Jon Corzine; The Intrepid Trader Who Pushed The Limits Of Risk

Jon Corzine has crashed and burned before; sent packing by Goldman Sachs in 1999 after a 24 year career, evading death in 2007 from a near-fatal car accident and now the $40 billion implosion of his own brokerage firm, MF Global. John Corzine made double edged risks, with the potential to drive his firm forwards, or with the potential to demolish it all. It was all but 20 months after taking over when his company filed for bankruptcy, after suffering a massive $192 million QUARTERLY loss and disclosing more than $6.3 billion in bets on European Government Bonds!!

The financial crisis should have put an end to risk takers, but it only fuelled Corzine's hunt for more and more profit. He saw the crisis as an opportunity to make money by taking on higher risks which will eventually generate greater returns. By trading with the company's own money, he exposed them immediately to trading risk, which then also required senior management and ethos changes as MF Global was new to this. Corzine took the plunge and bought half a billion dollars worth of struggling European bonds (Portugal, Italy, Greece....). The return was high as the market was unsure if the governments would pay back their debt. By using the bonds as collateral to borrow money, he transferred the risk to his firm in New York. The reason being? American accounting rules meant that he could book the profits immediately before the bonds had matured! Convenient, for him. By 2011, Corzine had borrowed $6 billion to buy European bonds, forever increasing the risk, whilst yielding higher profits. The strategy that depended on the markets perception of risk in the Eurozone was working, for now anyways!
What is the most I could lose on this investment? The question that almost every investor should ask themselves when considering very risky investments. Value at Risk is a useful tool for risk assessment, most often used by commercial and investment banks to capture the potential loss in value of their traded portfolios from adverse market movement over a specific period. It will then be compared to their available capital and cash reserves to make sure that their losses can be covered without putting the firm in danger of risk. The absence of MF Global's European bonds in its published VAR meant that the company lacked the complete picture, concealing information from the public and hiding their risk. Once the news finally did get out, it took markets a week to absorb the information as it was such a huge shock. MF Global was slashed of their credit rating by Moody's investment service to non-investment grade, 'junk bonds'. This meant that shareholders were very unlikely to receive payments and so to no surprise, MF Globals share price halved! Creditors in London were left in shock, demanding millions from the company, anxious about their European bond holdings.This inevitably left the firm with nothing else but to file for bankruptcy.

The question posed at the end of the day is that did Corzine really take that big of a risk? Or did he simply just fail to understand how risk can be seen in the post crash world?. What we have to remember is that finance is not just a mathematical game, but a social one too. 'Real risk' is not always the cause for failure, it is perception of risk that sometimes matters more. This brings me to my final question, should financial giants like MF Global be allowed to get away with this? Or should there be regulations put in place in order to prevent financial giants failing in the future?
Let me know what you think!

VW; The 'Diesel Dupe' of 2015

VW have been in the headlights for quite some time now following their emissions scandal which has been ongoing since 2009, un-noticed until now. The sophisticated piece of kit known as the 'defeat device' has been fitted to approximately 11 million cars worldwide, allowing them to cheat on their emissions test and pass, when in reality, their emitting up to 40 times more nitrogen oxide pollutants than is allowed. "We've totally screwed up" (Michael Horn, VW America Boss), that doesn't even cover it.

With diesel sales already slowing, this was the last thing VW needed. The crisis led to a sharp fall in demand, and consequently share prices fell too. So, this poses the question, how efficient is the stock market when information is withheld? Share prices at all times should fairly reflect all relevant available information and new information should affect its price quickly and rationally. 

As we can see from the graph below, VW's share prices plummeted on the 18th September when they finally disclosed their secret to the public. Although if we look more closely, we can actually see that share prices began to fall on the 17th, the day before. This somewhat suggests that information regarding the 'defeat device' was possibly leaked to a specific party just before that information was made available to the public. 

This small decline tells us that the share price reflects Fama's Semi-Strong Form Efficiency and therefore we can rule out Weak Form., and possibly Strong Form? Fama (1970) states that share prices reflect all publicly available information, such as company announcements or annual earnings figures. Abnormal returns cannot be made by studying publicly available information as the market has already adjusted prices to reflect it. 

Please leave any comments, wether you agree or disagree!! 

Digby Jones Troubleshooter - A review on Ebac

Ebac's company objective was to diversify into a new market, boosting the wealth of the business from 15 million to 50 million through the acquisition of Norfrost. The acquisition was a huge risk to take for Ebac, considering the assets they were obtaining and planned to use may not all be functional. Not only this, but how many more years would they get out of these machines in order to make it profitable before they have to invest in entirely new machinery?

The time scale set for completion was very unrealistic, 6 weeks until completion of the factory was not enough time, a more suitable time period as Digby suggested should be 2-3 months. This would have given them more time to inspect the machines thoroughly before they left the Norfrost factory to ensure they would be in working order once dismantled, shipped and re-assembled.

It is clear that the family run business is in need of some outside expertise, specifically on the marketing front. They failed to identify a target market with enough time until completion of the factory. As the market is already dominated by foreign companies (e.g. Beko) which can afford to produce goods and import them for a low price, Ebac needed to implement a strategy in order to give themselves a competitive advantage as they simply could not afford to sell their goods at as low prices. Understanding consumer demand in a market they had just dove into was vital. Basing their market on Norfrost's standing customers was a large risk to take, as they may have already found other suppliers, leaving Ebac with no orders upon completion of the factory. In order to gain a competitive advantage Ebac needed to invest heavily on ensuring the quality of their goods was of a very high standing, sticking out from competitors products.