Opinion

Bethany McLean

The euro zone’s self-inflicted killer

Bethany McLean
Nov 18, 2011 22:59 UTC

By Bethany McLean
The opinions expressed are her own.

There were a lot of things that were supposed to save Europe from potential financial Armageddon. Chief among them is the EFSF, or European Financial Stability Facility.

In the spring of 2010, European finance ministers announced the facility’s formation with great fanfare. In its inaugural report, Standard & Poor’s described the EFSF as the “cornerstone of the EU’s strategy to restore financial stability to the euro zone  sovereign debt market.”  The facility itself said in an October 2011 date presentation that its mission is to “safeguard financial stability in Europe.”

That of course hasn’t happened. And the evidence suggests that the EFSF may have only exacerbated the problems.

In theory, the facility is supposed to provide a way for a country that the market perceives as weak to still borrow money on good terms. The initial idea was that instead of the financially troubled country itself trying to sell its debt to live another day, the EFSF would be the one to raise the money and lend it to the country in question. The logic was simple: country X might be shaky, but the EFSF deserved a triple-A rating.

For all of its would-be financial firepower, the EFSF isn’t much to see—it’s just an office in Luxembourg with a German-born economist CEO named Klaus Regling, who oversees a staff of about 20. Its power—and that rating—is derived from the assumption that any debt it issues is guaranteed by the members of the euro zone. Initially, each member pledged unconditionally to repay up to 120% of its share of any debt the EFSF issued. (A country’s share is determined by the amount of capital it has in the European Central Bank.)

Did accounting help sink Corzine’s MF Global?

Bethany McLean
Nov 1, 2011 20:18 UTC

By Bethany McLean
The opinions expressed are her own.

On Monday morning, MF Global, the global brokerage for commodities and derivatives, filed for bankruptcy.  The firm’s roots go back over two centuries,  but in less than two years under CEO Jon Corzine, whose stellar resume includes serving as the chairman of Goldman Sachs, as New Jersey’s U.S. Senator, and as New Jersey’s governor, MF Global collapsed, after buying an enormous amount of European sovereign debt. The instant wisdom is that he made a big bet as part of his plan to transform MF Global into a firm like Goldman Sachs, which executes trades on behalf of its clients, and also puts its own money at stake. Although the size of the wager has received a great deal of scrutiny, the accounting and the disclosure surrounding it have not–and may have played a role in the firm’s demise.

In the 24 hours since the filing, more ugly questions have piled up, with the New York Times reporting that hundreds of millions of dollars of customer money have gone missing, and the AP saying that a federal official says that MF Global has admitted to using clients’ money as its problems mounted. Whether this was intentional or sloppy remains to be seen; MF Global didn’t respond to a request for comment by press time.

At the root of MF Global’s current predicament was a simple problem:  the profits in its core business had declined rapidly.  That core business was straightforward, even pedestrian; what the firm calls in filings a “significant portion” of total revenue came from the interest it generated by investing the cash clients had in their accounts in higher yielding assets and capturing the spread between that return and what was paid out to clients. As interest rates declined sharply in recent years, so did MF Global’s net interest income, from $1.8 billion in its fiscal 2007 second quarter to just $113 million four years later. MF Global’s stock, which sold for over $30 a share in late 2007, couldn’t climb above $10 by 2009.

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