record.

What caused investors to lose confidence in MF in late October? There’s a simple, sensible explanation. Six days before it filed for bankruptcy, MF reported a large quarterly loss, the details of which contained a message: Don’t expect this company ever to be profitable again. The markets responded accordingly.