MF Global: How Wall Street Giants Fall
Posted under: In a hearing on Thursday the judge granted the motion to transfer cash accounts from the defunct MF Global to other brokerages. Cash only accounts worth $869 million will be transferred from MF Global and clients will receive sixty cents on the dollar, which amounts to approximately $520 million in cash. Forty percent of the cash on deposit will not be dispersed, but the remaining amounts should be transferred in about a week.
However, some of the cash belonging to customers is simply gone. Regulators suspect that at least some of the borrowed customer cash was used to pay off bad bets made by MF Global, meaning the money is not simply missing. It is gone. And it is likely untraceable.
How Can A Giant Disappear?
The collapse of MF Global, a company which had been led by former New Jersey governor and ex-Goldman Sachs chief Jon Corzine, revived concerns that Wall Street deals a casino culture, responsible for the economic collapse in 2008. About 1,066 workers were laid off as a result of the bankruptcy, leading to more unemployment claims and creating a ripple effect in an economy already teetering on another collapse.
This is not the first time that we are seeing the end of an era, the fall of a Wall Street giant. After the demise of Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co, the logic behind the downfall of MF Global comes down to this: loss of faith by short term investors, leading to a loss of liquidity. What does that mean? It means that the bank over leveraged itself, using short timer investor money (as in customer money) to pay back debts and losses – and that somehow customers caught wind of something being wrong, panicked, and removed their money at an alarming rate. Without the necessary cash on hand, the result was the collapse of MF Global.
In the case of MF Global, the institution took high risk short-term bets that few investment bankers would advise their own clients to take. Yet, the finance giant did it to themselves. They bet on the European debt market, expecting a large profit once the European crises was solved. But when news leaked of the large debt buy-ups, investors panicked and MF Global came under pressure to put up more money to support its trading positions, threatening to drain the firm’s liquid cash.
Within days of this information coming out, the firm lost more than 67& of its market value, getting downgraded to junk status, leading to investors pulling out money and raising to higher borrowing costs. Much like the memorable scene in Wall Street 2, MF Global heads, including Mr. Corzine and his advisers, frantically tried every major Wall Street player, hoping to off-load at least some of the firm in a bid for survival.
They even found a savior, ready to ride in and save the day. Interactive Brokers was ready to sign a deal and acquire MF Global. With the deal ready to proceed, everything came to a halt when late one night, Interactive Brokers investigated customer accounts and MF Global and red flags went up: some of the customer money was missing. The red flags were bright enough to cause Interactive Brokers to abandon the deal, leaving MF Global to find another solution. That solution was bankruptcy.
Regulators Had Expressed Concern – But No Action… read more HERE.
Originally published in The BroadStreet Times
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