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Debt and Default: Are More Financial Dominoes About to Fall?
Is the financial game almost up?

By Bob Stokes
Tue, 08 Nov 2011 17:30:00 ET
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To MF Global Holdings' bond holders, Jon Corzine was "the man on the white horse."
 
No wonder: before he took the CEO position at MF Global, Corzine had been New Jersey's Governor, a U.S. senator, and the CEO of Goldman Sachs.
 
Bond holders had such confidence in Corzine that they demanded an extra percentage point in interest if he left to return to government.
 
But instead of "saving the day," he blew up the company's finances.
 
Corzine made a $6.3 billion bet on European sovereign debt, which eventually led to MF Global filing for bankruptcy on October 31:
 
"Bond investors lent MF Global Holdings Ltd. (MF) $650 million three months ago in a bet Jon Corzine would succeed in turning the futures broker into a mini-version of Goldman Sachs Group Inc. The firm filed for bankruptcy before making its first interest payment on the debt."
Bloomberg (11/2)
 
What began as lender over-confidence turned into "no confidence." In another Bloomberg article (11/7), author William Cohan wrote:
 
"MF Global found itself in financial peril so quickly because its short-term lenders decided almost overnight that they no longer wanted to take the risk of lending money to the firm. Jefferies faced the same situation -- even if it stanched the bleeding last week -- and it isn’t out of the woods."
 
How many other financial firms are close to losing the confidence of lenders?
 
"When the house of (credit) cards begins to fall in on itself, the trend turns from inflation to deflation. That’s when creditors turn their focus from lending to collecting and when debtors turn their focus from borrowing to repaying. But by this time there are too many IOUs, and debtors cannot service them, much less repay them. Falling asset values and economic contraction thwart efforts to honor the loans. Debtors begin to default. When that happens, the game is up."
Conquer the Crash, 2nd edition, p. 404
 
Just how close are we to "game up"?
 
Well, the latest Financial Forecast states: "While Europe is the epicenter of the credit crisis, the situation in the U.S. is hurtling toward the same type of abyss..." The recently published issue goes on to reveal the thought-provoking analysis behind that statement. 

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