The BBC's business editor Robert Peston presumes the latter. 'MF Global isn't big enough or connected enough for its collapse to risk serious damage to the financial system,' he says. 'There should not be a domino effect of other bankruptcies.' But has he spoken too soon? The wool futures market, in which MF Global dominated 80% of deal-making, has plunged into chaos today. The aftershock may well be felt long into the future.
So, what went wrong? Well, MF Global holds $6.3bn in short-duration European sovereign debt. CEO Corzine believed these 'short-duration' debts to be low risk as they were due to mature in 2012, a year before the European Financial Stability
Facility was set to expire. The debt was bought from embattled Eurozone nations, including Belgium, Italy, Spain, Portugal and Ireland, priced at around five times the value of MF Global's equity capital.
Despite the so-called 'progress' on the EU bail-out, investors decided that the level of risk was too high and began pulling vast swathes of cash out of the business. In its second quarter results statement presented on October 25, MF Global reported losses of $191.57m. So, in answer to the question, it simply lent more than it could afford to lose. Much, much more.
The firm's brokers were banned from trading floors across the US yesterday as shares in its two largest creditors, JPMorgan and Deutsche Bank's fell 3.3% and 8.7% respectively. And it's so long MF Global, a firm with 230 years of history, stemming back to a small sugar brokerage on the banks of the River Thames in London.