THE HUGE US brokerage firm MF Global became the country’s largest casualty of the euro zone crisis yesterday when it filed for bankruptcy protection after making big bets on the European sovereign debt market.
The futures broker, 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 company since the collapse of Lehman Brothers in 2008, and the seventh largest US bankruptcy by value in US history.
MF’s collapse will add to market jitters ahead of Thursday’s G20 economic summit in Cannes and came as the Greek government also added to uncertainty by announcing a referendum on its deeply unpopular EU bailout, and the Organisation for Economic Co-operation and Development (OECD) reported that the euro zone is facing near zero growth next year.
It slashed its euro zone growth forecast to just 0.3 per cent from 2 per cent in May, warning that any sudden crisis could plunge the bloc deep into recession.
The unexpected referendum decision by Greek Prime Minister George Papandreou provoked opposition outrage in Greece and nervousness in European capitals. “We trust citizens, we believe in their judgement, we believe in their decision,” Mr Papandreou told ruling Socialist party (Pasok) deputies. Failure, however, could see his government forced to resign.
Mr Papandreou said he needed wider political support for the fiscal measures and structural reforms required by international lenders.
Main conservative opposition New Democracy party spokesman Yannis Michelakis accused him of wrecking tactics. “He cannot govern and instead of withdrawing honorably, he dynamites everything,” he said.
Global credit institutions such as JP Morgan Chase, which was said to be owed $1.2 billion (€1.7 billion) by MF Global, and Deutsche Bank, owed various sums from $76 million to $325 million, were listed as the broker’s creditors.
Its brokers were barred from trading floors across the US as market participants tried to assess whether the company’s failure would trigger the same catastrophic effects as Lehman or the more short-term and contained upheaval caused by the 2005 bankruptcy of Refco, another futures broker.
MF Global was undone by a slew of credit downgrades to “junk” after Moody’s, Standard Poor’s and Fitch decided the company had taken on too much risk with its $6.3 billion bet on European sovereign debt.
Mr Corzine, the former head of Goldman Sachs and former Governor of New Jersey, worked with bankers and lawyers through Sunday night to try to sew up the deal with Interactive Brokers.
That would have involved operating assets transferred to the acquirer while the holding company was put into bankruptcy. People close to the situation said that structure would ensure an immediate, orderly transfer of positions.
But by yesterday morning, both sides had failed to finalise a deal. MF Global’s shares were suspended as the Federal Reserve Bank of New York said it was stopping doing business with the company, which had been a “primary dealer”, part of an exclusive club of firms licensed to sell US government debt.
Marketmakers on the floor of New York’s ICE Futures US exchange, a centre for soft commodities, scrambled to open accounts with rival clearing firms.
However, signs of liquidity strains were limited, according to one large dealer, who said that while trading was a bit more difficult in eurodollar futures and options, there were no disruptions to the funding markets such as commercial paper and swap spreads.
These markets would normally feel a “ripple effect” if there were a broad pullback from counterparty risk, this person said.