What sank MF Global? (1) --a big risky bet on the European sovereign debt

Similar to the shortfall of oil, which led to the sharp increase in the oil price during 1970s, a considerable decline of the exponentially increasing virtual money, which is spurred by the widening transactions and the development of financial derivatives, contributes to a significant drop in prices of financial instruments, an increase in investment costs that shakes the confidence of investors who subsequently run away from the risky financial markets. Then the financial bubble will collapse coming after investors’ fleeing, resulting in a recession.

Greek, Italy, and Spain appear to be the biggest victims in the currently prevailing European sovereign debt crisis as well as harbingers of the seemingly upcoming globally-spread recession. The inability of governments to afford its issued large amounts of debt was the initial clue implying the closure of the last-round economic thrives. Investors who sensed the slipped government credibility decisively jumped out of the swinging markets, a move that lowered trading volumes and transaction frequency. Reduced demand for euro bonds triggered the price slump and market fluctuation. The volatile market and impaired investor confidence deepened the risks; in other words, investment in euro bond markets became more expensive. The downscale trend of capital markets in Europe hinted an economic gloom.

Unfortunately, MF Global held approximately $6 billion euro debt issued by Italy, Spain, and Portugal, a concentrated risky investment that MF could hardly survive when the European debt crisis faltered. MF’s greed overrode its sanity “Never put all eggs in one basket”. Its failure primarily comes from its abandonment of portfolio management and ignorance of risk control.

Judy Wang