MARKETS plunged in London and New York yesterday as MF Global, the $41bn brokerage, became the first big American casualty of the European sovereign debt crisis.
MF Global Holdings filed for Chapter 11 bankruptcy protection in the US following the collapse of a last-minute deal to sell off assets.
It became the eighth-largest bankruptcy in US history after ratings agencies cut its status to junk, a move triggered by the disclosure of a $6.3bn (£3.9bn) bet it had made on debt issued by troubled Eurozone nations including Italy and Spain.
Michael Epstein, a restructuring adviser at CRG Partners, described the crisis as a “baby Lehman”, although the fall-out from MF Global is expected to be far less than that created by the failure of the investment bank three years ago.
Yesterday the FTSE 100 closed down 2.8 per cent to 5,544.22, its largest drop since 22 September. Banks were hit particularly hard with Royal Bank of Scotland and Lloyds Banking Group falling 7.8 and 7.6 per cent respectively.
In the US, stocks in financial services also fell with Morgan Stanley closing down 8.6 per cent. The Dow Jones and the S&P 500 both lost more than two per cent.
Shares in MF Global were suspended after a two-thirds fall over the last week. The group was forced to file for bankruptcy protection after the US Federal Reserve said it would not do any more business with it. Sale talks with Interactive Brokers Group broke down, although some parts could still be sold to the rival.
British arm MF Global UK has appointed KPMG as special administrators and about 730 jobs at Canary Wharf are at risk. It is the first use in this country of new administration rules, devised by the FSA in the aftermath of Lehman, to save investors years of legal action.
Richard Fleming, administrator at KPMG, told City A.M.: “We will prioritise the return of client money. The good thing about the asset base is that they are high quality assets.”
LCH.Clearnet and the London Metal Exchange each said the firm remained a member.
Brokers at MF Global, which has 2,870 staff in total, had relied on commissions from executing trades, clearing trades, and the interest income they get from the cash collateral received from clients. Interest revenue across the US economy has been low, however, since the Fed cut interest rates to just above zero.
Some parts of MF Global’s empire escaped administration but their prospects of a sale depend on events in the US. Analyst Niamh Alexander at Keefe, Bruyette & Woods, said: “Customers might move very quickly. It may be that every hour that passes shrinks the portfolio of assets that could be transferred [to a buyer].”
From sugar trader to global powerhouse
MF Global grew from its roots as a London sugar trader at the end of the eighteenth century to a global powerhouse. Recently, it was driven by the ambition of former Goldman Sachs chief Jon Corzine.
Since his appointment to MF Global last year, Corzine (right) presided over a shift in strategy from linking buyers with sellers, or placing trades on an exchange, to holding an inventory of securities and betting on their price movements.
This was a major change for the group’s staff, who were used to a conservative approach from management.
Now the investors who bought into Corzine’s vision, such as private equity firm JC Flowers, have been left licking their wounds.
JP Morgan Chase and Deutsche Bank are both trustees of more than $1bn of global debt for pension funds and institutions. Neither bank would comment but it is understood JP Morgan’s exposure is below $100m.