As Crikey first reported yesterday, MF Global, the big US financial broker, filed for bankruptcy, owing more than $US39 billion to clients worldwide, including Australia. It’s the eighth largest financial collapse in US history, excluding banks such as Washington Mutual.
The Financial Times said that bankruptcy became the only option after MF Global was suspended as a primary dealer by the New York Fed, as well as its suspension from the major futures exchange, the Chicago Mercantile Exchange, ICE and NYSE Liffe:
“MF Global became the largest US casualty of the eurozone crisis on Monday as it filed for bankruptcy protection after making big and bad bets on the European sovereign debt market.
“The broker-dealer, run by Jon Corzine, an ex-chief executive of Goldman Sachs and former governor of New Jersey, admitted defeat in its attempt to stay in business after an 11th-hour deal to sell itself to Interactive Brokers Group fell apart. It is the largest failure of a US financial firm since the collapse of Lehman Brothers in 2008.”
Australian newspapers missed the story yesterday, despite MF Global being downgraded last Tuesday (US time) by Moody’s and then revealing a surprise $US191 million quarterly loss on October 25, and then copping another downgrading from, S&P.
The company’s problems, especially its silly 33 times leverage (assets of $US41 billion, on capital of $US1.23 billion), meant a 3% fall in asset values would have wiped it out, as the collapse in the value of the $US6.3 billion of eurozone debt it was trading, seems to have done.
In the bankruptcy filing, US bank, JPMorgan Chase was given as owing $US1.2 billion, and was the biggest creditor of the US group. But media reports said all but around $US80 million was agency money, or funds that it had paid MF Global on behalf of clients or other parties.
Following the New York bankruptcy filing for MF Global Holdings and MF Global Finance USA, The Financial Services Authority in London said the British High Court had appointed administrators to the MF Global UK arm. KPMG executives Richard Fleming, Richard Heis and Mike Pink were appointed as joint special administrators of the UK business which employs 725 staff.
“The UK and overseas operations of MF Global UK Limited have ceased trading and the joint special administrators are working with the regulatory authorities, clearing systems and other counterparties in relation to the orderly wind down of the trading operations,” they said in a statement.
There was no mention of the Australian operations and their fate in the filings.
A Fairfax report this morning said there was around $400 million in the company’s Australian trading book, with an estimated $168 million of clients money. The status of this money will have to be sorted out by ASIC. But much of it is understood to relate to the company’s Contracts For Difference products. Yesterday’s fall in Australia and the big overnight plunges in Europe and the US could see many investors caught short today on these products.
CFDs are pooled funds with all client money being pooled in one account, meaning big losses by some clients can mean possible losses. A failure to meet margin calls can also cause losses that are transmitted to other paid up accounts. MF Global was said to be the fourth-biggest CFD provider in the country. Some local investors will have to post more margin and collateral by 2pm today if they are customers of Comsec, the country’s largest online broker. Media reports said that clients of Westpac’s online broking arm and those of the ANZ’s E*trade are also said to be affected.
The local arm of MF Global had nothing about these developments on its website at 9am.
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