October 31, 2011

MF Global Bankruptcy Spooks Investors; First U.S. Casualty of Europe’s Debt Crisis

Securities firm run by former New Jersey Governor and Goldman Sachs head Jon Corzine

Jon Corzine earlier this year. (Photo: AP) Jon Corzine earlier this year. (Photo: AP)

WASHINGTON (AP) — MF Global Holdings Ltd., the securities firm run by former New Jersey Governor and Goldman Sachs head Jon Corzine, is seeking bankruptcy protection one week after reporting its biggest-ever quarterly loss.

MF Global shares plunged 66% last week. Besides the loss of $186.6 million for the fiscal second quarter, investors were spooked when MF Global's debt was downgraded to junk status. Credit-rating agencies expressed concern about the firm's $6 billion portfolio of European debt.

MF Global appears to be the first major U.S. casualty of Europe's debt crisis, although last week it sought to reassure investors that the investment in European sovereign debt was prudent. It blamed the big loss on weaker-than-expected trading revenue and one-time costs.

Trading in shares of MF Global Holdings Ltd. was halted early Monday. The Wall Street Journal and others reported that Corzine worked over the weekend to find a buyer. The Journal says that an effort to sell the firm to Interactive Brokers Group of Greenwich, Conn., fell through.

"If they don't find a buyer, the only other option would be someone willing to come in and provide enough financing to reorganize the company," said Christopher Ward, a bankruptcy attorney with Polsinelli Shughart PC. "I think that's unlikely, given the market conditions" and the company's debt, he said.

NY Fed Suspends MF Global From Doing New Business

The filing came after the New York Federal Reserve said it suspended MF Global from doing new business as a primary dealer. MF Global was one of 22 companies considered financially secure enough to sell U.S. government debt on behalf of the Fed.

Corzine took over the helm at MF Global early last year. He set out to grow the company into a global investment bank. In addition to futures and commodities trading, MF Global started making bets with the firm's own money, The Journal reported.

Corzine is also a top fundraiser for President Barack Obama. Corzine has helped raised at least $500,000 for Obama's re-election campaign since April, according to records released by the campaign.

MF Global turned a profit just three times in the past 12 quarters. As the European debt crisis threatened to spread, investors and analysts focused on the company's holdings of debt from Belgium, Italy, Spain, Portugal and Ireland.

Last week, Corzine said he expected the firm to "successfully manage these exposures to what we believe will be a positive conclusion in December 2012."

At worst, MF Global's bankruptcy could roil credit markets and make financial companies reluctant to lend to each other. It wouldn't equal the fallout from the failure of Lehman Bros. in 2008 because Lehman was bigger and more intertwined with other companies.

However, banks could be spooked temporarily by concerns about who lost money as a result of MF Global's bad bets. Fears about losses on European debt already have roiled markets for months.

As the names of MF Global's business partners were reported, some companies sought to distance themselves. Investment bank Jeffries Group Inc. said in a statement that it holds less than $9 million in debt issued by MF Global.

Bank Stocks Fall on News of Bankruptcy Filing

Bank stocks fell broadly Monday after the bankruptcy filing. Bank of America fell 4.5%. Both Citigroup and Morgan Stanley fell 5.5%.

MF Global filed its petition with the U.S. Bankruptcy Court for the Southern District of New York. Including its subsidiaries, MF Global has assets as $41.05 billion and liabilities of $39.68 billion, according to its bankruptcy petition.

Its five biggest unsecured creditors are banks assigned to administer bonds issued by MF Global. Their job is to collect MF Global's payments and distribute them to bond holders. The banks, which include units of JPMorgan Chase & Co. and Deutsche Bank, do not necessarily own MF Global's bonds themselves, said Ward, the bankruptcy attorney.

The company's biggest stockholders are investment managers, insurers and hedge funds. Among them: Fidelity; Guardian Life Insurance Co.; hedge fund Fine Capital Partners, LP and TIAA-CREF.

The case was assigned to Judge Stuart Bernstein. Bernstein gained attention this summer for a ruling that might make it harder for victims of Bernard Madoff's Ponzi scheme to recoup their losses.

Bernstein ruled against a trustee who was trying to recover investors' losses from an unrelated $700 million fraud. The trustee sued Wachovia, saying that the bank ignored obvious signs of fraud. Bernstein ruled against the trustee, saying the bank's suspicions were not the same as actual knowledge of the scheme.

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Associated Press writer Ken Thomas contributed to this report.

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