11/07/2011 06:33 pm ET Updated Jan 07, 2012

MF Global Proves We Are All Still at the Mercy of Bankers

The weekend saw a near catastrophe similar to the Lehman failure in 2008, although it had nothing to do with Europe and few noticed it. The explosion of MF Global continues to cause ripple effects of the type we've seen before, and not in a good way, three years ago. Let me bring you up to date on this largely unreported, but still quite potent and ticking time bomb.

A bit of history will help: MF Global spent most of its life as a simple commodity brokerage house, executing commercial and private trader orders in the many futures pits around the globe. In the previous two decades, it was one of the biggest of the commodity houses outside of the investment banks.

Their devotion to the execution of client orders, however, as opposed to using their access to develop prop-trading funds and managed futures funds, ultimately doomed them. As markets moved to electronic platforms and high frequency and algorithmic trading models began dominating trade, their client-centric business model became anachronistic. Since 2008, shares of MF Global had been slowly but significantly dropping -- the firm was dying a slow death.

Enter Jon Corzine. When he first joined MF Global in 2010, I was surprised. What did this ex-Goldman CEO and New Jersey Governor want with this dying commodities firm? In retrospect, we see: Corzine, the ultimate egotist, was going to rehabilitate his reputation by saving MF -- and therefore the "Hail Mary" pass of deeply leveraged bets in Italian sovereign debt.

Thus leading us back to recent news on MF Global. We couldn't want for a more complete soap opera of financial ruin: We've got rogue trades, missing money, huge 40-to-1 leverage, a missing CEO who's under investigation by the FBI and has retained top-drawer legal representation, and 50,000 accounts slowly being relocated to new homes with positions intact, but with only a fraction of the margin money they supposedly originally held.

Is any of this sounding vaguely familiar? It should -- from Lehman to AIG; these are very familiar lines to a now old play. Further, until Saturday, it looked possible that the MF Global snowball could even touch off a liquidity and credit crisis in the same nature as Lehman.

Late Friday, the CME released a small notice to customers and clearinghouses on margins. On a first read of this notice, it seemed as if CME was hiking margins close to 30 percent on all of its products across-the-board for all of its customers. Everyone freaked out.

CME, charged with overseeing MF Global prior to their blow-up and now responsible for transferring those client accounts, seemed to be hitting the panic button. Were they groping for safety from further rogue trades from MF inside their own system that no one was so far aware? Were the clearinghouses collectively going to be hit with a multi-billion dollar burden? No matter what was going on behind the scenes, inside the trade statements being pored over by the Federal trustees, everyone was being asked to come up with several more billions of margin money come Monday morning.

Most traders don't have money for extra margins -- we all trade close to our limits, almost all of the time. A 30 percent increase in margin costs was going to translate into massive liquidations in all the major commodity markets; Oil, gold, copper, wheat, corn, soybeans. There'd be a scramble for liquidity and for credit -- also a replay of 2008. Would this one default in one commodity firm be enough of a tipping point to generate a true credit squeeze that might even ripple through equities, through the bond market? We'd have to wait for Monday to find out.

But on Saturday afternoon, the CME "clarified" their previous notice: They were looking to lower the margin requirements of transferred MF accounts, not bring everybody else's UP.

The fear among insiders of the commodity markets before this collective sigh of relief heard on Saturday was palpable -- while futures and OTC commodity trade isn't anywhere the size the mortgage markets were in 2008, it got people thinking. And it got me thinking.

Nothing has changed. The leverage is still too high. The interconnectedness of markets is still too great. The lack of regulation continues and the chance of rogue trades taking down financially inflated markets and causing systemic risk is still out there. We still rely upon banks and the "shadow" banks of leveraged funds to accurately report their positions to us, instead of having them under constant scrutiny by the Fed or other capable regulators.

What have we learned since 2008? Apparently nothing.