MF Global Bankruptcy, Research Paper Example

Abstract

The research seeks to find out the real reasons why MF Global failed and had to file for bankruptcy, and who is to be blamed. MF Global was warned several months before of the risky nature of its financial status and the debt it had purchased from sovereign European economies, but resisted for perhaps several reasons, using lobbying as one of its strategies.

Arguments will be made on the company being a private entity and lack the financial resources of large banks, its lack of contingency plans, the ethical behaviors of John Corzine and the rest of the management team, as well as the failure of The European Economic Community to protect is troubled economies, in an effort to answer the question.

Conclusions will be made based on the evidence presented.

Introduction

John Corzine , a 64 year old former governor of New Jersey, according to Karry, Sandler & McLaughlin (2011), had helped run Goldman Sachs from 1994 to 1999, began managing MF Global in March 2010. Significantly it was noted by Karry et al. (2011), that the former governor began increasing the forms risk even to the extent of using his own money to trade, and had acquired several European sovereign debts that had rattled the markets.

However, this continued until something went wrong in 2011.

One of the signs that a financial entity was in trouble was when customers began making a run on it for their cash deposit, and in the case of MF Global this materialized when customers began calling and liquidating their resources and the company  employees began refusing to take calls, according to Ahmed (2011).

According to Ahmed (2011), things began going wrong at MF Global when the company financial managers made risky bets in a tumultuous market and ended up with a $6.3 billion sovereign debt that included countries like Spain and Italy, whose economies were in trouble.

Financial experts reported that in the position that MF Global found itself, the debt was 5 times the $I billion equity it had, and this caused two major lending agencies to cut the grade on its debt, while expressing concerns about the company risk control management as well as the magnitude of the loan in question (Ahmed, 2011).

The situation took a turn for the worse in 2011, when MF Global reported a third quarter loss in its operation, and its stock value began eroding to the point where trading partners began calling for the company to injection more cash against its portfolio 9Ahmed, 2011).

In response to this request MF Global leadership under John Corzine drew down a $1.3 billion a line of credit, hoping to allay fears, but this was inadequate, and the seemingly indestructible financial fortress crumbled and went into bankruptcy.

A number of reasons were highlighted as to why this financial catastrophe, similar in nature to Lehman Brothers took place, and some of these were (a) the company lacked a contingency plan at the time of the crisis, according to the chief executive officer of Typhoon Capital Management,  (b) it was a private entity and had no large cash reserve like the large banks which dominated this industry, (c) the company leaders gambled on the idea that the European Economic Community through its banks would not allow sovereign economies France, Italy and Ireland to fail.

It could be argued that three proposals were correct and MF Global should have carefully weighted its options before venturing into a troubled economic climate as they did.

The financial community in hindsight may also blame John Corzine for not ensuring his team of managers practice more prudence in the going- concern and in the end the former governor must take all the blame, since the final responsibility for the success or failure of the company rest on his shoulders.

According to Craig, Protess & De La Merced (2011), although the commodities and derivative firm fell apart in a ferocious speed, regulators had raised warning flags more than four months earlier, telling MF Global that it needed to raise more capital and that its European debt was quite risky.

Where the blame could be placed on the shoulders of John Corzine and his financial managers, was when the CEO resisted claims being made by regulators that the company needed more cash by engaging in lobbying efforts to dissuade the views presented, according to Craig et al. (2011).

The case could be made that John Corzine had knowledge of the true financial state of the company and as such opposed the recommendations being made to him, but several months later when the FBI began investigating the reasons why the firm had failed, a massive $ 630 million could not be found (Craig, et al. 2011). This brings the question of John Corzine character, ethicality and fiduciary responsibility into question.

Evidence produced by CME an investigating company, revealed that the CEO had transferred a client’s money in a manner that was undetectable, and failed to notify the regulating authority until shortly before the bankruptcy filing was to be done.

This act according to Craig et al. (2001) could be used to argue that John Corzine breached his fiduciary responsibility to the company stakeholders and also violated Wall Street regulations.

MF Global financial statement in June of 2011, had a footnote that the company had bought debt from Italy, Ireland and other troubled Europeans nations , according to Craig et al. (2011), but it seems there were no financial figures presented to give any indication of the severity of the debt, and financial regulators may have overlooked the statement.

It would appear that this was what John Corzine and his team were expecting in that they offer no explanation, since they were not asked the critical question.

Another reason that could be given for the failure of MF Global was the fact that the company executive made a risky bet hoping the European Economic Community would come to the aid of these troubled economies, but the bet failed when this did not happen.

Blame then by some analyst may be pointed in the direction of the European governing body, rather than on John Corzine and the MF Global management team.

Conclusions

MF Global deliberately strategized and implemented a debt purchasing policy that was five times greater than the equity it had at the time in European economies that were in serious financial trouble, and should be held responsible in the final analysis.

The leadership of the company was given adequate warning regarding the nature of their risky and eroding financial status, and chose not to respond until it was too late.

In particular the CEO of the company by using lobbying to influence regulators and then to transfer millions of dollars of a client’s fund without reporting it in a timely manner, should not be spared from the blame, because it was a deliberate attempt to deceive in both respects.

Reference

Ahmed, A., (2011), MF Global Bankruptcy Rattles Wall Street, New York Times

www.dealbook.nytimes.com/2011/10/12/mf-global-bankruptcy-rattles-wall-st-firms , 10/23/12

Craig, S., Protess, B., De La Merced, M., (2011), Many Alarms before MF Global Crashed, New York Times www.dealbook.com/2011/11/02/many-alarms-rang-before-mf-global-crashed-in-in-ruins/ , 10/23/12

Karry, T., Sandler, L., Mc Laughlin, D., (2011), Corzine Seeks to Reorganize as Broker-Dealer Unit to Liquidate, Bloomberg News www.bloomberg.com/news/2011/10/31/mf/global-financial-files-for-bankruptcy-protection-in-new-york-.html , 10/23/12