MF Global Holdings Ltd., the holding company for the broker-dealer run by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed Chapter 11 bankruptcy today in New York after its bets on European sovereign debt went sour.
The holding company for the futures brokerage and broker- dealer headed by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon Corzine sought court protection on Monday morning in New York, less than a week after reporting a record quarterly loss and disclosing a $6.3 billion wager on European sovereign debt. The company’s stock price declined 67% last week with its bonds trading at distressed levels as investors were spooked when MF Global’s debt was downgraded to junk status by both Moody’s and Fitch rating agencies. The gigantic exposure ultimately proved out to be the company’s undoing – not because the trades soured but because things escalated from there with demands from regulators to boost capital, credit downgrades, margin calls and finally bankruptcy.
Trading in MF Global was halted on the New York Stock Exchange prior to the filing. The bankruptcy filing followed the company’s suspension as one of 22 primary dealers by the New York Fed, as well as the suspension on trading by MF Global on the Chicago Mercantile Exchange, ICE and NYSE Liffe, which said MF Global clients were limited to liquidation-only trading.
In Australia, MF Global has 5% of the CFDs market and is thought to be the fourth biggest player behind IG Group and CMC Markets according to a May Investment Trends report. With the future of the UK and Australian divisions in jeopardy many clients were trying to withdraw funds from the provider. Local brokers were also closing off business with MF Global while some of the UK and Australia’s biggest banks were left counting the cost of their exposure.
‘I’ve never seen anything like it,’ said one former employee. ‘We had no idea that things were that bad. I am speechless.’ However, some City sources noted that the their were early signals. About two weeks, European equity research personnel were offered voluntary redundancy packages in what was thought to be a restructuring of the business to focus on fixed income trading.
MF Global, based in the USA with offices in at least seven other countries is thought to have some 2,870 employees. The European division of MF Global, which was once part of Man Group, employs about 725 staff in London, with a further 175 across the Continent. The group’s business in London consists of stock broking in commodities, fixed income, foreign exchange and shares dealing. The share trading business is divided into institutional and contracts for difference and financial spread betting for its retail clients.
The bankruptcy proceeding listed MF Global Finance USA with $100 million to $500 million in assets and $10 million to $50 million in estimated liabilities. The company has about USD 1.6 billion in debt. MF Global had been close to a sale of the bulk of its assets to electronic broker and market maker Interactive Brokers Group late on Sunday, according to people familiar with the situation.
MF Global on Monday sent a note to its spread betting and CFD clients in the UK informing them it had taken a ‘strategic decision’ to discontinue the operations with immediate effect, requiring them to either liquidate their positions immediately or post 100% of their value. ‘The UK and overseas operations of MF Global UK Limited have ceased trading and the joint special administrators are working with the regulatory authorities, clearing systems and other counterparties in relation to the orderly wind down of the trading operations,’ they said in a statement.
Meanwhile the UK FSA confirmed on Monday that MF Global UK Ltd’s administration by KPMG will be conducted under the new Special Administration Regime (SAR) devised for investment firms. This is the first time that SAR will be used since the mechanism was adopted in February 2011 following the collapse of Lehman Brothers. The SAR has advantages over ordinary corporate administrations including a quick return of client assets, the FSA said.
On the other side of the world, MF Global Australia holds about $168 million of client funds and its problems threaten to engulf the Australian Securities and Investments Commission if its offshore problems spill over to the local arm. It is already understood that clients from large banks including Commonwealth Bank, Westpac and ANZ have all been impacted and have been hit with margin calls while clients at CommSec are presently no longer able to open new contracts for difference. ANZ and Westpac both had working relationships with MF Global in which their clients utilised the broker to trade CFDs, although both said only a small number of their customers were affected. All three banks said their financial exposure to MF Global was either very small or not material. In Asia, Singapore Exchange Ltd (S68.SG) clamped down by directing MF Global’s local arm not to take on new derivatives positions and to reduce current trades with immediate effect.
The broker of commodities, derivatives, shares and forex had $7.2 billion of customer funds in segregated accounts as of Aug. 31, according to the Commodity Futures Trading Commission. The largest unsecured creditors are JP Morgan Chase – owed $1.2bn – and parts of Deutsche Bank, which are owed $1bn in notes due in 2016 and 2018, MF Global said in court papers.
The bankruptcy and ominous sell-off are a sad ending for the 228-year-old brokerage led by Jon Corzine. It also brings an ignominious end to the plans of Mr Corzine, chief executive of MF Global and former chief executive of Goldman Sachs, who had been aiming to expand the operation from its roots as a futures broker into a mini Goldman by taking on more risky trades.
Comments: A brokerage company that was clearly too aggressive and greedy for its own good. In partuclar, Corzine’s decision to chase yield by investing heavily in European sovereign debt was clearly ill-advised and always seemed much too risky.
Whose funds were MF Global using to leverage 30 times into PIGS debt? It would appear that Corzine walks in, probably with a heavily performance related contract, leverages up a sleepy balance sheet, then walks away when it collapses. What were the rest of the (ex-Goldman) board doing, and were they all complicit? The end result being that the staff lose their jobs.