Lieutenant Walther Liveblogs World War II: November 1, 1941
Feist: The Bad in Each Other

Understanding MF Global: Brad DeLong's Brain Degrades into Jelly Department

I must be incredibly slow and thick today--as if I had taken a starship ride down into the Unthinking Depths--because I cannot understand why anybody would ever enter into a repo-to-maturity contract with MF Global.

As I understand it:

  • You lend MF Global the money which you don't get back until the bonds mature.

  • Your loan is "secured" by the bonds--but if the bonds default at maturity, MF Global is toast and the bonds won't cover the principal payment you are owed.

  • MF Global pays you a lower interest rate than the bonds would pay.

  • If the value of the bonds declines before maturity, you get to ask MF Global for additional collateral--but if you do so you throw it into bankruptcy and then you are caught in an unholy legal mess.

Why not just buy the bonds? Then you not only get a higher interest rate, but you have the option of selling a liquid security in the time before maturity if you wish--which is better than the option to throw MF Global into bankruptcy and get stuck in an unholy legal mess.

What were they thinking? Or, rather (since they are trained professionals), what am I missing?