Business

European debt pushes MF Global to bankruptcy

WASHINGTON — 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 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.

Corzine, the former head of investment banking giant Goldman Sachs Group, 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 believed that they were more likely to default.

That bet eventually doomed the company. Its regulator complained last month 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 on 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.

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.

"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 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. Corzine wanted to build it into a major investment bank.

One method: Trading for the bank's own profit, a practice known as proprietary trading. Corzine made his career at Goldman as a trader, and the company became a trading powerhouse under his watch.

Proprietary trading was responsible for much of MF Global's quarterly loss, it said in court papers.

As of last week, MF had amassed net exposure of $6.29 billion in debt issued by Italy, Spain, Belgium, Portugal and Ireland. Of that, $1.37 billion was from Portugal and Ireland, which already were bailed out by European authorities. More than half was from Italy, where borrowing costs have increased in recent days as investors grew concerned about its finances.

By comparison, Morgan Stanley's net exposure was only $2.1 billion as of Sept. 30, according to its latest quarterly filing. Morgan Stanley's stock was battered last month by rumors of its exposure to European debt.

Still, Corzine was hopeful that European leaders would solve the crisis and protect the value of its holdings before investors grew wary. Last week he said he expected the firm to "successfully manage these exposures to what we believe will be a positive conclusion in December 2012."

  Comments