I’m writing this because these days the world is extremely unsafe and we must pay attention to not only to what return do we get on our money but also if our money is safe.
Recently MF Global filled for bankruptcy or chapter 11. I won’t go in details but will summarize what happened in few words.
MF Global is among the 10 biggest USA bankcryptcies ever. It’s place is #8.
1. Lehman Brothers Holdings, September 2008: $691 billion in assets
8. MF Global: $40 billion (as of Sept. 30)
MF Global was a waiting candidate for a bankruptcy with the high leverage it had and it was a matter of time until something happaned to take this broker down. MF Global had leverage of 32.8, which corresponds to a real Tier 1 ratio of 3.0%.
Mf Global Q3 2011 – Assets 39 833, Equity 1 214, Leverage 32.8, Tier 1 (%) 3% in billion USD.
So basically it was a matter of 3% drop in it’s portfolio to take down the whole equity and put the broker in chapter 11.
MF Global owned $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt, the company said in an Oct. 25 presentation. The Italian debt was about 50% or approx $3 billion. So, with $1.2 billion in capital and $6.3 billion exposure to sovereign debt, it was only about 19% loss on the value of bonds to put the company in chapter 11. Concerns that it might lose money on the holdings led to demands from regulators to boost capital, credit downgrades, margin calls and finally bankruptcy.
Lehman Brothers went bankrupt in September 2008 with a leverage of 32.2.
Before I start doing an analysis of different banks and brokers, I want to tell you how I calculate the equity to get a more accurate leverage (true leverage). It’s is essential to clearly identify the actual amount of equity. For me that’s common equity + accumulated earnings, excluding preferred shares, subordinated and other type of capitals. The assets are (assets minus the true amount of equity).
According to the old Greenspan, the leverage should be less than 10.
Today, we should not only look at banks that are too big to fail but to be more safe, we must also hold money in banks and brokers that have low leverage. It’s recommended that the leverage is less than 10.
According to a report of the Financial Stability Board (FSB) from November 4, 2011, the list of systemically important
financial institutions (SIFIs) include banks that will not be allowed to fail. Of course that is if we assume that the host countries of these banks will have the ability to inject capital and recapitalize them. That is another important point to which I will write more below. We face a cycle of sovereign debt crisis, so not only the banks will fail but many countries. A conclusion from a book that I read of Kenneth S. Rogoff and Carmen M. Reinhart – “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises”, in such debt cycle a 50% of the countries default or restructure their debt and it happen in clusters. Many of these countries will have a problem to save the too big to fail banks if they are bankrupt too.
Here is the list of the FSB, and respectively their leverage and true tier 1 capital.