The Fast Fall of MF Global

By Covering Business     June 4, 2012

By Julia Leite
Columbia Journalism School C’12

Having spent five years running Goldman Sachs, another five in the Senate and four governing New Jersey, Jon Corzine finally stepped out of the spotlight in March 2010 when he accepted a job as the chief executive of the MF Global, a relatively low-profile brokerage that dealt mainly in financial derivatives. Less than two years later, he would find himself at the center of one of the world’s most publicized bankruptcies, taking fall for a risky bet that separated farmers across the country from more than a $1 billion and brought the firm to its knees. 

When Corzine joined MF Global, it was a conservative business that brought together parties looking to hedge their riskier positions. Most of its customers were farmers who wanted to protect themselves against future swings in commodity prices. However, under Corzine’s stewardship, the company would place large bets on European debt. Those positions were designed to bring fast growth to fuel a grand expansion that would create a rival to Goldman Sachs. Instead, they triggered a run on the brokerage that brought down the firm and its CEO.

Because MF Global was a commodities brokerage, its bankruptcy didn’t have near the market impact that Lehman Brothers did in 2008, but its collapse remains the eighth-largest bankruptcy in US history.

Its scale aside, this was not a run-of-the-mill bankruptcy. After the filing, federal regulators launched a probe to investigate whether MF Global had used money in segregated customer accounts to cover its own debts, a violation of the rules governing brokerages. Now, months after the bankruptcy filing, many of MF Global’s clients remain separated from their money.

Critics of the financial industry said the MF Global case highlighted how efforts to tighten regulation in the wake of the financial crisis had fallen short.

The fall of MF Global was hard and fast. For the quarter ended in June 30th, the company reported $45.9 billion in assets, and just $1.4 billion in equity. That left the firm with debt of $44.4 billion, leaving it leveraged to degree reminiscent of the financial crisis. Yet, while the major banks were forced to scale back their leverage ratios after the crisis – Goldman’s, for example, went from 17 percent at the end of 2008 to 13 percent at the end of 2011 – MF Global’s leverage remained high at 30 percent.

MFGlobal’s heavy debt load was partly the result of Corzine’s pursuit of fast growth. His plan was to raise money quickly in order to turn MF Global into a full-service investment bank. The tradeoff to Corzine’s strategy was that if the MF Global’s risky bets didn’t pay off, the company would not have the capital to bail itself out.

On October 24, Moody’s downgraded MF Global, citing concerns over “management’s ability to prudently balance risk and reward.” The downgrade prompted MF Global to move up its earnings release for the quarter ended in September 30 by a day. The company reported a loss of $186.6 million, a steep decline from the $13.3 million gain it recorded the previous quarter, and below the loss of $38.8 million it recorded in the same quarter in 2010. Revenues fell from $314.5 million to $205.9 million. The leverage had remained pretty much the same, with $41 billion in assets to $1.3 billion in equity.

At this point, investors started to balk at the MF Global’s exposure to European debt. Corzine said on an earnings call that the bets on Europe were clouding investors’ perceptions about the company.

MF Global had used a type of loan that allowed it to borrow money using European sovereign debt as collateral. Both the loans and the collateral were scheduled to mature on the same date, when the company would repurchase the assets.

The company’s bets on European sovereigns and its off-balance sheet repos were not news to investors. In its quarterly report filed with the Securities and Exchange Commission in August, MF Global said these transactions were accounted for as sales and purchases, so the related assets and liabilities were taken off its balance sheet, and the company recorded a “forward repurchase or forward resale commitment.” It also stated that these repos totaled $16.6 billion at the end of June, higher than the average for the firm, especially because of “trading in repurchase agreements with respect to opportunities available in European sovereign debt markets.”

The bet Corzine made was that Europe would not let the countries fail. It hasn’t. However, Corzine had not prepared his company for the possibility that its creditors would vanish or suddenly start demanding higher interest to lend to MF Global.

Once Moody’s lowered its credit rating, borrowing became significantly harder for MF Global. With other agencies such as Standard & Poor’s and Fitch starting to downgrade the company a few days later, the costs to keep MF Global afloat would have only increased, leaving the company with a liquidity problem.

Despite Corzine’s apparent confidence in the company and Chief Financial Officer Henri Steenkamp’s statement on the earnings call that the company felt good about its capital structure and liquidity position, investors weren’t so sure anymore. With so little capital, investors concluded that a major move in European bonds could leave MF Global in a difficult position.

The mass exodus by investors shut off access to the loans MF Global was counting on to finance its operations, and the company ran out of cash quickly. The Wall Street Journal recently reported that Corzine gave direct instructions to transfer money out of a costumer’s account to the brokerage account just days before MF Global filed for bankruptcy. The trustee overseeing the bankruptcy estimates that more than $1.2 billion in costumer funds is missing from MF Global.

In its last few days, MF Global tried to find a buyer, which would have saved it from collapse, but negotiations were slow, and the market pressure on the company was already too much – with costumer’s trying to get their money out amid rumors of misuse, lenders demanding tougher conditions for loans with every rating downgrade, the stock falling hard and repos being called back by the lenders. MF Global filed for bankruptcy on October 31, less than a week after its last earnings release, thrusting Corzine back on to the national stage.

This article was written for the Columbia Journalism School’s seminar on business journalism in the spring of 2012.


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