I am not sure if the MF Global bankruptcy has caught your attention. However, if the only aspect of this bankruptcy that has caught your attention is the "Corzine" matter, or the comingling of funds by this firm, then you are missing the big picture.
Right now, this seems to be setting up as, potentially, the 8th largest bankruptcy in US history and the largest failure of a financial firm since Lehman.
What happened to MF Global?
In effect, MF Global invested in European bonds in a highly leveraged manner, and thought that it would make significant profits in the difference between the loan payments it had to make on its leveraged position and the relatively high coupon payments that these bonds were paying. However, the fly in the ointment is when one of these country's default on their notes, or the notes are written down, such as in the case of Greece. As the Greek situation deteriorated, and a significant portion of these loans were going to be written off, the counter-parties to MF Global were placed at serious risk and demanded higher margin requirements to back the MF Global loan, which, of course, MF Global did not have. Hence, this liquidity crunch caused the MF Global bankruptcy.
Can it happen again?
Now, if you are foolish to believe that MF Global is alone in this position within the financial world, then I have MANY bridges to sell you. Furthermore, we have not even started dealing with the countries with larger debt issues such as Italy or Spain.
Let's first look at Greece, which has approximately 11€ Billion in debt maturing in 2012, which represents 6.55% of its total GDP. Until this point, we have been led to believe that Greece is in the worst situation of all the European countries. However, the United Kingdom has 14€ Billion in debt that is maturing in 2012, which represents 6.77% of its total GDP. Now, here is the kicker: Italy has over 16€ Billion in debt maturing in 2012, which represents 7.5% of its total GDP. Therefore, it is quite clear that we are nowhere near done with the European debacle. Furthermore, if the European Union is having such a difficult time dealing with Greece, what is going to happen when Italy now comes to the forefront?
What is making this situation much more dire is that the Italian borrowing costs have recently soared. In fact, yields have risen from 4% to over 6% within the last 12 months. This has meant an additional 40€ Billion a year in additional interest costs. This is in addition to the fact that the Italian economy has been contracting as we speak. In fact, Nouriel Roubini is suggesting that Italy will experience continued negative growth starting in Q3 2011.
So how much longer do you think it will be until this nightmare rears its ugly head, the size of which will dwarf the Greece issue!?!?
When, and not if, it does, you will see further financial firms with liquidity crunches, forcing more of them into bankruptcy. Now, what happens to investors when more firms go into these types of liquidity crunches?
The trustee overseeing the bankruptcy of the financial firm Sentinel Management Group that began in 2007 stated that "people should expect that the money on deposit with MF Global will be tied up for some time." In fact, it has been four years and counting for the investors with money on deposit with Sentinel Management Group.
The liquidity crisis of 2007-2009 was the "preliminary bout." In fact, we have not yet seen the "main event." However, the fighters are stepping into the ring as we speak, with the bell set to be rung to begin the bout early in 2012.
Ultimately, this is why I believe we can potentially experience fiscal and economic Armageddon wherein we have rising interest rates due to general distrust that loans will be prepaid, coupled with continued deflationary pressures as more loans default, more margin calls are made, and more governments force their creditors to take haircuts. And, they build upon each other and create a snowball effect that will potentially have a disastrous effect upon the entire world, which is a financial "perfect storm" for which NO ONE seems to be preparing.
Since we experienced the liquidity crisis of 2008, I have been warning investors and traders that there will come a time when it will be too risky to be trading, even if you are on the right side of the market. Situations like this are proving my point. We will come to a point within 2012, which could be the middle towards the end of 2012, where financial markets can potentially seize up for these reasons.
Therefore, if you correctly intend to short the world markets in 2012, make sure you are continually taking more and more of your money off the table the deeper we move into 2012 and the heart of this impending worldwide financial liquidity debacle. Lastly, you need to research your bank thoroughly, as many banks will be hit with the same liquidity issues when things go really bad, and even though you are out of the market, you need to make sure you can access your money at your bank.
See my article on Seeking Alpha for more on your bank account safety.