WASHINGTON – The European debt crisis has claimed its first big casualty on Wall Street, a securities firm run by former New Jersey governor Jon Corzine.
MF Global Holdings Ltd., which Corzine has headed since early last year, filed for bankruptcy protection Monday. Concerns about the company’s holdings of European debt caused business partners to pull back last week, leading to a severe cash crunch, the company said in papers filed in federal bankruptcy court.
Corzine, the former head of investment banking giant Goldman Sachs Group Inc., oversaw MF Global as it amassed US$6 billion in debt issued by financially strapped European countries such as Italy, Spain and Portugal. Their bonds paid bigger returns than U.S. Treasury debt because bond investors believed that they were more likely to default.
That bet eventually doomed the company. Its regulator complained last month that it was overvaluing European debt, forcing it to raise more money, according to papers filed with U.S. Bankruptcy Court for the Southern District of New York. Last week, MF Global reported its biggest ever quarterly loss.
Credit rating agencies downgraded MF Global last week. Its stock plunged 66 per cent. Spooked business partners required it to post more money to guarantee its trades. Before long, the company was short on cash.
MF Global looked for outside investors or buyers, but no alternative emerged before the regulators’ deadline, the court papers said. Trading in shares of MF Global Holdings Ltd. was halted early Monday.
MF Global’s bankruptcy shows the danger of investing when the outcome will be determined by government action, said Daniel Alpert, managing partner at the New York investment bank Westwood Capital Partners LLC.
“I don’t think it’s a canary in the coal mine, but it does show you that it’s still a very volatile market,” he said. “The nature of this crisis is that events can lead in any number of ways, and markets are trading on news, not numbers.”
MF Global’s big bet on Europe might not have happened before Corzine’s tenure. Until he joined, the company was known mainly as a dealer in derivatives, investments based on the value of some underlying asset. Corzine wanted to build it into a major investment bank.
One method: Trading for the bank’s own profit, a practice known as proprietary trading. Corzine made his career at Goldman as a trader, and the company became a trading powerhouse under his watch.
Proprietary trading was responsible for much of MF Global’s quarterly loss, it said in court papers.
As of last week, MF had amassed net exposure of $6.29 billion in debt issued by Italy, Spain, Belgium, Portugal and Ireland. Of that, $1.37 billion was from Portugal and Ireland, which already were bailed out by European authorities. More than half was from Italy, where borrowing costs have increased in recent days as investors grew concerned about its finances.
By comparison, Morgan Stanley’s net exposure was only $2.1 billion as of Sept. 30, according to its latest quarterly filing. Morgan Stanley’s stock was battered last month by rumours of its exposure to European debt.
Still, Corzine was hopeful that European leaders would solve the crisis and protect the value of its holdings before investors grew wary. Last week he said he expected the firm to “successfully manage these exposures to what we believe will be a positive conclusion in December 2012.”
MF Global turned a profit just three times in the past 12 quarters.
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.
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.
“It appears their exposure to risk was particularly acute,” but the impact on markets will likely be muted, said Karen Shaw Petrou of Federal Financial Analytics.
However banks could be worried temporarily 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.
Bank shares fell sharply on Wall Street after the bankruptcy filing. JPMorgan Chase & Co. fell 5.3 per cent, Bank of America Corp. 7.1 per cent and Citigroup Inc. 7.5 per cent by the end of trading Monday.
Including its subsidiaries, MF Global has assets as $41.05 billion and liabilities of $39.68 billion, according to its bankruptcy petition. It likely ranks as the eighth-biggest U.S. corporate bankruptcies, according to the research firm BankruptcyData.com. It is slightly bigger than Chrysler LLC., which filed as part of a government-run bailout and restructuring in 2009. It falls below financial-crisis casualties such as Lehman Brothers Holdings Inc., Washington Mutual Inc. and CIT Group Inc.