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MF Global files for bankruptcy, undone by Europe's financial crisis

The Wall Street trading firm sustains big losses on debt issued by troubled European nations. The sequence of events evokes 2008, but 'I don't think this is Lehman all over again,' an expert says.

November 01, 2011|By Nathaniel Popper, Los Angeles Times
  • A sign for MF Global Holdings on the floor of the New York Stock Exchange.
A sign for MF Global Holdings on the floor of the New York Stock Exchange. (Justin Lane, EPA )

Reporting from New York — A major Wall Street trading firm run by one of the most storied names in finance became the first major casualty of the European financial crisis.

MF Global filed for Chapter 11 bankruptcy Monday after sustaining big losses on its holdings of debt issued by Italy, Spain and other troubled European nations. The firm had been run for the last year and a half by Jon Corzine, the former head of Goldman Sachs, who rose to become a U.S. senator and New Jersey governor.

MF Global's downfall came after a chaotic week in which clients stopped trading with the firm and investors sold shares in the company, echoing the sequence of events that led to Lehman Bros.' massive bankruptcy in 2008.

As the value of European sovereign debt has fallen in recent months, analysts have questioned what other financial firms might be exposed to losses. While more damage is expected, industry experts doubt that MF Global's problems will spread to the larger economy in the way that Lehman Bros.' problems did at the height of the financial crisis.

"I don't think this is Lehman all over again," said Scott Peltz, an expert in financial firm restructuring at the accounting firm McGladrey. "This appears to be a fairly unique circumstance."

The bankruptcy filing in Manhattan comes less than a week after the European Union announced a plan to help prop up the economies of some of its weaker members. The plan was greeted warmly by investors, but it will produce losses for some of the financial firms that hold European sovereign debt. Even before the plan was announced, European governments stepped in to rescue a Belgian bank that faced big losses.

Bankers and analysts spent Monday trying to determine which financial institutions might face losses stemming from MF Global's downfall. A number of institutional investors and pension plans are among the holders of MF Global stock that will probably lose their investments.

The bankruptcy marks a remarkable turn in fortunes for Corzine, who had previously risen to the top of both the financial and political worlds before losing a 2009 bid for a second term as New Jersey governor.

When Corzine left the governor's mansion in 2010 there was talk of him rejoining Goldman, where he had been chairman and chief executive during the 1990s, or taking on a job with the Obama administration. Instead he signed on as CEO at MF Global, which was previously known primarily as a quiet firm that executed trades on behalf of customers.

Corzine, a former bond trader, promised to expand the company by doing more trading with the firm's own money. That strategy helped a number of Wall Street firms record big profits before the financial crisis, but it was widely blamed for the troubles that Lehman Bros. and other firms encountered during the crisis.

Since the crisis, most banks have scaled back such trading operations, and Congress has passed legislation that will restrict it in the future, but MF Global and other firms that are not bank holding companies are not subject to the legislation.

Just last week, MF Global announced that it had purchased $6.3 billion of European sovereign debt, hoping it would rise in value. For the most recent quarter, though, the firm booked losses of $192 million. Analysts say that few other banks have made similarly outsized bets on European bonds.

"There's no excuse for what this guy did," Dick Bove, a bank analyst at Rochdale Securities, said of Corzine. "He took big risks on his own hook because he was convinced that he was right and that he couldn't lose money."

Over the course of last week, clients grew concerned that MF Global wouldn't be able to execute trades or pay back loans, and the company's share price dropped more than two-thirds.

MF Global reportedly spent the weekend looking for a buyer, but those plans fell through and speculation turned Monday to who might buy pieces of the firm out of bankruptcy.

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