Soros Gambles Big on European Debt

The fact that George Soros took his investment firm private earlier this year may be the factor that potentially allows him to score big on a $2 billion bet: European bonds purchased from MF Global Holdings Ltd., Jon Corzine’s now-bankrupt securities firm.

Of course, Soros (left) is gambling his reputation, as well as money, on the possibility that the eurozone will succeed in avoiding defaults by the time the bonds mature at the end of 2012.

MF Global, before declaring bankruptcy on Oct. 31, had made its own big bet on European bonds, accumulating some $6.3 billion in short-term debt from Italy, Spain, Portugal, Belgium, and Ireland—some before Corzine even joined the firm. During the summer of 2011, however, according to a Wall Street Journal report, the staggering amount of debt in a steadily weakening economic environment spooked investors and drove the firm into bankruptcy.

This was despite the fact, according to testimony from Jon Corzine in a congressional hearing Thursday, that the bonds were held via “repurchase transactions to maturity” (RTMs or repos) that, according to Corzine, actually reduced the risk of holding the securities outright.

Said Corzine: “Financing the purchase of debt with RTMs allowed MF Global to reduce certain kinds of risk. Because RTMs financed MF Global’s purchase of the debt security to the security’s maturity, the RTMs eliminated the risk (referred to as ‘financing risk’) that at some point during the life of the security MF Global would not be able to find additional financing for the security, and would therefore be forced to sell the security, potentially at a loss. Elimination of the financing risk meant that MF Global’s market risk (arising from the fluctuation of the price of the underlying debt security) was significantly reduced.”