October 31, 2011, MF Global Bankruptcy Rattles Wall St. Firms By AZAM AHMED
MF Global tried to reassure clients of its strength last week after a downgrade, but the company filed for bankruptcy Monday.Tina Fineberg for The New York TimesMF Global tried to reassure clients of its strength last week after a downgrade, but the company filed for bankruptcy Monday.
“Investors across the financial sector are definitely on high alert trying to avoid or minimize these sovereign debt exposures,” said Ed Ditmire, an analyst at Macquarie Capital.
MF Global made a risky bet in a tumultuous market. Recently, the firm revealed that it had $6.3 billion of sovereign debt in troubled countries like Italy and Spain. The position was nearly five times the firm’s equity of more than a billion dollars. As the sovereign debt crisis reached a peak in October, two rating agencies cut the grades on the company’s debt, saying they questioned the firm’s risk controls given the size of the position.
The downgrades sent the company into a tailspin. Trading partners asked the firm to post more money against their portfolio. Adding to the jitters, MF Global reported a third-quarter loss, which further eroded its stock and made its capital position even more tenuous. The firm drew down a $1.3 billion credit line as it fought to stay afloat. But it proved insufficient, and MF Global was forced to file for bankruptcy.
After Moody’s downgrade last week, MF Global sent a letter to clients trying to reassure them of the firm’s strength. On Monday, as some clients called to ask questions and liquidate their accounts, MF Global was not picking up the phone.
Some financial exchanges prevented MF Global employees from entering Monday, while others, including the Chicago Mercantile Exchange and the IntercontinentalExchange, halted the firm’s trading in the morning. That forced clients of MF Global to sit tight or liquidate their holdings.
“I’m disappointed in the way the Chicago Mercantile Exchange, MF Global and the regulators have handled this bankruptcy,” said James L. Koutoulas, chief executive of Typhon Capital Management, a hedge fund client of MF Global. “They had no contingency plan in place and just cut off our trading screens, and we’re forced to liquidate clients’ accounts unfavorably.”
It is difficult to know what other firms could face the same pressure. Most of the small brokerages that clear futures trades like MF Global are private companies, so their capital positions are not as vulnerable to the whims of the public markets. The rest of the industry is dominated by large banks, which analysts say have sufficient capital.
The irony is that MF Global’s sovereign debt may turn out to be right — eventually. The firm was ostensibly making the wager that Europe would come to the rescue of its troubled economies and the countries would not default on their debt.
In such a event, MF Global’s holdings would most likely have paid off. But investors and others just did not have the patience to wait and see.
“The positions still have not caused any losses to the best of my knowledge,” said Richard Repetto, an analyst at Sandler O’Neill. “But this risk-taking is just excessive compared to the size of the balance sheet.”
Michael J. de la Merced contributed reporting.
MF Global tried to reassure clients of its strength last week after a downgrade, but the company filed for bankruptcy Monday.Tina Fineberg for The New York TimesMF Global tried to reassure clients of its strength last week after a downgrade, but the company filed for bankruptcy Monday.
“Investors across the financial sector are definitely on high alert trying to avoid or minimize these sovereign debt exposures,” said Ed Ditmire, an analyst at Macquarie Capital.
MF Global made a risky bet in a tumultuous market. Recently, the firm revealed that it had $6.3 billion of sovereign debt in troubled countries like Italy and Spain. The position was nearly five times the firm’s equity of more than a billion dollars. As the sovereign debt crisis reached a peak in October, two rating agencies cut the grades on the company’s debt, saying they questioned the firm’s risk controls given the size of the position.
The downgrades sent the company into a tailspin. Trading partners asked the firm to post more money against their portfolio. Adding to the jitters, MF Global reported a third-quarter loss, which further eroded its stock and made its capital position even more tenuous. The firm drew down a $1.3 billion credit line as it fought to stay afloat. But it proved insufficient, and MF Global was forced to file for bankruptcy.
After Moody’s downgrade last week, MF Global sent a letter to clients trying to reassure them of the firm’s strength. On Monday, as some clients called to ask questions and liquidate their accounts, MF Global was not picking up the phone.
Some financial exchanges prevented MF Global employees from entering Monday, while others, including the Chicago Mercantile Exchange and the IntercontinentalExchange, halted the firm’s trading in the morning. That forced clients of MF Global to sit tight or liquidate their holdings.
“I’m disappointed in the way the Chicago Mercantile Exchange, MF Global and the regulators have handled this bankruptcy,” said James L. Koutoulas, chief executive of Typhon Capital Management, a hedge fund client of MF Global. “They had no contingency plan in place and just cut off our trading screens, and we’re forced to liquidate clients’ accounts unfavorably.”
It is difficult to know what other firms could face the same pressure. Most of the small brokerages that clear futures trades like MF Global are private companies, so their capital positions are not as vulnerable to the whims of the public markets. The rest of the industry is dominated by large banks, which analysts say have sufficient capital.
The irony is that MF Global’s sovereign debt may turn out to be right — eventually. The firm was ostensibly making the wager that Europe would come to the rescue of its troubled economies and the countries would not default on their debt.
In such a event, MF Global’s holdings would most likely have paid off. But investors and others just did not have the patience to wait and see.
“The positions still have not caused any losses to the best of my knowledge,” said Richard Repetto, an analyst at Sandler O’Neill. “But this risk-taking is just excessive compared to the size of the balance sheet.”
Michael J. de la Merced contributed reporting.
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