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Corzine-led securities firm seeks bankruptcy protection

- Associated Press - Monday, October 31, 2011

The European debt crisis has claimed its first big casualty on Wall Street, a securities firm run by former New Jersey Gov. Jon Corzine.

MF Global Holdings Ltd., which Mr. Corzine has headed since early last year, filed for bankruptcy protection Monday. Concerns about the company's holdings of European debt caused business partners to pull back last week, leading to a severe cash crunch, the company said in papers filed in federal bankruptcy court.

Mr. Corzine, the former head of investment banking giant Goldman Sachs Group Inc., oversaw MF Global as it amassed $6 billion in debt issued by financially strapped European countries such as Italy, Spain and Portugal. Their bonds paid bigger returns than U.S. Treasury debt because bond investors thought they were more likely to default.

The bet eventually doomed the company. Its regulator complained recently that it was overvaluing European debt, forcing it to raise more money, according to papers filed with U.S. Bankruptcy Court for the Southern District of New York. Last week, MF Global reported its biggest ever quarterly loss.

Credit-rating agencies downgraded MF Global last week. Its stock plunged 66 percent. Spooked business partners required it to post more money to guarantee its trades. Before long, the company was short of cash.

MF Global looked for outside investors or buyers, but no alternative emerged before the regulators' deadline, the court papers said. Trading in shares of MF Global Holdings Ltd. was halted early Monday.

In a statement, the Securities and Exchange Commission and the Commodity Futures Trading Commission said that they and other regulators had been closely monitoring MF Global's situation for several days "in anticipation of a transaction that would include the transfer of customer accounts to another firm."

The two agencies said they have determined that a bankruptcy proceeding overseen by the industry-funded Securities Investor Protection Corp. "would be the safest and most prudent course of action to protect customer accounts and assets." SIPC, which can provide up to $500,000 for each customer of a failed brokerage, announced separately Monday that it is beginning the liquidation of MF Global under its customary procedures.

MF Global's bankruptcy shows the danger of investing when the outcome will be determined by government action, said Daniel Alpert, managing partner at the New York investment bank Westwood Capital Partners LLC.

"I don't think it's a canary in the coal mine, but it does show you that it's still a very volatile market," he said. "The nature of this crisis is that events can lead in any number of ways, and markets are trading on news, not numbers."

MF Global's big bet on Europe might not have happened before Mr. Corzine's tenure. Until he joined, the company was known mainly as a dealer in derivatives, investments based on the value of some underlying asset.

Mr. Corzine, who wanted to build it into a major investment bank, is also a top fundraiser for President Obama, having helped raise at least $500,000 for Mr. Obama's re-election campaign since April, according to records released by the campaign.

One method in Mr. Corzine's transformation plan for MF Global was to trade for the bank's own profit, a practice known as proprietary trading. Mr. Corzine made his career at Goldman as a trader, and the company became a trading powerhouse on his watch. Proprietary trading was responsible for much of MF Global's quarterly loss, it said in court papers.

Bank shares fell sharply on Wall Street after the bankruptcy filing. JPMorgan Chase & Co. fell 5.3 percent, Bank of America Corp. 7.1 percent and Citigroup Inc. 7.5 percent by the end of trading Monday.

Including its subsidiaries, MF Global has assets as $41.05 billion and liabilities of $39.68 billion, according to its bankruptcy petition. It likely ranks as the eighth-biggest U.S. corporate bankruptcies, according to the research firm BankruptcyData.com.

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