MF Global As First Major Casualty of European Debt Crisis

After the Greek bailout plan stalled amid talk of a referendum vote, the global financial market reacted with horror. The disastrous turn of events seemed like it could force Greece into bankruptcy and catapult it out of the Eurozone.

But, while plans for the referendum were scratched and a glimmer of hope remains that Greece may yet recover in the long run, MF Global Inc., a global financial derivatives broker that invested $6.3 billion in European sovereign bonds, is headed for Chapter 11 Bankruptcy. The firm, under the helm of CEO Jon S. Corzine since March of 2010, bet heavily on European government bonds and lost. MF Global is being called the “first major US casualty of the European debt crisis.”

After MF Global announced a $191.6 million quarterly loss on October 25th, its fate was all but sealed. Two short days later, MF Global’s credit rating was downgraded to junk status and investors started to flee. According to some reports, MF Global’s bankruptcy amounts to the seventh largest bankruptcy in U.S. history. James Giddens, who was entrusted with liquidating Lehman Brothers’ brokerage after it filed for bankruptcy, was appointed by U.S. District Judge Paul Engelmayer as trustee for overseeing the liquidation of MF Global.

Corzine, former CEO of Goldman Sachs and former senator and governor of New Jersey, resigned from his post as MF Global’s CEO, saying that he felt “great sadness for what has transpired at MF Global and the impact it has had on the firm’s clients, employees and many others.” Corzine, and other top executives at MF Global, are already the subject of legal inquiries about irregularities at the firm and more lawsuits are likely to follow.

Some $633 million was found missing from customer accounts during the days leading up to MF Global’s bankruptcy filing. It was this deficiency that apparently scuttled attempts to sell MF Global before it was too late. Recent reports suggest that MF Global’s accounts at JP Morgan Chase, a custodian for the brokerage, may contain those missing funds. If it is found that MF Global mixed customer funds with its own, it would violate regulatory rules and perhaps uncover liability for securities fraud. In light of allegations that MF Global mixed customer funds in with its own, it is further disconcerting that its CEO, Jon Corzine had been actively trying to delay reforms that would stop firms from using customer funds for proprietary trades.

The bigger question asked in the aftermath of MF Global’s sudden collapse and Corzine’s epic fall is how regulators did not do more to control the high risk-taking that Corzine introduced during his brief tenure at MF Global. Some critics point out that Corzine tried to turn MF Global, which was previously focused on derivatives, into more of an investment bank type institution. Corzine was a self-described “recidivist banker” who, in retrospect, was given too much free rein to adopt high risk positions.

As Bart Chilton, a commissioner with the Commodities Futures Trading Commission (CFTC), “MF Global is the new poster child for why thoughtful financial regulation is needed, now more than ever.” One can’t help but wonder whether a pair of corporate law professors got it right in a recent article in which they argued that “those who have the power to make decisions about trading, and who profit significantly from them” should have to “share the losses when firms fail.” Corzine and other top executives at MF Global will surely bear the brunt of the blame for MF Global’s collapse and their practices at MF Global will be scrutinized for any shades of impropriety. But, for the many customers who entrusted their money with MF Global, it is already too late.

 

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