No. of Recommendations: 7
Turns out that John Corzine is a pretty savvy investor. His big bet at MF Global was on Italian 2% bonds maturing December 2012. At the time Corzine bought the bonds, the future of Italian sovereign debt was highly questioned. To his credit Corzine was able to accurately forecast that the ECB would unilaterally backstop Italian bonds. Corzine’s only fault was over-leveraging them. If one of us had purchased these bonds in a cash account without leverage, we would have a nice return. MF global was not able to meet the margin calls by Morgan Stanley at the time. Had MF Global been able to meet the calls and/or been given Fed backstopping, we would be hailing Corzine as one of the best performing investors for 2012.

Corzine was way ahead of his time. Bill Gross announced yesterday (10/5/12) that PIMCO has been buying Italian sovereign bonds. [2]

"Spain and Italy are recent adds based on expectation that the ECB will buy them in a few weeks," Mr. Gross told Dow Jones Newswires in emailed comments Friday. He explained his philosophy in such situations as: "Buy what central banks buy before they buy them.

Another instance that the distance between financial genius and financial dunce is sometimes very small. Kind of reminds me of Long Term Capital Management where Nobel Laureate economists almost blew up the financial world and had to be bailed out by the Fed in 1998.

I think buying short term Italian and/or Spanish sovereign bonds is a reasonable strategy for a low percentage of assets. Obviously I would not recommend leveraging them >5X like Corzine did. Leverage up to 2X would be fine if you can borrow at low margin rates. Alternately, you could go along with Bill Gross on this trade by owning a PIMCO fund. The new PIMCO ETF “BOND” has been a huge success. . .

PS: In June I posted that I thought MF Global failed due to managerial incompetence, not criminal intent.[3] Being incompetent is not a criminal offense, hence Corzine and all of the MF Global team are off the hook.



[1] Trade that killed MF Global

[2] Bill Gross story on buying Spanish and Italian bonds

[3] Yodaorange 6/22/12 post on MF Global
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