They are both defunct they each used an excessive amount of leverage; their blow ups were public, closely watched, and spectacular.

But what might be most unusual is a strange similarity between the two of them. The bets that blew up LTCM eventually paid off a few months after the debacle. It was the leverage, not the directional bets, that killed them.

I wonder: Might something similar occur with MFG? Had they not used used leverage, would their European bets soon begun to have paid off . . . ?

Category: Really, really bad calls, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Do MF Global and Long Term Capital Mgmt Have Anything in Common?”

  1. cthwaites says:

    Not sure to yr last question, but I don’t think LTCM ever commingled prop and client accounts…

  2. b_thunder says:

    “The bets that blew up LTCM eventually paid off a few months after the debacle” – do you mean after the 1990s decade, or 10 years after LTCM went belly-up?

    LTCM, after all, was run by PhD guys who were too effing confident in their abilities. But after 20-year bull market, who wasn’t ? While it looks to me like Corzine was betting the ranch (actually a ranch-equity loan at 4000% LTV) on a bailout by the Euro-clowns.

    But that’s beside the point, which is that given the most recent admissions from “an executive,” MF now looks like Enron, not LTCM.

  3. Broken says:

    Aren’t many of the firms out there leveraged in their account?Why was MF the one that was gang-banged?

    If every leveraged firm out there got MFed, I wonder how many would be left standing. In the Wall-street game of musical chairs, when the music stopped, MF was the one left without a seat.

  4. bobby says:

    What I do not understand is the under reporting(or non) of the potential fraud here…MFG is (was?) one of the largest clearing firms in the world…and I cannot make a trade and cannot get funds to a client that is supposed to be in a SEGREGATED account….I am just a small IB, but this story should be way bigger than it is…


  5. streeteye says:

    Sounded like – repo rate fell below short-term sovereign rates. So you buy the sovereigns, pay for them by repo-ing them to maturity. As long as the sovereigns are money good, you lock in a profit, amplified with massive leverage. But if any of those countries exit the Euro and default, you lose your shirt.

    Unclear what happened next, if they had a margin call from repo counterparties when the sovereigns kept dropping, if the rating agencies freaked out, or if their other counterparties freaked out, or all of the above.

    Sounds like ‘moral hazard’ – heads, I, Jon Corzine, make a mint; tails, shareholders and everyone associated with MF Global loses.

    If customer money was misused, Jon Corzine will be this crisis’s Dick Whitney, the president of the NYSE in the 30s who went to jail after ‘borrowing’ money from the New York Yacht Club to cover margin calls. Would be ironic, since Corzine wasn’t around for the worst misdeeds of the financial crisis, and a Democrat to boot, but even though IANAL, if you represent that customer money is yours and pledge it in a margin call, that clearly seems like criminal fraud.

    The MSM doesn’t want to speculate about the possible criminality of leading financiers and politicos… that’s what we’re here for LOL.

  6. HungryHoneyBadger says:


    True. The MFGlobal people seemed to have done something illegal and against the rules.

    LTCM were legally stupid…..

    The author of the blog has railed against those that violated the property rights in regard to the mortgage mess. If MFGlobal took their customer’s money to fend off margin calls, then it’s in the same league, if not worst.

    When do the calls for Corzine’s perp walk start?

  7. 873450 says:

    Apparently moral hazard doesn’t exist in Greenwich – Meriwether blew up his 2nd fund 2008-09.

    How’s #3 doing?

  8. jaytrader says:

    Most of LTCM’s losses were in Volatility Trades as well as Convergence Trades that well didn’t converge. They were buying and selling volatility all over the world. Funny thing is that the only market that volatility didn’t explode higher was the German DAX Mkt where of course volatility was dampened by pairing off LTCM’s bets in that market. This was how large and important LTCM was. They were market. One can’t make the assumption that LTCM was right because LTCM was the grease for the markets. They created liquidity for all of these exotic products. When they were caught on the wrong side and needed a bid/offer to get out of positions – there was no one available as many dealers just stepped aside or even got in on the squeeze. So spreads and correlations blew out. When the squeeze ended things came back to normal not because of rational markets/efficient markets are because the models were right it was just that no one wanted to trade those instruments after LTCM. There was no market after LTCM. What came next? You betcha! CDO, CDS, and synthetics. MF Global did the same thing as Lehman/Bear/AIG and the other nitwit firms that went belly up. Buy bonds on margin – leverage them up in the Repo Market and enjoy the spread. When the Repo Mkt called them out for more colaterral we all know what happened next. Make no mistake, MF Global got this trade wrong!

  9. Rouleur says:

    …regardless of the fraud…MFG made levered bet(s) on Greek debt…hedged with CDS…when the bonds were given a 50% haircut AND is was not called a default by the “rating” agency…they lost half of their capital, and for sure, they were levered well in excess of 2:1…toast…

  10. Fredex says:

    MF Global has more in common with REFCO.

  11. Sechel says:

    There is a difference.
    LTCM was about arrogance , a belief that finance was like physics and an exaggerated sense of one’s intelligence.
    MF was about hubris or more importantly the need of one man to prove he could out-do his former Goldman Sachs and once again recapture Wall Street fame.
    And unfortunately there is this little thing about the customer funds which was never an issue with LTCM.

    There will be investigations, lawsuits and holding people accountable, which has been sorely lacking on Wall Street these last few years. I believe/hope the regulators will be out to prove a point here.

  12. Jim Greeen says:

    “The ultimate result of shielding men from the effects of justice is to fill the world with criminals.”

  13. knickablogger says:

    Barry is 100% correct: Same countries same concepts same problem same result. The funny thing is, as some of the posters pointed out, JM was using much more sophisticated instruments 15 years ago. So the problem isn’t financial inovation, but the timeless inabilty to put stop losses on basis trades which are supposed to converge to fair value.

  14. microcap says:

    I happened to have just finished reading Lowenstein’s “When Genius Failed” [ a great read ]

    While you are technically correct about the trades working BR, I would add that a) Greenspan cut rates the day after the LTCM bailout, and even that didn’t work as the consortium lost over 20% of its assets in the first two weeks! [p.221-222] On October 15, Greenspan cut rates again and sent the signals that the Greenspan put was alive and serious. That’s when the market rallied and all the trades started working.

    Bernanke will have a hard time cutting rates :)

  15. gman says:

    My first thought on this blow up was long greek debt and hedged w/ CDS that ended up not providing any protection and then too much leverage.

    Mixing customer and prop accounts is something much worse(if true)…one step short of the full on PONZI

  16. Rouleur says:

    …i just heard that they MFG was levered 40:1…they must have had to sell their levered commodity positions to meet margin calls…commodities wilted a bit…they learn nothing from the past…occupy, baby!

  17. Rouleur says:

    …now, with the Greek referendum…maybe it is the case that MFG were right on their bet, just too early…if the Greeks give it a thumbs down…i guess “The Euros” are still negotiating…

  18. blackjaquekerouac says:

    the oldest delusion in the book. ‘if we’d only had more time.” the whole basis of the LTCM trade wasn’t that the market moved against them…it’s that the market moved into them. these professors stared in disbelief as “the unthinkable happened!” REALLY? The fact that the clown working for Former Important In Everything John Corzine “couldn’t see the unthinkable happening” says all you need to know about his underlings. Hell event the “story-liners” don’t know how to report “how to blame it all on Senator Corzine”…when we all know. “He was the patsy” on this. what? You don’t honestly think he ordered the co-mingling do you? HAHAHAHAHA! “Some Big Picture” you got here. “Big Picture of bullshit!”

  19. hammerandtong2001 says:

    That’s right. Levered 40:1.

    Interactive passed on the last minute buyout when they couldn’t acount for hundreds of millions in misallocated customer funds. The head of the CME said essentially the same thing.

    So I guess this is how it ends.

    It took 3+ years, trillions in taxpayer bailouts, billions in paid out bonuses, foreclosure scams and illegalities – circumventing centuries of property law, off balance sheet trillions in opaque trading, outright client ripoffs ala Paulsen and his “big short…” and endless more.

    So finally, MF Global — just steals their client’s money and bets and blows it all?

    How does “jail” not enter this conversation?

    God help us. It’s come to this: just steal it and the taxpayer will make good the $1 billion MF stole?


  20. louis says:

    I see a similar kick in the nuts to the average guy.

  21. victor says:

    The story goes that when Napoleon Bonaparte was asked: “Why do Generals lose battles”, he laconically answered: “Too late, Too late, Too late”. But financier Jon C turned politician, then turned financier again upended loser Generals by being “Too early”? ditto for the professors/Nobel laureates @ LTCM?

  22. Finster says:

    And now I shout at the top of my lungs: “Fractional reserve banking is using client funds for betting.”

    The entire system is working exactly this way, only the bankers are on permanent bailout through the FDIC and the backstop of the central bank. There are two ways to put money into a bank:

    1. Make a deposit (you wish to use that money and account for it as yours in your books as a customer)
    2. Give a loan to a bank or buy bank CP (or bonds): Now you give use of the money to the bank and receive interst.

    Banks lever 1. and 2. as money for their use. Which is why you need the FDIC and the FED to get your deposit out when it fails.

    Only here, when client’s brokerage accounts are in question is the obvious fraud visible to all.

  23. V says:

    Are all the ex-directors and CEOs still living in luxury?

  24. ToNYC says:

    “Are all the ex-directors and CEOs still living in luxury?”

    Are you asking why they spent their lives getting their ass in the Club?
    Alfred Nobel survived and mastered dynamite with a whole lot less collateral damage than the Greenspan/Bernanke FED did with leverage and fractional credit creation.

  25. microcap says:

    Another thing I learned from Lowenstein’s book, which is to be careful when quoting leverage ratios. We have all heard that LTCM was 100 to 1 levered, MF Global 40 to 1 etc. etc…..

    But those can be misleading, as they are often the leverage ratios AFTER losing a lot of money. LTCM didn’t start out at 100-1. But when you lose money and you have leverage, your ratio goes up exponentially. Say you put 10% down on a home [old-fashioned I know :)], you are levered 9-1. But if the house drops in value by 50%, your leverage is now 18-1 etc. and now when you default, it looks like you were ridiculously levered.

    So be careful when reading those numbers–it doesn’t mean that MFG and LTCM weren’t stupid or criminal.

  26. ToNYC says:

    “So be careful when reading those numbers–it doesn’t mean that MFG and LTCM weren’t stupid or criminal.”

    It could mean that MFG 0r LTCM, but not both, was stupid and criminal.
    FBI timelines only go one way.

  27. jimc1004 says:

    > Meriwether blew up his 2nd fund 2008-09.

    > How’s #3 doing?

    He goes back much farther than that, read Liars’ Poker!

    Unlike Mr. Meriweather, who has not been charged with any crimes, Gov. Can’t-Buckle-Up has
    apparently decided starting over would be too painful?

    How completely unsympathetic.

    In the 1930s Richard Whitney was first the head of NYSE, then later Wall Street’s point man in DC in resisting any and all attempts to regulate the Wall Street Casino. After it was revealed that Whitney had systematically misused $ Millions in customer securities as well as the NYSE internal [employee] widows and orphans’ fund, he was sent off to Sing Sing, and the Wall Street anti-regulatory counter-insurgency collapsed, enabling the New Deal financial regulations to finally be enacted.

    Thank you Jon! I hope this inspires a REAL financial reform bill! Maybe we should name it after the Gov?

    “Let no crisis go unused”.

  28. jimc1004 says:

    “Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.”
    – Seth Klarman; The Forgotten Lessons of 2008