by: Bill Holter
August 2, 2012
Think back, do you remember Lehman Bros.? How about MF Global and more recently PFG Best? What do they all have in common? Yes, they all went bankrupt you are correct but…what they ALL had in common was “how,” or more to the point HOW FAST they went bankrupt. All of these entities literally went belly up within a week’s time. But how does a firm “just go bankrupt” … overnight? Easy, other firms begin to pull money out at the same time that no one will “lend” to them in the overnight markets. With 20 or 30 to 1 leverage, the milk spoils pretty quickly!
Now, we have Knight Capital in the exact same situation and it has been reported that they are looking for a buyer. They lost $440 Million (chump change in today’s world) when their “algo” trading system “malfunctioned” 2 days ago. There is speculation as to the how’s and why’s, I don’t really care. There is speculation on the conspiratorial level that this is just another “rehypothecated vacuum cleaner” being used to force people out of their commodity contracts or to steal client money, (I hope not and feel for the customers) but this I believe is losing sight of the much MUCH bigger picture.