The Weekend Economists' Panglossian Pandemic January 20-22, 2012

[Demeter]

27. More Evidence that JP Morgan Stuck the Knife in MF Global

http://www.nakedcapitalism.com/2012/01/more-evidence-that-jp-morgan-stuck-the-knife-in-mf-global.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

As much as most market savvy observers are convinced that there is no explanation for how MF Global made $1.2 billion in customer funds go poof that could exculpate the firm, JP Morgan’s conduct isn’t looking too pretty either.

In MF Global, JPMorgan again at center of a financial failure http://in.reuters.com/article/2012/01/19/mfglobal-jpmorgan-idINDEE80I0DO20120119

a Reuters investigative piece on the MF Global collapse, and it’s a doozy. While in proper journalistic form it is careful about reaching firm conclusions on a post mortem that is still underway, the pattern it has uncovered is not surprising to those of us who are onto JP Morgan.

As many, including this blogger, have pointed out, it was JP Morgan that did in the doomed Lehman by withholding $7 billion of cash and collateral.

And we’ve written how it used one of its best private clients, billionaire investor and industrialist Len Blavatnik, as a stuffee for toxic subprime debt in summer 2007, when every financial firm was desperate to offload US housing dreck.
A Billionaire Army of One vs. a Bank By JOE NOCERA http://www.nytimes.com/2010/09/25/business/25nocera.html?ref=business


The short form of the Reuters story is that JP Morgan, by virtue of being both a lender to MF Global as well as clearing its trades, has a big information advantage and could see how distressed the firm was. MF Global drew down the full amount of a newly-syndicated $1.3 billion credit facility, a huge warning sign. The Reuters story makes clear that JP Morgan went into “possession is 9/10ths of the law” mode, calling for full compliance with transaction procedures when normal business practice was to be more forgiving. The New York bank offers up the excuse that it lost money to MF Global, but that is not the issue. Any creditor to a bankrupt company will lose money. The issue is whether JP Morgan did anything irregular or impermissible to cut its losses, which in this case appears to have come in no small measure out of the hides of customers...
It’s also pretty clear that a lot of MFGLOBAL customer money is sitting at JP Morgan, but JP Morgan will argue in bankruptcy court that it should not have to disgorge it (it almost doesn’t matter what the facts are, JP Morgan will lawyer up to make the case). Unfortunately, since most of the counterparties hurt don’t have the political clout of TBTF bank, JP Morgan is unlikely to take a reputational hit anywhere close to what it might deserve.