MF Global's Bankruptcy
Jon Corzine's MF Global faces the music in a post-2008 financial crisis world.
The bankruptcy of MF Global late in 2011 showed that Wall Street never really learned its lesson about risk-taking from the 2008 financial crisis. It also spawned a new financial villain in CEO and former New Jersey governor and U.S. senator Jon Corzine.
MF Global's failure, the biggest spillover of the European debt crisis, will continue to stay in the minds of investors in 2012 as regulators, Congress and the Federal Bureau of Investigation search for $1.2 billion in missing client money. As investigators retrace the bankruptcy of the brokerage -- the eighth largest in U.S. history -- an investigation may serve up the most notable criminal complaints since the collapse of Lehman Brothers.
At issue are two things. First is the search for missing client funds that were supposed to be held in ultra-safe segregated accounts that may have been used by MF Global to liquidate trades leading up to its Oct. 31 bankruptcy. Secondly, there is the massive $6.3 billion bet the firm made on short-term "repo-to-maturity" positions on European government debt as the region fell into crisis. MF Global's demise was a speedy one. After reporting a third-quarter loss on $191.6 million and its multibillion-dollar European debt position on Oct. 25 earnings, the company's shares were nearly halved. Ratings agencies Fitch and Standard & Poor's cut MF's bonds to junk; customers fled the brokerage, and by the end of that week, MF's only way of surviving was a last-ditch fire sale to a competitor. Over Halloween weekend, MF executives feverishly rushed to find a buyer but quickly discovered hundreds of millions of dollars in client money was missing Currently, regulators, investigators and exchange operators like the Chicago Mercantile Exchange (CME) are searching through records to see if the money can be retraced to transfers, like a $200 million payment MF Global made to JPMorgan Chase (JPM) the Friday before its collapse. If MF knowingly transferred client funds, it would be a violation of federal securities laws. Even without a completed investigation or formal allegations of impropriety, there are lessons that can be drawn from MF's demise. Wall Street's regulators still don't have a full watch over Wall Street trading -- even after the voluminous new rules. More importantly, MF's disclosure of its European bet and its subsequent demise signals the difference between the actual and perceived risks that the European debt crisis has for financial institutions. Had MF Global been able to survive to see its short-term trades on Italian, Irish, Spanish and Belgium debt expire, the firm likely would have reaped a big windfall. But MF's demise signals that cracks still remain in the regulation and health of Wall Street. Yet to be seen is whether any criminal inquiries will arise in the new year. -- Antoine Gara