Eurozone crisis claims MF Global

MF Global became the largest US casualty of the eurozone crisis as it filed for bankruptcy protection after making big bets on the European sovereign debt market.

The broker-dealer, run by Jon Corzine, an ex-chief executive of Goldman Sachs and a former New Jersey senator and governor, admitted defeat on Monday 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.

Several people close to the last-minute talks said due diligence raised questions about whether the firm’s commodities book was fully funded. They said the shortfall appeared to have been as much as several hundred million dollars. The Securities and Exchange Commission and the Commodity Futures Trading Commission said MF Global reported “possible deficiencies in customer futures segregated accounts held at the firm” as it told regulators a sale had fallen through.

US rules require customer funds to be held separately from a futures broker’s own funds. It was not immediately clear whether the reported deficiencies related to recordkeeping or more serious problems. As of August 31, MF Global was required to keep $7.3bn in segregated accounts on behalf of customers, according to the CFTC.

After the talks on a sale fell apart, brokers backed by MF Global 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 $6.3bn bet on European sovereign debt.

Mr Corzine worked with bankers from Evercore and lawyers from Skadden, Sullivan & Cromwell and Weil, Gotshal & Manges through Sunday night to try to sew up the deal with Interactive Brokers. CFTC and SEC officials were on site and gave a “soft” deadline of Monday, people close to the deal said.

On Monday, MF Global’s shares were suspended and the Federal Reserve Bank of New York said it was stopping doing business with the company. Later, the Securities Investor Protection Corporation said it was initiating the liquidation of MF Global Inc to recover clients’ money.

The bankruptcy triggered a frenzy in Chicago’s futures-trading community, where firms whose trades were cleared by MF Global found themselves unable to execute orders. “Everyone’s in crisis mode, trying to work out how this affects them,” said one futures broker. “MF was the biggest clearer of trades at CME, and many guys have complex order books, with complex options and futures strategies – you can’t just liquidate that in a couple of hours.”

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.

In the UK, the collapse triggered the first use of a Special Administration Regime, a new form of financial company resolution set up after the collapse of Lehman, which aims to return client assets as soon as possible. A judge described its use as historic.

Additional reporting by Hal Weitzman in Chicago, Anousha Sakoui, Philip Stafford and Jeremy Grant in London and Dan McCrum in New York