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MF Global's European debt holdings lead to Chapter 11 filing

Former New Jersey Gov. Jon S. Corzine wanted to transform 
MF Global into a major investment bank after taking control.

Associated Press

Former New Jersey Gov. Jon S. Corzine wanted to transform MF Global into a major investment bank after taking control.

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, 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.

Also Monday, federal regulators discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm. The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.

The unaccounted-for cash could violate a fundamental tenet of Wall Street regulation: Customers' funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts daily.

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'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 LLC.

"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.

MF Global's European debt holdings lead to Chapter 11 filing 10/31/11 [Last modified: Monday, October 31, 2011 9:57pm]
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