MF Global Insight from Previous Bankruptcy

The largest independent commodities brokerage went under. Money was missing. Client accounts were frozen. A bunch of hedge funds were among the unsecured creditors.  It was the fourth largest bankruptcy in US history.  That was six years ago, when Refco filed for bankruptcy. It sounds like MF Global today.

To the eerie similarities between the two debacles add the fact that Refco’s futures and commodities trading arm became part of MF Global. At the time MF Global was Man Financial, owned by Man Group. Having successfully fought other bidders for the Refco futures business, Man Group folded it into its futures brokerage and in 2007 spun out MF Global. The brokerage lasted only four years as an independent company.

Immediate reasons for the two bankruptcies differ.  Refco went into crisis when it emerged that chief executive Phillip Bennett concealed $430 million in bad debts through an elaborate scheme. MF Global was apparently toppled by a massive bet on European sovereign debt. Regulators are investigating missing funds but we don’t know that there was any deliberate cover up.

In any event former chief executive Jon Corzine lost no time in getting himself a defense attorney. Note that Mr. Bennett was sentenced to 16 years for securities fraud.

Another difference: not all of Refco went into Chapter 11 bankruptcy. The futures and commodities subsidiary was not in Chapter 11 and that helped make it an attractive acquisition target. Also, there was no obvious impact on futures trading, whereas the MF Global bankruptcy caused trading to shrink, at least for some days.

Two big independent derivatives brokerages, two bankruptcies. What is it with these brokerages? The common theme that emerges is that it is difficult to make money in this business and even harder to control the risks.

In these difficult circumstances, hard-driving chief executives went to extremes to keep their companies going. Mr. Bennett concealed the red ink. Mr. Corzine made a huge, contrarian trade, buying debt in a shaky market, no doubt in the hope that it would bring a large profit. Instead it brought the company down.


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One Response to “MF Global Insight from Previous Bankruptcy”

  1. Was MF Global Too Large? « HedgeFundSmarts Says:

    […] of small futures brokers have survived for decades. Yet two big derivatives brokerages, Refco and MF Global, went bankrupt.   Refco collapsed amid a fraud scandal; MF Global apparently misplaced client […]

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