Motherfucking Global

How times have changed for Jon Corzine.

Just a couple of months ago he looked like the prime candidate to take over Tim “No Chance of a Downgrade” Geithner’s poisoned chalice at the US Treasury.

Now he looks like he’s heading to jail for stealing money from clients.

Probably the most sage coverage of this saga comes from Roger Lowenstein writing for Bloomberg:

Thirteen years ago, when the hedge fund Long-Term Capital Management was desperately negotiating with Wall Street banks for a bailout, Jon Corzine, the chief executive officer of Goldman Sachs Group Inc. (GS), called John Meriwether, LTCM’s founder, and read him the riot act. Wall Street would invest, Corzine said, but “JM” would have to accept more controls, including strict supervision over his firm’s trading limits.

Corzine, I wrote soon after, “understood the flaws” at LTCM better than anyone. The firm had no controls over risk limits, no accountability to anyone who wasn’t a trader.

Essentially, Corzine forgot the lessons of LTCM‘s failed arbitrageurs, and went the hyper-leveraged Martingale path. The trouble is that unless you predict accurately, this kind of activity is a quick and easy road to bankruptcy. Leveraged 50:1, a 2% drop in asset prices can be a wipeout, and end in insolvency.

There are two key points, and one key question to take away from this:

  1. The American banking system is susceptible to a Euro-collapse — MF Global went down betting on a Euro-stabilisation. The web of derivatives extends across the global financial system, creating ever-growing fragility.
  2. None of the lessons of AIG and Lehman have been learned — the bailouts and stimuli saved a broken system, and allowed it to continue to be broken.

And the question:

  1. What effects will MF Global’s removal from the web of debt have on the financial system as a whole?

The first point is obvious (although Morgan Stanley will keep denying it, and focus instead on how Groupon is worth at least $100 a share). The second point has been obvious for a long time.

The question is much murkier. Is MF Global too big to fail without sending financial systems into freefall (a la Lehman)?

The answer seems to be “probably not”.

From TIME:

So far, the problems at MF Global appear to not be spreading to other banks. While MF Global has $40 billion in assets, it only owed about $2 billion outright to other banks. What’s more, more than half of that debt is owed to J.P. Morgan, which is one of the strongest banks around. There are other banks that are owed $6.3 billion from loans MF Global took out to make its Euro debt bets. But those debts are backed by the bonds that MF bought, and if they end up being good as Corzine claimed, then those banks should get their money back, as well as the profits Corzine hoped to pocket for his firm. MF Global does not appear to have the same type of derivatives exposure to other banks that led to the demise of Bear Stearns and Lehman Brothers.

Nonetheless, we will see what we will see when we see it.

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Groupon: Unsustainable Parasite?

I’m always interested to see new business models emerge, and the internet has played a huge role in changing the way society operates, and the way people think about commerce. Online delivery has had a huge impact both on my life, and the way that I shop. If I want to buy something — a book, or a piece of furniture, or a piece of equipment, I can find it online, and order it, and it will arrive at my door. Previously, I had to go to the shop, look around the shop, collect, pay and go home. Now I just go to Google, then Amazon or eBay and the product is in my hands the next day. Now if this is revolutionary for me, it is even more revolutionary for sellers: instead of maintaining expensive retail real estate, they can maintain low-cost warehouses, and increase the range of products they stock . Of course, this new model presents challenges to established retail businesses, and to local government and communities who see town centres increasingly deserted, and more and more physical retailers going out of business f they can’t adapt. But that’s the nature of capitalism: things come and things go depending on what is popular, and what attracts custom.

But there are a certain class of businesses that have not been quite so affected by the online-retail revolution. Businesses like nightclubs, health spas, and restaurants where the physical premises is a huge aspect of the business model. Restaurants can’t establish a warehouse where food is assembled and send it out to the customers’ homes. I am sure McDonald’s have given this serious thought, but it just wouldn’t work — customers want freshly prepared food, delivered to their table in a bricks-and-mortar restaurant. Nightclubs can’t deliver themselves to me either — although the fact that I can stream any music I choose from Spotify and dance around my bedroom is surely a threat to their business model.

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