Recriminations fly after fall of MF Global

On Sunday night, MF Global was preparing to announce that its core operating businesses had been rescued in a sale to Interactive Brokers Group, a rival electronic broker, which was prepared to inject $1bn of capital.

But by Monday morning, the deal had fallen apart, MF Global filed for bankruptcy protection and its traders were banned from trading floors in Chicago and New York. The ambitious plans of Jon Corzine, chief executive, were in tatters.

With customers and counterparties struggling to extricate their positions and money from MF Global and more than 2,000 employees likely to lose their jobs, recriminations have already started. Many criticisms are aimed squarely at Mr Corzine’s attempt to spice up the company’s earnings with a $6.3bn bet on European sovereign debt, which credit analysts judged excessive in relation to its balance sheet.

“I haven’t seen any anger but obviously a $6bn-plus trade in European sovereign debt does seem outsized,” said an MF Global bond trader as he left the company’s headquarters in Manhattan on Monday. “There are definitely questions to be answered. I want to know who bought us those trade ideas and whether they are all with a single counterparty. Those are important questions.”

Mr Corzine’s last hope of salvaging anything over the weekend from the firm he joined only 18 months ago lay in the form of Thomas Peterffy, a 66-year-old Hungarian-born broker and horse fanatic. Larger banks had already snubbed a deal, deciding they could mop up any assets they wanted out of bankruptcy.

Mr Peterffy, chief executive and founder of Interactive Brokers Group, had agreed in principle to buy the bulk of MF Global’s assets on Sunday, according to people familiar with the talks, and MF Global had moved as far as drafting a statement announcing the sale.

Regulators, including officials from the Commodity Futures Trading Commission and the Securities Investor Protection Corporation, were in close contact with MF Global executives over the weekend and were supportive of the asset sale to preserve market stability, according to people involved.

But ultimately due diligence uncovered problems in MF Global’s books that shook the acquirer’s confidence and wrecked the deal. Before markets opened on Monday, company executives recognised they had to file for bankruptcy protection – the end of a road that started with quixotic bets on European sovereign debt.

Only days ago, Mr Corzine, who has been touted as a potential successor to Tim Geithner as Treasury secretary, was talking enthusiastically about his plans to increase the size and breadth of MF Global. He was hinting last week that MF Global would be an acquirer of businesses as it sought to transform itself from a broker that facilitates customer trades into a full-service investment bank. But he did so while reporting an unexpected loss and after the first in a fatal run of credit rating downgrades.

Monday morning’s events were less than orderly. Many MF Global floor traders, apparently unaware their employer was about to file for bankruptcy, turned up to work at the Chicago Mercantile Exchange’s trading floor to discover that their security clearance had been removed from the system.

“This is not just going to be resolved by CME liquidating trades,” said Chris Hehmeyer, head of HTG Capital Partners, a Chicago trading firm. “Like any other big bankruptcy, the issues here are very complex and unique.”

A widespread concern in Chicago on Monday was over how much of customers’ funds held in MF Global’s segregated clearing account at the CME could be reclaimed. “There’s a lot of smaller firms and futures brokers who cleared with MF, and if they only get 90 cents on the dollar, it’ll be a huge black eye for the industry,” said the head of a large brokerage. “Then the CME has to decide whether they pony up to make the customers whole. They don’t have an obligation to do that.”

And, as with any financial company, but particularly one with only moderate scale such as MF Global, it is uncertain whether there will be a company to emerge from bankruptcy. “The problem will be that a lot of the clients will want to be at viable brokers in the meantime, and so it would be hard to recapture the moment,” said Ed Ditmire, analyst at Macquarie.