MF global: Good Bets, Good Timing?

The graves of Wall Street, it has long been said, are filled with those who were right too soon.

And so it may be. But even it proves to play out just as Mr. Corzine forecasted, it won’t do MF, or Mr. Corzine’s reputation, any good.

The great irony of the failure of MF Global, the firm run by Jon Corzine, the former governor of New Jersey and the former chief executive of Goldman Sachs, is that its bets will, in the long run, probably turn out to have been good ones. He is said to have bet large sums that Europe would not let countries like Italy and Spain default. If that was right, then the elevated interest rates available on government bonds represented a phenomenal bargain.

Whatever is going to happen in the future, in the present sovereign bond prices have been sliding.

An unleveraged investor could have ridden out the current downturn, but MF, as is the fashion on Wall Street, was heavily leveraged. Its June 30 balance sheet showed $44.4 billion of liabilities and only $1.4 billion of equity. The firm was heavily dependent on short-term funding, with less than half a billion in long-term debt. That meant the firm was vulnerable if the value of its holdings fell, or if its lenders simply got nervous and demanded more collateral to back the loans.

Some combination of that may have happened.

There are a couple of obvious questions. Did MF take risks that were too large or too concentrated? Risk officers are supposed to keep that from happening, but when the chief executive is the trader that is not easy to do. Were there margin calls that MF deemed unreasonable? Will it complain about its lenders? Wouldn’t it be fun if Mr. Corzine blamed Goldman for his problems?

This is a reminder of the wisdom of the Volcker Rule. Let gambling be done by those that cannot call on the Federal Deposit Insurance Corporation or the Treasury for a bailout, and by those that do not have access to low-cost insured deposits.

It is also a reminder that liquidity can be a fair-weather thing. It was only a week ago that we were hearing that MF had all kinds of available liquidity. Now it has filed for bankruptcy protection.http://dealbook.nytimes.com/2011/10/31/mf-global-files-for-bankruptcy/?ref=business

Economy Beats Expectations in August

The Canadian economy grew by 0.3 per cent in August, the third consecutive monthly gain.

Statistics Canada said Monday that much of the gains came from the strong energy sector, where output advanced by 2.8 per cent. Excluding that, real GDP was unchanged.

The finance and insurance sector rose by 1.4 per cent. A higher volume of trading on the stock exchanges, partly a result of financial markets reacting to concerns over the debt situation in some countries, led the increase.

Overall, economists had been expecting slightly weaker growth of 0.2 per cent.

The comparatively strong showing suggests the threats to the economy that emerged over the summer (namely the U.S. debt ceiling crisis, and the sovereign debt problem in Europe) weren't enough to derail Canada's economy.

Assuming September shows no gain, Scotiabank's economics team noted in a report Monday that the economy seems on track to post a 2.7 per cent annualized gain in the third quarter as a whole. That's ahead of the 2.0 per cent the Bank of Canada is expecting.

Canada's economy would have to shrink by 0.5 per cent in September to match the Bank of Canada forecast.

Rothschild family

The Rothschild family is a European family of German Jewish origin that established European banking and finance houses starting in the late 18th century. It has been argued that during the 19th century, the family possessed by far the largest private fortune in the world as well as by far the largest fortune in modern world history. The book “Currency war” which I read during the summer basically describes Rothschild family’s effect on world’s most significant histories. And the book argues that the world war I, and II, The American Civil war, the numerous deaths of American presidents are all related to the conspiracy of Rothschild family.

Historian Paul Johnson writes that the Rothschilds are elusive. There is no book about them that is both revealing and accurate. Libraries of nonsense have been written about them. For this the family is largely to blame." A woman who planned to write a book entitled Lies about the Rothschilds abandoned it, saying: "It was relatively easy to spot the lies, but it proved impossible to find out the truth. The family is highly secretive... They kept no more documentation than was necessary. They systematically destroyed their papers." He also notes that this was understandable, since they were private bankers and had confidential relations with several governments and innumerable powerful individuals. They were Jews, and particularly concerned that details could be used to promote anti-Semitism. Their latest historian, Miriam Rothschild, believes another reason was that they kept no muniment room. The Rothschilds were not interested in their history, but were respectful towards their ancestors, as a matter of good form; they prudently thought about the future, but lived for the present.

"All the same," Johnson writes, "the salient facts about the Rothschilds are clear enough. They were a product of the Napoleonic Wars, just as the first phase of large-scale Jewish finance was a product of the Thirty Years War, and for the same reason: in wartime, Jewish creativity comes to the fore and gentile prejudice goes to the rear. In all essentials, the family fortune was created by Nathan Mayer Rothschild in London." He notes that prior to the beginning of the revolutionary wars in France, in the mid-1790s, European merchant banking was dominated by non-Jews, including the "Barings of London, the Hopes of Amsterdam and theGebrüder Bethmann of Frankfurt". The financial demands of war quickly expanded the money-raising market and so opened room for newcomers, including a German-Jewish group with the Oppenheims, Rothschilds, Heines, and Mendelssohns among them.



The Rothschilds already possessed a very significant fortune before the start of Napoleonic Wars (1803–1815), and the family had gained preeminence in the bullion trade by this time. From London in 1813 to 1815, Nathan Mayer Rothschild was instrumental in almost single-handedly financing the British war effort, and the French war effort, financing the shipment of bullion to the Duke of Wellington's armies across Europe, as well as arranging the payment of British financial subsidies to their Continental allies. In 1815 alone, the Rothschilds provided £9.8 million (£694m in today's money) in subsidy loans to Britain's continental allies.



The brothers helped co-ordinate Rothschild activities across the continent, and the family developed a etwork of agents, shippers and couriers to transport gold across war-torn Europe. The family network was also to provide Nathan Rothschild time and again with political and financial information ahead of his peers, giving him an advantage in the markets and rendering the house of Rothschild still more invaluable to the British government. In one instance, the family network enabled Nathan to receive in London the news of Wellington's victory at the Battle of Waterloo a full day ahead of the government's official messengers.

Rothschild's first concern on this occasion was to the potential financial advantage on the market which the knowledge would have given him; he and his courier did not immediately take the news to the government. See a partisan French pamphlet in 1846 by John Reeves in 1887 in The Rothschilds: the Financial Rulers of Nations. It was then repeated in later popular accounts, such as that of Morton

The basis for the Rothschild's most famously profitable move was made after the news of British victory had been made public. Nathan Rothschild calculated that the future reduction in government borrowing brought about by the peace would create a bounce in British government bonds after a two year stabilisation, which would finalise the post-war re-structuring of the domestic economy. In what has been described as one of the most audacious moves in financial history, Nathan immediately bought up the government bond market, for what at the time seemed an excessively high price, before waiting two years, then selling the bonds on the crest of short bounce in the market in 1817 for a 40% profit. Given the sheer power of leverage the Rothschild family had at its disposal, this profit was an enormous sum.

Nathan Mayer Rothschild initially started his business in Manchester England in 1806, and gradually moved it to London, where in 1809 he acquired the location at 2 New Court in St. Swithin's Lane, City of London,where it operates today; he established N. M. Rothschild and Sons in 1811. In 1818, he arranged a £5 million loan to thePrussian government, and the issuing of bonds for government loans formed a mainstay of his bank’s business. He gained a position of such power in the City of Londonthat by 1825–6 he was able to supply enough coin to the Bank of England to enable it to avert a market liquidity crisis.

Ascent of money

I finally chose a book for the book review of my International business class! 

“Ascent of money” written by Niall Ferguson talks about the history of world’s financial market and how it yielded in the first place. Ferguson first came to notice a decade ago with “The Pity of War,” a revisionist tour de force arguing that Britain made a world-historical error by entering World War I (and thereby destroying its empire) when it should have simply waited out the swift German conquest of Europe and remained a superpower, with Europe the better for it. More recently the Scottish-born Ferguson, who now spends half the year teaching at Harvard and the other half at Oxford, has turned his attention to the prodigal young heir to the British imperial crown, the United States. In “The Cash Nexus” (2001) and “Colossus” (2004), he urged Americans to emerge from their self-denial and fulfill their obvious destiny as the next “liberal” empire spreading the light of democracy and Anglo-­Saxon legalism across the globe. “The greatest disappointment facing the world in the 21st century,” Ferguson concluded in “The Cash Nexus” (published in the opening months of the Bush presidency), is that “the leaders of the one state with the economic resources to make the world a better place lack the guts to do it.” Ferguson later supported the Iraq war as evidence that Washington had finally gotten up its courage, imperially speaking.

Whatever one thinks of his arguments, it’s impossible to ignore Niall Ferguson. He’s like the brightest kid in the debating club, the one who pulls all-nighters in the library and ferrets out facts no one thought to uncover. And in his latest book, “The Ascent of Money” — humbly subtitled “A Financial History of the World” — Ferguson takes us on an often enlightening and enjoyable spelunking tour through the underside of great events, a lesson in how the most successful great powers have always been underpinned by smart money. “The ascent of money has been essential to the ascent of man,” he writes, making a conscious reference to the BBC production he loved as a boy, Jacob Bronowski’s “Ascent of Man.” (In fact, like Ferguson’s three previous books, “Colossus,” “Empire” and “The War of the World,” “The Ascent of Money” was written as a companion to a TV documentary series.)

“Behind each great historical phenomenon there lies a financial secret,” Ferguson says. He goes into fascinating detail about how “it was Nathan Roth­schild as much as the Duke of Wellington who defeated Napoleon at Waterloo” by selling bonds and stockpiling gold for the British Army. The richest bankers on the Continent in the 19th century, the Rothschilds became known as die Finanzbonaparten (the Bonapartes of finance). And, as Ferguson argues, they also played a crucial part in the South’s defeat in the Civil War by declining to invest in Confederate cotton-­collateralized bonds. Imperial Spain amassed vast amounts of bullion from the New World, but it faded as a power while the British and Dutch empires prospered because they had sophisticated banking systems and Spain did not. Similarly, the French Revolution was made all but inevitable by the machinations of an unscrupulous Scotsman named John Law, whom the deeply indebted French monarchy recklessly placed in charge of public finance. “It was as if one man was simultaneously running all 500 of the top U.S. corporations, the U.S. Treasury and theFederal Reserve System,” Ferguson writes. Law proceeded to single-handedly create the subprime mortgage bubble of his day. When it collapsed, the fallout “fatally set back France’s financial development, putting Frenchmen off paper money and stock markets for generations.” Wilhelmine Germany, meanwhile, came up short in World War I because it “did not have access to the international bond market,” Ferguson writes. Every one of these episodes sounds like a warning shot: Will America be the next great power to fall because of unsound finance?

The question is particularly pressing in the midst of what is widely seen as the worst financial crisis since the Great Depression. And Ferguson’s conclusions are troubling. Only a few years after accusing Washington of “imperial understretch” for failing to flex its muscles — and without any hint of irony — Ferguson now argues that the United States may be succumbing to financial overstretch. Deeply in debt to the rest of the world, it has become part of a “dual country” that he calls “Chimerica.” “In effect, the People’s Republic of China has become banker to the United States of America,” he writes. Until the current global financial crisis, this seemed to be a fairly reliable relationship. American consumers over-bought goods and over-borrowed from China, and the Chinese in turn accumulated huge dollar surpluses that they plowed back into Wall Street investments, thereby supplying profligate Americans with the financing we needed to consume and sustain ourselves as the lone superpower. “For a time it seemed like a marriage made in heaven,” Ferguson writes. “The East Chimericans did the saving. The West Chimericans did the spending.”

Suddenly, however, it’s looking more like a marriage made in hell. According to Ferguson, much of the current crisis stems from this increasingly uneasy symbiosis. It turns out “there was a catch. The more China was willing to lend to the United States, the more Americans were willing to borrow.” This cascade of easy money, he argues, “was the underlying cause of the surge in bank lending, bond issuance and new derivative contracts that Planet Finance witnessed after 2000. . . . And Chimerica — or the Asian ‘savings glut,’ as Ben Bernanke called it — was the underlying reason why the U.S. mortgage market was so awash with cash in 2006 that you could get a 100 percent mortgage with no income, no job or assets.” Going forward, the system seems likely to be increasingly unstable, as Treasury Secretary Henry Paulson suggested recently when he warned that unless fundamental changes are made, “the pressure from global imbalances will simply build up again until it finds another outlet.”

Previous periods of global stability and peace had relied on judicious mechanisms like the Congress of Vienna or the Bretton Woods agreements. Now the international system — and America’s position within it — has come to depend on what looks more like a global Rube Goldberg machine running on hot money. And though Ferguson doesn’t come out and say it, the Chinese may now have the upper hand in this chimerical Chimerica. While so far it’s worked in Beijing’s interest to under­write America’s rampant consumerism — because we buy so many of their goods — the Chinese also have the option of recycling some of their surplus billions into their own huge population. We, on the other hand, don’t have the option not to borrow from them. Indeed, it’s no secret on Wall Street and in Washington that the real targets of President Bush’s $700 billion bailout plan were the foreign funds, including “sovereign wealth funds,” that keep America’s financial system afloat. Unless these foreign financiers — principally China and Japan — get reassurance that the global financial system can function properly again, Ameri­ca’s long period of growth and power may be coming to a close.

Perhaps, then, the conclusion should be that Americans need to flex our muscles less as an empire and fight a little harder for fiscal sobriety and balance in our foreign policy. To be fair, Ferguson was early in seeing that America’s fiscal problems were serious. In “Colossus,” he warned presciently of America’s increasing reliance on Chinese capital, although he argued then that we should be mainly worried about domestic entitlements like Medicare and Social Security — indicating that he, like the Bush administration, seriously underestimated the ultimate cost of the Iraq war.

As with Ferguson’s three previous documentary efforts, “The Ascent of Money” sometimes feels as if it were laid out like a shooting script. Ferguson will depart from an exegesis on the 17th century or the Great Depression to pop up in post-Katrina New Orleans or Memphis (for a report on bankruptcies), and we surmise it’s to record another on-scener for PBS. The book, whose main text comprises a scant 360 pages (a light effort for Ferguson, especially considering the ambitious subtitle), is also reductionist at times. Is it really fair to say Chimerica is mainly at the root of our current problems? (A lack of oversight and regulation of the subprime mortgage market here at home had a lot to do with it as well.) China’s backwardness between the 1700s and 1970s was largely due to its dearth of financial innovation, he suggests, but other historians have pointed equally to the absence of technological innovation of the kind that arose in Europe’s close-quartered patchwork of states because of repeated wars.

And in the end, as Ferguson himself seems to acknowledge, the scope of the financial crisis that is plaguing the world today calls into question the book’s premise — that the “trajectory” of finance through history, while “jagged and irregular,” is “unquestionably upwards.” Our increasingly sophisticated finance clearly contains self-destructive tendencies, and its very complexity may have become our undoing. Ferguson wonders whether the cruel realities of biological evolution are the model for what is happening now. Contemplating the financial Armageddon that has devastated Wall Street and set back globalization, he asks: “Are we on the brink of a ‘great dying’ in the financial world — one of those mass extinctions of species that have occurred periodically, like the end-Cambrian extinction that killed off 90 percent of Earth’s species, or the Cretaceous-Tertiary catastrophe that wiped out the dinosaurs?” Here we thought we were making all this progress as a species, and suddenly we find our supposed innovations lumped with Tyrannosaurus rex. Doesn’t sound like much of an ascent to me.

Michael Hirsh is Newsweek’s national economics correspondent and the author of “At War With Ourselves: Why America Is Squandering Its Chance to Build a Better World.”