Dec 08 2011

MF Global: more evidence of the London financial black hole

Posted by: Nick Shaxson in: Thoughts

Update: new links added

I spend a lot of time in Treasure Islands outlining the various ways in which London is an offshore jurisdiction for financial regulation (as well as for many other things.) Emmanuel Fourmont just pointed out this to me, from Zero Hedge, a respected financial blogger, following an earlier post describing a “gradual freeze of the shadow banking system” in Europe. It is quite an apocalyptic post:

the entire shadow banking system in Europe is becoming unglued. . . . virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of “hypothecation, and re-hypothecation

The article makes a couple of crucial, crucial points:

the trail in the MF Global collapse, where it is yet another infinitely leveragable product that once again comes to the fore, once again goes straight to that hub for “questionable activities” – London.
. . .
The MF Global bankruptcy . . . is a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world’s entire financial system, and ii) an implicit construct embedded within the shadow banking model which permitted the heaping of leverage upon leverage upon leverage, probably more so than any structured finance product in the past (up to and including synthetic CDO cubeds), and certainly on par with the AIG cataclysm

Offshore bolt-hole London, once again. This is exactly, exactly what I describe in Treasure Islands, naming some of the same players (and rehypothecation, too, which is the ability to re-use collateral again and again: something that should never have been allowed to happen. In London they just didn’t give a f###ing damn, as long as the world’s money rolled in. And now it’s the British taxpayers, and many others, who will pay)

Zero hedge has written a long, informative and excellent article, which is worth reading for financial crisis (and offshore) wonks, but I’ll leave it there; I’ve got too much else on at the moment. I’d just add that John Corzine, who led MF Global, has just said this:

“I simply do not know where the money is”

As a final note, back to Zero Hedge; which points out again that the AIG cataclysm was London-centred too:

The actual [AIG] office that blew up the world the first time around, was not even based in the US. It was a small office located on the top floor of 1 Curzon Street in London’s Mayfair district, run by one Joe Cassano: the head of AIG Financial Products. The reason why this office of US-based AIG was in London, is so that Cassano could sell CDS as far away from the eye of Federal regulators as possible.

(And the post looks at the principle of ‘rehypothecation’ of collateral. The IMF has just put out another paper touching on this, arguing that the shadow banking system is even bigger than realised. It’s here.) Final quote from Zero Hedge again:

In the UK, the epic failure of supervision has allowed banks to become de facto monsters of infinite shadow banking fractional reserve leverage – every bank’s wet dream!

My quote of the day (yesterday.) If you want to read more, Reuters has more on this story here, again pointing out the London loophole, as does this blogger (hat tip: Bill Kruse). Naked Capitalism has a more (initially) skeptical and detailed look at the nuts and bolts of rehypothecation, looking at the similarities with money creation (as Zero Hedge notes) and adds:

Banks operated in London to get around the US restriction; then rehypothecation was a massive factor in the complexity of the Lehman bankruptcy. . . two years on, there is no UK reform of rehypo. . . see this JP Morgan offering, for an example of what they think they can do. Presumably they think that with an implicit Government backstop, it’s OK to rehypo to the max; they have a derivatives business to support, too.

That would be a Doomsday Machine
. .
JP Morgan . . . are thinking hard about how to get rehypothecation going in the grand style. They know a volume business with a cheap government backstop when they see one

See also the Debtonation blog, which also notes:

in the City of London’s shadow banking system, anything goes

One more for the Economic Crisis and Offshore page.

9 comments so far

Bill Kruse 12th December, 2011 2.22 pm

Karl Denninger touches on the subject in a post from today If the City is really all that’s holding this country together financially then we’ve got a problem because the City has to go, pure and simple.

Matt Scott 12th December, 2011 10.22 am

Great work Nick, so good to read your book and then see you’re active on a daily basis updating people. You don’t often see that with successful authors I find. Just wondering what you think of the current euro treaty talks – is it a case of cameron protecting the tax haven of The City against reasonable euro attempts at reform?
Keep up the great work!

Nick Shaxson 12th December, 2011 8.53 am

will write something short, shortly – a bit snowed under right now, thanks

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