For A Nation That Obsessed With What “Is” Is, We Can Now Wonder What “Net” Is

One of the consequences of MF Global and the whole PSI in Europe is that investors are less trusting about what “net” is.

The “gross” positions are about 2.6 billion. That is across Europe. If they are long and short all sorts of German and French government bonds in their role as market maker, that wouldn’t be much of a concern. If that is the bulk of the gross position, then the market has clearly over-reacted.

I would like to see gross and net by instrument. So bonds as one line item. CDS as another. Futures as another. I would like to see gross and net on a notional basis, and DV01 basis. It would also be helpful to know a jump to default number. I would want sovereign exposure and European bank exposure. Basically I would want the data that I would have on my own positions.

If it turns out the bulk of the gross position is in German and French bonds with limited net exposure and a small DV01 then JEF is being punished unfairly and should bounce. This is probably the most realistic situation as they are a primary dealer in Europe.

If it turns out the exposure involves some big curve bets where they bought long Italian debt and hedged with some short dated protection, that is a different story, and it would be bad.

My guess is the market is over reacting and that the positions make sense in the scope of their primary dealer status and the details would show minimal risk on all proper credit risk measures. I think more disclosure is better right now, and even if the market takes some advantage of the disclosure to cause some P&L pain, that is far better than losing trust in the company and deciding to do business elsewhere.