Nouriel Roubini, also known as Dr. Doom, made waves in the social networking and financial industry (NYSEARCA:XLF) after making some dark tweets. On Monday, Dr. Roubini tweeted “What happened to MF Global (NYSE:MF) could happen to Jefferies (NYSE:JEF), Barclays (NYSE:BCS), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS). Leverage and maturity mismatch can lead to runs.”
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On Halloween, futures broker MF Global filed for Chapter 11. Within a day, it was made aware that the company was not in compliance with the CFTC and CME (NASDAQ:CME) in regards to customer segregation requirements. After refusing to disclose information to regulators, CEO Jon Corzine admitted to using client money as its financial troubles mounted. The former Goldman Sachs CEO managed to run MF Global into the ground after taking the reigns of the company in March 2010. Investors have to wonder when will regulators take leveraged money and Paul Volcker seriously? Eric Lewis, a specialists in international insolvency cases explains, “For every dollar of its own capital on its books, it had borrowed $40, a leverage even greater than that of Lehman Brothers at the time of its collapse.” Dr. Roubini goes on to explain, “Broker dealers still very levered a little less than before, and have a huge maturity mismatch: so a large loss reduces capital and leads to a run.”
On the positive, Dr. Doom believes that JP Morgan (NYSE:JPM), Bank of America (NYSE:BAC), and Citigroup (NYSE:C) are “less at risk to a run only because insured deposits of retail bank subsidize the BK presumably the brokerage unit. Huge moral hazard unsolved.” As the chart above shows, the entire banking sector (NYSEARCA:KBE) has been in decline, with Jefferies and Bank of America leading the way.
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With massive debts and leverage weighing on the global financial system, other well-known economists have also raised bank run concerns. In his November 1 post, Economist and Nobel Prize winner Paul Krugman writes, “The question I’m trying to answer right now is how the final act will be played. At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro.” It appears the bank run is already underway. Greek bank deposits plunged by 5.5 billion euros in September, the biggest monthly drop ever.
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