How did MF GLobal fail? The story has been changing by the hour, but it always seems to come back to one person: John Corzine. Apparently the risk taken on by one person cause a failure of confidence in the company and this caused a domino spiral towards bankruptcy. There had been some rumblings on the Street, some staff jumped ship in the past few weeks, but did anyone really expect a total failure .... again?
It all started with very large positions that John Corzine, former New Jersey governor and Goldman Sachs Group Inc. co-chairman took in Italian, Spanish, Belgian, Portuguese and Irish debt. The fear about Europe's debt crisis and the possible losses that MF Global could sustain, caused a lack of confidence in MF Global, the position was just too big. Regulators began to look at the position, and the market began to downgrade and basically shun MF Global. Other firms could have stepped in to offer some liquidity to MF Global, but some say that they chose not to help because they just didn't like John Corzine.
On Saturday the New York times reported that MF Global was in trouble and that trading may be halted on Monday. On Monday trading was halted, there were talks of a take over, but discussion with Interactive Brokers failed and the US branch was forced into Chapter 11 bancruptcy, by the end of the day, the UK branch also went into administration. In the wake of Lehman, one would expect that we would be prepared, there would be some safety net. Now, once again, clients are scambling to get a redemption of thier assets. This morning there were announcements that assets were co-mingled and that 1 Billion dollars was missing, the result is all assets are now frozen until the trustees can sort everything out. The client assets should be safe, at least securities are safe, but those in Futures or other commodities trades may not be safe. It was reported that a attorney for MF GLobal made a statement late today that all client assets had been recovered, but there are still reports about possible missing millions. MF Global is in bankruptcy court as we speak, it is reported that they have requested 2.7 to 3 million dollars to pay salaries and 5 million in discretionary dollars.
The big story at this moment is the co-mingling of funds. It looks like there will be criminal charges against Corzine, there may also be some insider trading charges. If executives knew about the European exposure and the extended levereage and took a short position against the company, they could be charged with insider trading. They are expecting client and shareholder lawsuits to be filed by the end of the week.
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