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| (Photo credit: artemuestra) |
Given that so many people have a pessimistic outlook on the global state of economic affairs, many folks have flocked to commodity investments over the past few years. Those who have used commodity exchange-traded funds and mutual funds may have been disappointed with their recent performance, but at least that was only a consequence of market performance. Many others that have gained access to these asset classes through specialized brokerage firms have had much more to fret about. Back in 2011, MF Global, the brokerage giant run by former New Jersey Governor and Goldman Sachs CEO Jon Corzine was faced with a large liquidity crisis. Historically, institutions like MF would borrow funds on an unsecured basis. Recent times, however, have seen these firms' counterparties implement collateral requirements.
As an enormous repo-trade moved into the red, MF found itself in hot water. Assuming that none of the bonds involved in the trade defaulted, the repo trade was relatively low-risk. So long as MF could maintain the positions until maturity, they would net out in the black. As circumstances in Europe continued to look bleak, however, additional collateral was required to prevent the firm's counterparty from pulling the loan. The trade was so large that coming up with additional collateral was no small task. ... Continue to read.
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