Bloomberg News

Corzine’s MF Global Suspended From Trading With New York Fed

November 07, 2011

(Updates with Interactive Brokers comment in seventh paragraph, bond price in 11th.)

Oct. 31 (Bloomberg) -- MF Global Holdings Ltd., the futures broker run by Jon Corzine, was suspended from conducting new business with the New York Federal Reserve today after posting a record loss.

The firm’s board met through the weekend in New York to consider options including a sale to avert failure, according to a person with direct knowledge of the situation. It was stopped from doing new business with the New York Fed until it shows it’s able to fulfill its responsibilities as a primary dealer, according to a statement on the regulator’s website. Trading in MF Global’s stock was also halted.

Pressure is mounting on Corzine, the former governor of New Jersey and U.S. senator, after MF Global declined 67 percent last week and its bonds started trading at distressed levels amid its disclosures of bets on European sovereign-debt. MF Global was in discussions with five potential buyers for all or parts of the company, including banks, private-equity firms and brokers, said the person, who asked not to be identified because the talks are private.

“While the pieces are attractive, figuring out potential buyers is a lot harder,” Robert Rutschow, an analyst with CLSA Credit Agricole Securities in New York, said in an Oct. 28 note to clients. “In the current environment, banks can’t even go to the bathroom without permission from their regulator, let alone buy a brokerage firm that was looking to grow proprietary trading and expand risk-taking activities.”

Interactive Brokers

The most attractive part of the New York-based firm is its retail futures brokerage, which could fetch $500 million to $600 million, he said. MF Global hired Weil, Gotshal & Manges LLP for a London affiliate, a person said. The law firm currently represents Lehman Brothers Holdings Inc., which in 2008 filed the biggest bankruptcy in U.S. history.

MF Global may file for Chapter 11 bankruptcy protection as soon as today and sell assets to Interactive Brokers Group Inc., the Wall Street Journal reported on its website, citing a person familiar with the matter it did not identify. Interactive Brokers would likely make an initial bid of about $1 billion during a court-supervised auction after the company files for Chapter 11, the newspaper cited the person as saying.

Caitlin Duffy, a spokeswoman for Interactive Brokers, declined to comment.

Jeremy Skule, a New York-based spokesman at MF Global, didn’t immediately respond to an e-mailed request for comment on the Wall Street Journal article or answer his telephone outside of normal business hours. The shares dropped 47 percent to 64 cents in European trading from their Oct. 28 close in New York.

Moody’s, Fitch Downgrades

MF Global is getting advice from Evercore Partners Inc. as it seeks buyers. In addition to Weil Gotshal, MF Global hired Skadden, Arps, Slate, Meagher & Flom LLP to plan for restructuring that may include bankruptcy, the Wall Street Journal reported yesterday.

MF Global reported a $191.6 million quarterly loss on Oct. 25 and Moody’s Investors Service and Fitch Ratings cut its credit rankings to junk.

The company’s $325 million of 6.25 percent bonds, issued at par in August, fell 14.75 cents to 35.25 cents on the dollar at 8:28 a.m. in New York, for a yield of 35.2 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Its shares fell 16 percent to $1.20 on Oct. 28 after reaching a low of 99 cents.

Macquarie Examined

Corzine, who served as co-chief executive officer of Goldman Sachs Group Inc., reached out to his former firm about selling all or part of the company, according to two people with knowledge of the firm’s deliberations. Goldman Sachs may be interested in acquiring futures positions or other financial assets at the right price, said the people, who asked not to be named because the discussions were private.

Macquarie Group Ltd. has examined MF Global’s books, though Australia’s largest investment bank wasn’t working toward getting a deal done over the weekend, according to a person with knowledge of the situation. Paula Chirhart, a spokeswoman for Macquarie in New York, declined to comment.

Barclays Plc is among banks that have looked at MF Global, another person said. Kerrie Cohen, a bank spokeswoman in New York, declined to comment.

State Street Corp., which is also reported to be a potential bidder, doesn’t comment on rumors, Hannah Grove, a spokeswoman for the Boston-based firm, said in an e-mail.

Increased Sovereign Debt

Corzine was recommended for the position at MF Global by former Goldman Sachs banker Christopher Flowers, the chairman and CEO of JC Flowers & Co. At the same time he took the job, Corzine became an operating partner of Flowers’s buyout firm, which in 2008 bought as much as $300 million of preferred stock in the firm at a conversion price of $12.50 a share.

JC Flowers, which controls one of the eight board seats at MF Global, is also a potential buyer, a person familiar with the matter said.

Diana DeSocio, an MF Global spokeswoman, declined to comment.

MF Global’s futures unit earns interest income from the collateral it holds to back its customers’ trades. That revenue has been cut as the Federal Reserve target interest rate on overnight loans has been between zero and 0.25 percent since late 2008. The firm reported interest income of $113.2 million in the quarter ended in September. When rates were at 5.25 percent in 2007, the company earned $1.77 billion in the quarter ended in March. MF Global also makes money by charging fees for brokering trades at futures and options exchanges.

Eight-Member Board

Since Corzine, 64, arrived at MF Global in March 2010, he increased the firm’s risk and used its own money to trade, including investments in European sovereign debt that have rattled markets.

MF Global, which has a market value of $198 million, owns $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt, the company said in an Oct. 25 presentation.

The company’s eight-member board consists of Corzine, MF Global’s chairman and CEO; Edward Goldberg, managing member of Dix Hills Partners LLC; David Gelber, chairman of Walker Crips Group Plc; Robert Sloan, managing partner of S3 Partners LLC; Martin Glynn, the former CEO of HSBC Bank USA; David Schamis, managing director at JC Flowers; David Bolger, former chief financial officer of Aon Corp.; and Eileen Fusco, vice chairman, Pro Mujer International, according to data compiled by Bloomberg.

Tap Bank Lines

The company tapped the entirety of two bank lines, three people with knowledge of the matter said last week. MF Global said in an Oct. 25 investor presentation that it had $1.3 billion in unused credit facilities, without giving a date for the tally.

MF Global’s lenders include Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co., Bloomberg data show.

“We believe MF could generate proceeds from sale of its customer asset portfolio or FCM which frees up capital,” Niamh Alexander, an analyst at KBW Inc. in New York, wrote in an Oct. 27 note to clients, referring to a so-called futures commission merchant, or futures brokerage. “However, we cannot quantify the cost of wind down or exiting broker positions that could offset those proceeds and wipe out equity.”

Alexander estimated MF Global could get about $765 million for the futures unit. A sale would also free up as much as $1.3 billion in regulatory capital MF Global is required to hold against its $12.7 billion in customer collateral, Alexander said.

--With assistance from Christine Harper, Zachary R. Mider, Dawn Kopecki in New York, Christopher Condon in Boston and Shelley Smith in Hong Kong. Editors: Alan Goldstein, Pierre Paulden

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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