MF Global Clients Face Day of Reckoning as Margins Call
MF Bankruptcy Causes Biggest Foreign Bank Liquidity Scramble To 'Fed Safety' Ever, Harbinger Of Major Eurobank StressWhen Lehman filed for bankruptcy in that fateful week of September 2008, one thing caught everyone's attention: the epic surge in the Fed Reverse Repos originated by "foreign official and international accounts": essentially cash placed at the Fed by foreign institutions in exchange for collateral, primarily in the form of Treasurys, as well as other securities. This is nothing but an immediate cash parking in a 'safe place', which withdraws overall liquidity from the market, and as has been noted elsewhere, serves as an indirect gauge of banking system funding stress. In the week of September 24, this number soared from $46.6 to $93.7 billion, a $44 billion increase, or the single biggest jump in the history of the series. Well, as the chart below demonstrates, what happened with MF Global caught foreign banks, which as we have noted over the past several weeks have been dumping US Treasury and MBS paper, entirely by surprise as they scrambled to withdraw the last traces of available liquidity from the market, and to place as much of it as possible within the safety (and we use the term loosely) of the Fed. In the just released H.4.1 update, foreign Reverse Repos with the Fed soared from $81.3 billion to $124.5 billion, the most ever, and a weekly surge of $43.2 billion, the second largest ever, second only to the Lehman collapse. Furthermore, as noted daily, European banks have been doing precisely that with local cash from non-US subsidiaries, and parking near record amounts with the ECB (today the European central bank disclosed a whopping €253 billion had been deposited with it: just shy of the 2011 high), even as they have been dumping US Treasurys on one hand, and now are forced to repo what little paper they have left with the Fed due to systemic uncertainties in the MF aftermath, one can see why suddenly there was absolutely no liquidity left in the market, and why the meager €3 billion EFSF bond offering, so desperately needed to fund the ongoing Irish bailout and which incidentally is the story of the week, had to be pulled.
Was it just two weeks ago when we penned "Another Quarter, Another Blatant Window Dressing By The Primary Dealer Banks To Make Their Balance Sheets Seem Strong", the same post in which we said, "We have made it clear time and again, that this chart demonstrates nothing short of the end of quarter window dressing, when PDs convert their asset holdings into cash to make their Tier 1 Capital much more robust than it truly is. After all, none other than JPM and Citi were praising just how prepared for Basel III they are with their "sterling" capitalization ratios... which were only sterling courtesy of precisely the highlighted window dressing which occurs each and every quarter. We expect nothing less from Bank of America and Morgan Stanley when they report their own numbers in the coming days. We also expect the regulators to do absolutely nothing to prevent this blatant abuse of fiduciary duty which has no other purpose than to hide the true sad state of America's banking system." Ironically, we have just found out that had regulators not only listened to us over the two years we have been pointing this out, but also done something on it, MF Global would likely not have filed for bankruptcy. Here is the WSJ, confirming all our worst fears: "For the past two years, MF Global Holdings Ltd. may have disguised its debt levels to investors by temporarily slashing the debt it was carrying before publicly reporting its finances each quarter, according to an analysis by The Wall Street Journal. The activity, referred to in the financial industry as "window dressing," suggests that the troubled financial firm was shouldering more risk and using more borrowed funds to facilitate its trading than investors could easily detect from the firm's regulatory filings. And scene: but wait, there's more. As we have shown over and over and over, this has continued for 8 quarters in a row since Lehman first exposed this criminal activity. Sure enough, another company just went bankrupt because of the SEC's gross and criminal negligence, incompetence, and overall corruption.
Tomorrow's much-watch-moment, aside from NI HEADS on the Bloomberg Terminal for every second-by-second market-ramping/crushing headline from Europe, is the non-farm payroll print. With a median estimate of +95k across the 91 'economists' that Bloomberg keeps an eye on, we did notice that the dispersion is considerably lower than normal (expectations are more 'confident' than normal). Not one 'expert' sees a drop in payrolls with Sean Incremona (4Cast) and Pierre-Livier Beffy (Exane) at the low-end with +50k and everyone's favorite talking-head, Joe LaVorgna of Deutsche, topping us out at +150k. At almost 3 standard deviations above consensus, Joe is going for the home-run as we note the last time he was this 'positive', back in May/June 2011, NFP missed expectations dramatically - printing below the lowest estimate.
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"Let's do some quick math. If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you'd get a market capitalization of roughly $72 trillion. The notional value of the derivative market is roughly $1.4 quadrillion." - Graham Summers, The One Market The Fed Doesn't Want You To Know About