Wall Street recklessness bolsters argument for CD investing

Broken pink piggy bank with scattered pennies

A large financial firm borrows enormous amounts of money and invests it in risky assets. The investments sour, and pretty soon the firm can’t meet its obligations, so it goes bankrupt. Sound familiar?

Lehman, in September 2008, comes to mind.

But, unfortunately, this is MF Global, in October 2011.

What’s hard to fathom is how, only three years after a financial debacle caused by excess leverage and deficient common sense, another big Wall Street firm could bet the farm and lose.

The ink on the Dodd-Frank financial reform legislation has hardly dried!

Investigators are still poring over the books of MF Global, run by former Goldman Sachs CEO and onetime New Jersey Gov. John Corzine, but here’s what’s come to light so far:

MF Global self-destructed by buying shaky European government debt ($6 billion or so) and financing it with "repos to maturity."

A "repo to maturity" is yet another "trade" in an undistinguished line of opaque transactions Wall Street has concocted to buy assets with borrowed money, with little or no down, and to hide what it’s doing from regulators and investors.

The problem here was that, when the collateral for these "repos" declined in value, MF Global had to put up ready cash.

And it didn’t have any.

It may have kept itself temporarily afloat by "borrowing" from customer accounts. (Some $500 million to $1.2 billion is missing.)

But, eventually, the jig was up, and the company went under.

Financial pundits would call what MF Global did a "risk-on" trade. I’d call it "stupid-on."

Thankfully, rather than being "too big to fail," MF Global was "too small to save," so a taxpayer bailout wasn’t necessary.

But, once again, we’ve had a large firm annihilating itself by making idiotic bets with borrowed money, while government agencies (and there were plenty, from the Commodity Futures Trading Commission to the Fed) did little or nothing to stop it.

The way I see it, if regulators are so ineffective they can’t keep firms like MF Global from engaging in fatally toxic transactions, at least the government ought to make whole innocent investors who get caught up in the results.

Come to think of it, that’s why some of us rely on Federal Deposit Insurance Corp. and National Credit Union Administration deposit insurance.

So, no matter how bad CD rates get, I’m sticking to these fully government-insured investments.

Give me the "risk-off" trade any day.

You can follow Interest.com on Twitter and Facebook.