 "The next Global MF-type collapse could be Sachs, Morgan Stanley: Roubini")
Economist Nouriel Roubini is back with his Doomsday predictions. According to tweets by Dr Doom or Roubini, who gained fame for predicting the 2008 financial crisis, large financial institutions like Goldman Sachs, Morgan Stanley, Barclays and Jefferies and Co could collapse and suffer the same fate as US brokerage firm MF Global.
“What happened to MF Global could happen to Jefferies, Barclays, Goldman Sachs & Morgan Stanley”, said Roubini in a tweet on Monday. He added that leverage and maturity mismatch could lead to runs.
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Roubini, however, argued in another tweet that JPMorgan Chase, Bank of America and Citigroup are “less at risk to a run only because insured deposits of retail bank subsidize the BK presumably the brokerage unit. Huge moral hazard unsolved.”
The problem, as pointed out by Roubini earlier, is short-term financing. Everyday big firms borrow billions through short-term loans and then use it to make long-term bets on risky assets that yield more money.
Since most investment banks depend on overnight repos and short-term financing to maintain their long-term asset leverage, the risk of running a business is high.
In many ways, MF Global’s bankruptcy is reminiscent of the collapse of Lehman Brothers in 2008 at the height of the financial crisis. MF Global found it self in a fix because its short-term lenders refused to lend any more money to the firm.
According to William D. Cohan, a former investment banker and the author of Money and Power, Jefferies faced the same situation last week. “Both provide further evidence that the short-term funding model for securities firms needs to be ended because it’s simply too risky,” he argues in an article in Bloomberg.
MF Global’s filing for bankruptcy protection followed bad bets on euro zone debt and the company’s shares plunged as its credit ratings were junked. Moreover, even though the company was a mid-sized brokerage firm, its disclosure sparked a confidence crisis.
MF Global even admitted in its financial statements that it was at risk if the ratings companies downgraded its debt. “Pursuant to its trading agreements with certain liquidity providers, if its credit rating falls, the amount of collateral” the company “is required to post may increase,” MF Global said in its 10Q disclosure for the second quarter of 2011.
Even though Morgan Stanley and Goldman have registered as bank holding companies since the 2008 crisis and beefed up their balance sheets, Roubini argued Monday that those efforts were not sufficient.