Notes From Underground

Another day another crisis in EUROLAND, or the LA LA LAND of Wall Street, which we will know refer to as THE LAND OF MORAL HAZARD. The leaders of the Wall Street establishment have proven again that no risky investment is too big as long it is with OPM (other people’s money). Jon Corzine went all in on a bet on PIIG DEBT in an effort to increase the annual returns at MF GLOBAL. In a ZIRP environment, a clearing house has a difficult time making money because the earnings, which are the overnight float, are so extremely low. In order to generate greater earnings on the FLOAT, greater risks need to be taken so the need to purchase riskier sovereign debt becomes the outlet.

Corzine is reported to have said that the EFSF would backstop the DEBT, meaning that the higher yields came with very little risk. Increased yields with little fear of DEFAULT leads one to increase higher returns through LEVERAGE. No worries mon: The ECB is our friend. Corzine played the ultimate hand of moral hazard and discovered that the market is a cruel mistress–LUCK BE A LADY TONIGHT. The luck ran out and shareholders and clients have been left holding the bag. It seems that Corzine forgot that MF GLOBAL was not GOLDMAN SACHS or even Lehman in stature so at the end of the day it merely took the wise Tom Petterfy to pull the plug on the deal.

The head of Interactive Brokers realized that the losses on the books of MF GLOBAL were too big for him and not big enough for the forces of Moral Hazard to rescue. JON CORZINE, YOU PLAYED A WEAK HAND AT AN INOPPORTUNE TIME. This was not a redo of Long Term Capital Management, especially because the bailout king, SIR ALAN GREENSPAN, was not in charge. Oh well, Jon, it will only be a matter of time until you get the call from Washington to assume a major government post.

***Tomorrow is FOMC day as we get an early statement and then a press conference. As the world remains in turmoil, Chairman Bernanke we do nothing to rock the boat but will raise a further alarm as to the disaster that confronts the world from the European debt crisis. The economy is fragile and unemployment continues to plague the demand side of the growth equation.

There is also a G-20 meeting so the FED will be cautious but I would like to see some journalist ask Bernanke about his views on Christina Romer’s op-ed piece, and to follow it up with the FED‘s view on the Japanese intervention. Of note, the RBA unexpectedly cut rates last night, citing cooling inflation along with fears about Europe. Again, the FED will not get aggressive at this point and wait for further evidence of slowdown.

***The Greek referendum is a key part of the landscape, but I think Papandreou is actually doing the correct political act. If he is sure the referendum will pass it will strngthen in hand by placing the POPULAR WILL into the equation, thus removing some of the potential for street action. Greek citizens are being asked a great deal of sacrifice in the push for austerity so their input is critical. Otherwise the modern history of Greece is for possible intervention from the Greek military. It is a bold step but it is not to be feared.

Tags: Alan Greenspan, Bernanke, Debt, default, ECB, EFSF, Euroland, Fed, FOMC, G-20, Goldman Sachs, Greece, leverage, MF Global, moral hazard, other people's money (OPM), Papandreou, PIIG, RBA, referendum, ZIRP

This entry was posted on November 1, 2011 at 7:25 pm and is filed under Debt Market, Europe, Fed. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.