Derivatives Begin To Unravel

From Forbes:
Things went from bad to worse this week for MF Global. The commodities and derivatives brokerage firm reported fiscal second quarter losses on Tuesday that sent its share price plummeting nearly 50% and 67% on the week.

The firm, run by former New Jersey governor and former Goldman Sachs chief Jon Corzine, then saw its credit rating cut to junk by Moody’s and Fitch making borrowing costs higher.

What’s behind MF’s terrible week?

Put simply, the European debt crisis. MF holds $6.3 billion worth of bonds issued by Italy, Spain, Belgium, Ireland and Portugal. Couple that with quarterly losses of $191 million and it’s a recipe for disaster.

Reuters reports that MF Global is working this weekend to sell all or part of its business. MF Global has reached out to major banks including Barclays, Citigroup, Deutsche Bank , Jefferies Group Inc , JPMorgan Chase, Macquarie Group Ltd , State Street Corp and Wells Fargo, according to Reuters. “If it gets done, it needs to get done by Monday,” a source told Reuters. “Whether it gets sold in parts or pieces, they are in good shape to orchestrate this process.”

MF Global”s problems trigger not-too-old memories of fall 2008 when some of Wall Street’s most powerful financial firms’ fates were determined over the course of a weekend. In fact, it appears some of the players remain the same. The Wall Street Journal reports that J. Chris Flowers is amid those trying to make a deal work for MF Global. Flowers you might remember from the 2008 financial crisis–he had a hand in nearly every major deal that went down that fall including Bank of America‘s purchase of Merrill Lynch.
My View:

The great deleveraging process of Economic Winter continues.

MF Global, like many hedge funds and banks, underestimated the reserve capital requirements needed to continue their business in the event their investments were, shall we say, less than stellar performers.

It was unreasonable to expect that high leverage (12 to 1 or higher) would not lead to crisis as some point.

Now they need to be sold, or bailed out! 

The situation is highly reminiscent of Lehman's, but on a smaller scale.

But it is a reminder that we are in the process of working our way down Exter's pyramid as we move from less liquid assets to the very liquid assets of cash and gold.

The question is not if we are moving down the pyramid, but whether it will occur slowly or quickly, and even catastrophically.