It all started this weekend, when the NYT’s Gretchen Morgenson wrote a piece about MF Global and its Euro bond bets.
She said that problems from Europe usually come to the U.S. riding “on the waves of derivatives.”
Two sentences in particular set this whole cat-fight off:
MF Global’s debacle was a result of complex swaps deals it had struck with trading partners. While those partners owned the underlying assets — in this case, government debt — MF Global held the risk relating to both market price and default.
These arrangements at MF Global underscore two big problems in the credit derivatives market: risks that can be hidden from view, and risks that are not backed by adequate postings of collateral.
Two days later, ISDA media.comment pounced on her in a column called, “Sad Proof”. They mocked her, saying that Morgenson didn’t know what the heck she was talking about since MF Global’s bets were made with bond positions financed via repo transactions, not derivatives.
We would have thought that, with a little checking, this point would be pretty obvious to one and all…
In short, there were no derivatives, no opaque financial instruments and no hidden risks in the story of MF Global’s downfall. There were, though, a lot of inaccuracies in the way that story was told…
Then another financial journalist made fun of her for not understanding derivatives. Cue Felix Salmon of Reuters:
This is the tragedy of Morgenson: because she’s incapable of getting her facts straight, she needlessly destroys arguments which are fundamentally sound.
MF Global did indeed hide its European sovereign risk from view — it was held off balance sheet, for no good reason.
… And then Dealbreaker comes in with the final blow… “the thing that blew up MF Global was not a “derivative,” but rather just “leverage,” or “secured lending,” or “bog-standard repos.”” The essentially say, since the risk and the asset are split up in this case… isn’t that sort of a derivative? And so, isn’t Morgenson technically right?:
I grew up in a derivatives business, so when I see a thing that takes one asset and disaggregates some of the risks and costs of that asset and apportions them to different parties – I sometimes, just for fun, like to call that thing a “derivative.” Our little trade above separates the funding of the bond from its credit risk – one of us has the ownership of the underlying asset, but we’re both parties to a bilateral contract that has payoffs based on the state of that asset.
End game: it looks like Morgenson was technically right. The other financial journalists just assumed she was talking about a derivative because she mentioned the word in a sentence near to the one above in which she explained what blew MF Global up.
Ha. Of course, it’s not great that it took someone 567482 words to explain why she’s technically right.
Nice job everyone, that was fun.
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