Tuesday, November 1, 2011

MF Global files for Chapter 11 protection under a cloud

Investment bank can't locate customer funds

New York – The power politics of multinational investment banking never looked uglier than the events of Halloween, 2011.

John Corzine, former Democratic Governor of New Jersey, spent most of his time on Monday scrambling around Wall Street looking for a vital cash infusion to save his company, MF Global Holdings, Ltd.

He is the former chief of Goldman Sachs and a major fundraiser for President Barack Hussein Obama.

But like a sick New York junkie with no money and no way to get any, he was kicked to the curb all over the street. Even the Federal Reserve Bank has suspended doing business with the former commissions trading brokerage house run by Mr. Corzine since March, 2010.

Earlier this year, Mr. Corzine was the subject of much speculation that he would be named to succeed Tim Geithner as the Secretary of the Treasury.

It's a far cry from his image as late as last June when he arrived at the White House in black tie to honor German Chancellor Angela Merkel for her nation's stabilizing influence in the European Union.

Hundreds of millions of dollars in investor funds are simply missing, according to federal financial regulatory agencies.

As a result, exchanges suspended all trading in MF Global stock.

He told the “Wall Street Journal” last year that he wished to “Goldmanize” the low-risk MF Global business model in favor of taking risks with the company's own capital.

So he invested in $6.3 billion of debt from European countries – Italy, Spain, Portugal, Belgium and Ireland, but not Greece – with a slim Jim margin of equity numbering $1.23 billion. With assets of $41 billion and liabilities of $39.68 billion, MF was leveraged 40 to 1, a level “similar to Lehman Brothers',” according to one securities analyst. It was the failure of Lehman Brothers' leveraged fund that led to the credit crunch and the cascade of banking assets of 2008.

In a classic expression of tongue in cheek understatement, Karen Shaw Petrou of Federal Financial Analytics was quoted, saying “It appears their (MF Global) exposure to risk was particularly acute.”

When shares of MF Global fell 67% last week, Mr. Corzine approached various other investment bankers for a cash infusion, but when it became apparent that he and his staff have no real idea of where the investors' funds are located, each deal fell through, right up to the 11th hour, when the attorneys made the filing for Chapter 11 bankruptcy protection on Halloween – of all days.

The Securities Investor Protection Corporation will preside over the liquidation of MF Global under its “customary procedures,” according to a statement from the Securities Exchange Commission and the Commodities Futures Trading Commission.

Both regulatory commissions acknowledged to the financial press that they had been monitoring the situation for several weeks, just waiting for the other shoe to drop.

Investors may be provided up to $500,000 each in the case of a failed brokerage, under the mandate of the protection corporation.

European news is equally gloomy.

The European financial Stability Facility announced plans to sell 5 billion euros in 15-year bonds to finance the Irish bailout. Later on Halloween, it cut the offering to 3 billion euros on a 10-year duration, but got no takers.

“Even with government backing, nobody wants to buy these bonds,” a prominent analyst wrote.

“Three out of four of Italy's leading banks are already trading bbelow pre-bailout levels. UniCredit, Italy's largest band...is down nearly 6% to $0.85. Italian bond yields are more than 6% and risiing. And U.S. Treasurys are once again the security of last resort- the yield on the 10-year bond fell 12 basis points today,” according to Porter Stansberry.

Other investment banks are at risk.

General Electric holds both a $16 billion exposure to commercial real estate in euro nations, as well as a 50% share of consumer finance business in mortgages and credit cards. Added to the $71 billion exposure, there is an additional $40 billion in commercial loans and leases.

With $44 billion in net tangible equity capital, analysts fear that the perennial blue chip industrial giant will continue to sell its “trophy assets” such as NBC to cover its losses in eurozone hedge funding.

“And...if the crisis in Europe continues to get worse, there's no doubt GE's solvency is at risk.”


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