Former Goldman Sachs CEO Jon Corzine took the reins of the historic brokerage house MF Global in March 2010. Traditionally, MF Global generated commissions trading for clients – a low-risk (and often low-reward) business model. As evidenced by the quote above, given last year to the Wall Street Journal, Corzine wanted to "Goldmanize" his new firm. He envisioned a full-fledged investment bank that would take risks with its own capital.
Unfortunately for Corzine, he decided to focus that risk on European sovereign debt. The firm bought $6.3 billion of debt from countries including Italy, Spain, Portugal, Belgium, and Ireland... It avoided Greece. The firm only had $1.23 billion of equity as of the end of September. Total assets equaled more than $41 billion, meaning MF Global was leveraged almost 40 to 1 – a similar level to Lehman Brothers. A 3% fall in the company's portfolio would wipe out equity...
Thanks to this excessive leverage, we have our first U.S. victim of the European debt crisis. After its shares fell 67% last week and the company failed to find a buyer, MF Global filed for Chapter 11 bankruptcy this morning…
For his stellar performance at MF Global, Corzine will receive around $12.1 million in severance, according to the New York Times' business blog, Dealbook.
On a bizarre but unrelated note, MF Global floated a bond offering three months ago that included a clause stating bondholders would get an extra 1% if Corzine was asked to serve in the Obama administration.
While MF Global is the first to go, several U.S. companies carry far more exposure to European debt. Take General Electric, for example…
About 20% of GE's commercial real estate holdings are in euro nations – about $16 billion in total exposure. And 50% of GE's consumer finance business (mortgages and credit cards) is euro-based. That's $71 billion in total exposure. Plus, you can add to that another $40 billion in European commercial loans and leases (mostly aircraft).
I asked my colleague Porter Stansberry – possibly the biggest GE bear you'll meet – to comment on the situation. He told me…
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That's $127 billion in direct exposure to Europe. Assume a 20% haircut on these assets (based on bond prices), and you're looking at $25 billion in losses. That's a conservative estimate based on today's prices... but we expect the situation will get worse. |
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Due to $100 billion-plus of assets sales (including some of its best money-making properties, like NBC), GE now holds $44 billion in net tangible equity capital, which is enough to weather the storm in Europe – for now. However, I believe GE will continue to sell its trophy assets to cover these losses, which will greatly minimize the earnings power of the surviving company. And... if the crisis in Europe continues to get worse, there's no doubt GE's solvency is at risk. |
We expressed our doubts that last Thursday's European rescue was sufficient. It only addressed immediate needs (namely Greece), while ignoring the larger problems (namely Italy). After Thursday's manic gain, the market is waking up to the realities in Europe...
Three out of four of Italy's leading banks are already trading below pre-bailout levels. UniCredit, Italy's largest bank (and our preferred bellwether for the nation), is down nearly 6% to $0.85. Italian bond yields are more than 6% and rising. And U.S. Treasurys are once again the security of last resort – the yield on the 10-year bond fell 12 basis points today.
But it gets worse…
In addition to writing down Greek debt by 50%, the European Union bolstered its bailout fund, the European Financial Stability Facility (EFSF). Today, the EFSF announced plans to sell 5 billion euros in 15-year bonds to finance the Irish bailout. Later today, it cut the offering to 3 billion euros and shortened the duration to 10 years. Even with government backing, nobody wants to buy these bonds.
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New 52-wek highs (as of 10/28/11): V.F. Corp (VFC), Abbott Laboratories (ABT), Contango (MCF).
There's more profanity in today's mailbag, but it's positive (for a change). Please send your feedback – preferably without profanity – to feedback@stansberryresearch.com.
"Holy shit! If that wasn't the Holy Grail of Friday Digests, I don't know what is." – Paid-up subscriber "Ignorant Dupe"
"I admire how you are an honest and honorable person. You tell it like it is, even if the truth hurts. The truth hurts a lot these days. I have to laugh at how some of your immature subscribers, and former subscribers, bash you, call you an asshole, and threaten you. You have the guts to tell your readers a lot of things that they don't want to hear, but that they DO need to hear. I am not a financial whiz, and I'm 60. But I understand clearly how you explain Social Security as a Ponzi scheme, and I take no offense to you saying current recipients are 'on the dole.' Too few people (Glenn Beck and Rick Perry are on that short list) address SS as the Ponzi scheme that it is. Too many others sugarcoat that rotting piece of crap that we call SS, and then pass the buck to the next group of spineless politicians and 'leaders' who will then kick the can down the road further. My generation is going to suck the last dollars out of the SS system, and then it will be defunct. Meanwhile, social unrest and potentially violent revolution will be in high gear.
"I'd like to think that our politicians will fix things before that happens, but you and I both know that, by and large, our politicians are basically a worthless bunch of selfish buffoons. For those reasons, and some others, our economy and our society as we know it faces some extremely hard times, and who in their right mind could have any confidence in our leaders to make the tough, but meaningful changes that may allow us to avoid utter catastrophe. I've done something that I never thought that I would do. I bought a gun, and got my [concealed-carry] permit. Things are going to get REALLY ugly, and I am thoroughly embarrassed to face the world that my generation and yours are leaving for our children and grandchildren. Lord help us!!" – Paid-up subscriber James Prarat
"I was especially struck by your three e-mails about [in Friday's mailbag]…
"First let me say 'Asshole' should be the leader of the 'Occupy Wall Street' as he makes such a compelling rational argument as to why socialism is better than capitalism…
"The ex subscriber guy what hit me most about his comment was how the suggestion that those of us who use their mind to produce are non productive, comes from those who have no mind. I run my own business usually using my mind to do administration work, books and record keeping or sales and marketing. However my shop or small factory is only a five-person operation so usually I spend more time making things with my hands. 'I don't build in order to have clients. I have clients in order to build.' – Ayn Rand…
"Last but not least the 800k in social security benefits guy. Buddy I was just looking at my social security statement today. I suggest all subscribers pull theirs out and take a good look at it. Especially the part where it shows your contribution and employers. In Porters and my own personal situation all of this is our money as we are self employed. In your calculation and poor math you forgot to factor in the medical benefits of Medicare. My current medical cost last year was insurance premium 7k+ out of pocket 5k+ HSA contribution 5K so total 22k. I can only assume no insurance company in business for profit wants to sell 68 to 70 year old customers health insurance with a 10 co-pay and as low out of pocket expenses as Medicare for less than 20k/year.
"Your math was 22/yr is not 76 years but 36 years if you neglect the value of the free health care. My SS math at full retirement age is 1300/m x 2 = 30k/yr + Medicare benefit value 20k/yr . Wow 50k/yr x 16 yrs life expectancy of 82, amazing exactly Porters figure of 800K. What did this Ponzi scheme cost me so far with a few more years to contribute about 200k. Wow that is a 400% return on your money. Now that I am improving my investment skills because of this services so maybe I can hope my 401k will grow to a value of 800K. With a 6% per year return it would provide me with the same 50k per year the government has promised in this ponzi scheme for my vote.
"Porter You love what you do and it is evident in the Friday rants I do not think enough subscribers could cancel to end these rants. In fact the only thing that could make me cancel is if you stop the rants and stupid email post from the cancellation ex subscribers. I hope my email gets posted before I assume." – Paid-up subscriber Todd McClure
Porter comment: Todd... You are a very wise man.
"In yesterdays S&A Digest, you said that most individual investors should never buy stocks and this statement struck me as important, in the context of why I subscribe to your services.
"I only started looking at the stock market twelve months ago and then I did so by subscribing to many different competitors of S&A, as well as S&A.
In doing this, my aim was to find a financial newsletter that I could trust, was right most of the time and from whom I could/might learn a lot and at the same time make some money and, after assessing the many different newsletters I subscribed to (at significant cost) I finally, and recently, decided on the S&A newsletter(s) and more specifically your personal stuff.
"Considering that I started this process ONLY with your Digest, I could have avoided all of the others and just gone with your newsletters but not being a clairvoyant I didn't know this at the time, so here we are now.
"My point in all of this is that I don't know some of what you say, in how to value a company/stock, BUT that is what I am relying on you (and your other writers) to do for me and that is also what I believe I am paying you for, in my subscription fees.
Like most people, I am too bloody lazy to go through the process of valuing every stock I may want to buy and so I pay S&A to do it for me and I think that that is a reasonable thing to do. Otherwise, if people like me didn't think this way, then you may not have any subscribers.
"However, am I to assume from your S&A Digest of Oct 28th 2011, that I shouldn't be doing that and that I should be doing and relying on ONLY my own due diligence?? If the answer to this question is yes then what am I paying S&A for, apart from the lessons you give every Friday? I also have to say that I really enjoy and very much appreciate your Friday lessons." – Paid-up subscriber Robert
Porter comment: I personally think it's a mistake to do anything with my savings that I don't fully understand. As that is what I believe, that is what I wrote to you and to all of our subscribers. You are certainly entitled to your own view.
If you've been reading our newsletters, I trust you find our work to be reliable. I will continue working hard to make sure it remains so. But in my humble opinion, you should double-check everything we (or anyone else) write about something you're going to risk your savings on. To me, that's only common sense. I might pay someone else to pack my parachute. But I am sure as heck going to double-check that it is done properly before I jump out of the plane.
And to double-check something thoroughly, I have to know how to do it myself.
Regards,
Sean Goldsmith
New York, New York
October 31, 2011
'We have to take risks'... The first U.S. victim of the euro crisis... Is GE next?... Europe's bailout dud...