Law Of The Jungle

London Banker looks at insolvency in the context of Lehman and MF Global:

I am concerned that MF Global demonstrates that the too-big-to-bail banks have found a new and almost riskless way to make outsize profits. Because derivatives, repo and liquidity are so very highly concentrated now, and leverage is at pre-crisis levels again, these few players can rig the markets and liquidity to choose when and how their clients fail. Their top down view of clients’ trading and custody portfolios and cash positions and flows puts them in a position to exercise tyranny. They can game their clients, taking advantage of superior information, credit and liquidity to ramp or crash targeted markets as needed to precipitate a crisis. They can demand the choicest assets as collateral, setting very high over-collateralisation thresholds, and then exercise during post-failure turmoil to retain everything they hold at rock-bottom prices.

In today’s low volume markets, a crash or squeeze is even cheaper and less risky than ever before. Instead of working for their clients’ success, an unscrupulous clearing bank – or several operating in collusion – can profit on engineering market instability or turmoil.

In other words, these were murders. Don’t show weakness or the jackals will pull you down.

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