Diary of a Financier

An Insider’s Account of MF Global Collapse

In Idiosyncrasy on Wed 2 Nov 2011 at 08:27

MF Global’s COO, Bradley Abelow, just filed an affidavit regarding the collapse.  An important excerpt that puts together a timeline of the collapse:

E. Events Leading To Chapter 11 Filing

33. As a global financial services firm, MF Global is materially affected by conditions in the global financial markets and worldwide economic conditions. On September 1, 2011, MF Holdings announced that FINRA informed it that its regulated U.S. operating subsidiary, MFGI, was required to modify its capital treatment of certain repurchase transactions to maturity collateralized with European sovereign debt and thus increase its required net capital pursuant to SEC Rule 15c3-1. MFGI increased its required net capital to comply with FINRA’s requirement.

34. On October 24, 2011, Moody’s Investor Service downgraded its ratings on the Company to one notch above junk status based on its belief that MF Holdings would announce lower than expected earnings. On October 25, 2011, MF Holdings announced its results for its second fiscal quarter ended September 30, 2011. The Company revealed that it posted a $191.6 million net loss in the second quarter, compared with a loss of $94.3 million for the same period last year. The net loss reflected a decrease in revenue primarily due to the contraction of proprietary principal activities.

35. Dissatisfied with the September announcement by MF Holdings of MFGI’s position in European sovereign debt, FINRA demanded that MF Holdings announce that MFGI held a long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity, including Belgium, Italy, Spain, Portugal and Ireland. MF Holdings made such announcement on October 25, 2011. These countries have some of the most troubled 14 economies that use the euro. Concerns over euro-zone sovereign debt have caused global market fluctuations in the past months and, in particular, in the past week. These concerns ultimately led last week to downgrades by various ratings agencies of MF Global’s ratings to “junk” status. This sparked an increase in margin calls against MFGI, threatening overall liquidity.

36. Concerned about the events of the past week, some of MFGI’s principal regulators – the CFTC and the SEC – expressed their grave concerns about MFGI’s viability and whether it should continue operations in the ordinary course. While the Company explored a number of strategic alternatives with respect to MFGI, no viable alternative was available in the limited time leading up to the regulators’ deadline. As a result, the Debtors filed these chapter 11 cases so that they could preserve their assets and maximize value for the benefit of all stakeholders.

To wit, recall my assertion from this summer:

I’m amazed that this crisis is in its fourth full year. I do not expect a “double dip” into a new recession, but I do think the market will shakeout. (Wait to see if 1253 support holds on the SPX.) I think there’s some pretenders who are hanging by their umbilical cords, and they need to be snipped…

I expect the Fed to do what it can with its Fisher-Price toolkit. I expect the Fed to pursue QE3-lite, a housing-focused program like an airtight, hyper-HAMP.

From August:

The 2008 v 2011 analogue is completely aligned, and I do expect a shakeout to force a few bankruptcies/distressed acquisitions, since prolonged easing always begets imprudent risk.

–Romeo (hattip ZeroHedge)

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