Jon Corzine's bid to revive his Wall Street career crashed and burned overnight when his futures brokerage MF Global Holdings Ltd filed for bankruptcy protection following bad bets on euro zone debt.
Corzine, 64, who once ran Goldman Sachs before becoming a U.S. senator and then governor of New Jersey, had been trying to turn the more than 200-year-old MF Global into a mini Goldman by taking on more risky trades.
But once regulators forced it to fully disclose the bets on debt issued by countries including Italy, Portugal and Spain, it rapidly unraveled with no buyers willing to step in.
MF Global's meltdown in less than a week made it the biggest U.S. casualty of Europe's debt crisis, and the seventh-largest bankruptcy by assets in U.S. history.
The company's shares plunged last week as its credit ratings were cut to junk. The Chapter 11 bankruptcy filing came after talks to sell a variety of assets to Interactive Brokers Group Inc broke down earlier on Monday, a person familiar with the matter said.
Regulators had expressed "grave concerns" about the viability of MF Global, which filed for bankruptcy only after "no viable alternative was available in the limited time leading up to the regulators' deadline," the company's chief operating officer, Bradley Abelow, said in a court filing.
One of the regulators that pressed MF Global, the U.S. Commodity Futures Trading Commission, was unhappy with the brokerage's failure to give it the required data and records. "(T)o date we don't have the information that we should have," a source close to the CFTC told Reuters.
In the end, regulators and markets reacted swiftly to MF Global's troubles, which may have been exacerbated by Corzine's affinity for risk-taking over the course of a career that took him to the top echelons of Wall Street and then into politics.
RIPPLE EFFECTS
The bankruptcy is reminiscent of the collapse of Lehman Brothers in 2008 at the height of the financial crisis. But market participants said the impact from this collapse, far smaller, would likely be contained.
Still, MF Global's 2,870 employees, as well as trading counterparties, were left scrambling and confused on Monday, as MF Global halted its shares but did not file for bankruptcy until well after U.S. markets had opened.
Trading activity in U.S. gold, crude oil and grain futures slowed to a crawl as the bankruptcy forced a chaotic scramble to untangle trading positions.
"Ultimately it will have lost all confidence of its investor base," Michael Epstein, a restructuring adviser with CRG Partners, said of MF Global. "I'm not sure what restructuring it actually does. In some respects, it's a baby Lehman, in effect."
There was also uncertainty over Wall Street's exposure.
JPMorgan Chase & Co's exposure for a $1.2 billion syndicated loan to MF Global is less than $100 million, a source at the bank said. Deutsche Bank is listed in the court filing as a trustee for bondholders with $1 billion of claims. The banks declined to comment.
The impact on the markets should be smaller and nothing like when Lehman failed and hedge funds had money locked up with the firm for months, said Jeff Carter, an independent futures trader in Chicago.
At the Chicago Board of Trade, three traders wearing MF Global jackets were seen leaving prior to the opening of pit trading, and floor sources told Reuters they had been turned away after their security access cards were denied.
Back outside the Manhattan office, one MF Global employee said all he knew about the bankruptcy was what has been on TV. The company's HR department, meanwhile, was busy making calls withdrawing job offers it made in the past few weeks, according to a person familiar with the situation.
"A sale here is potentially the best outcome for employees because the company will continue to operate as opposed to slowly winding down," said Dan McElhinney, the managing director of corporate restructuring for Epiq Systems.
"I think there will be a lot of effort to tee up the sale pretty quickly here."
The New York Federal Reserve terminated MF Global as one of its primary dealers. CME Group Inc, IntercontinentalExchange Inc, Singapore Exchange Ltd and Singapore's central bank, among others, halted the broker's operations in some form except for liquidations.
European clearinghouse LCH.Clearnet declared MF Global in default.
THE ROAD TO BANKRUPTCY
Corzine was trying to transform MF Global from a brokerage that mainly places customers' trades on exchanges into an investment bank that bets with its own capital.
MF Global scrambled through the weekend and into Monday to find buyers for all or parts of the company, while at the same time hiring restructuring and bankruptcy advisers in case nothing could be done.
In the court filing explaining what went wrong, MF Global pointed a finger at regulators. The bankruptcy was hastened by pressure from the CFTC, the Securities and Exchange Commission and the Financial Industry Regulatory Authority, wrote Abelow, the COO.
FINRA ordered that its U.S. broker-dealer unit, called MFGI, boost net capital, and then reveal a $6.3 billion stake in short-term debt from European sovereigns with "troubled economies," he wrote.
Market concerns over such exposures led to MF Global being downgraded to "junk" status by various credit rating agencies, sparking margin calls that threatened liquidity, he added.
"Concerned about the events of the past week, some of MFGI's principal regulators -- the CFTC and the SEC -- expressed their grave concerns about MFGI's viability."
MF Global in the filing did not elaborate on the regulators' concerns or the reasons behind them. The SEC, CFTC and FINRA each declined to comment.
According to a July proxy filing, Corzine would be entitled to $12.1 million in severance, prorated bonus and other benefits upon being terminated without cause. Two other executives would be entitled to more: retail operations chief Randy MacDonald could get $17.9 million, and Abelow could get $13.7 million.
However, federal bankruptcy law may limit any possible severance payouts.
First-day hearings in the case were scheduled for Tuesday at 3 p.m. in U.S. Bankruptcy Court in Manhattan. Among other things, MF Global is expected to seek permission from Judge Martin Glenn to use cash collateral to keep operating its business, court papers show.
CLOCK TICKING
By filing for bankruptcy, MF Global freezes the value of its free-falling notes and gives potential suitors a clearer picture of the losses they would be taking on, said Bill Brandt, CEO of Chicago-based turnaround firm Development Specialists Inc.
If a sale is in the offing, he added, the buyer may be a European bank or sovereign government, as such entities would be particularly keen on stopping the slide and maximizing the value of the notes.
"The real question is how many assets will be left to transfer," said Niamh Alexander, an analyst at Keefe, Bruyette & Woods. "Customers might move very quickly and it may be that every hour that passes shrinks the portfolio of assets that could be transferred" to a buyer, she said.
The bankruptcy is the latest flop for finance-focused private equity fund J.C. Flowers, whose other recent investments include nationalized German bank Hypo Real Estate.
After dividends the private equity firm has received for its preferred shares, J.C. Flowers' net exposure to MF Global is $47.8 million, according to a source familiar with the matter. The firm declined to comment.
MF Global hired boutique investment bank Evercore Partners to help find a buyer, separate sources said last week.
The broker's deeply distressed 6.25 percent notes maturing in 2016 fell 4 cents to 46 on the dollar, according to the Trace, which reports bond trades. The price had earlier fallen as low as 15 cents.
MF Global shares remained halted in New York
Reuters
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Comments:
How can things go so wrong for the professionals managing Other People's Money?
Consequences must dominate Probabilities
In making decisions under conditions of uncertainty, the consequences must dominate the probabilities. We never know the future.
The intelligent investor must focus not just on getting the analysis right. You must also ensure against loss if your analysis turns out to be wrong - as even the best analyses will be at least some of the time.
The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong.
The intelligent investor must focus not just on getting the analysis right. You must also ensure against loss if your analysis turns out to be wrong - as even the best analyses will be at least some of the time.
The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong.