Undaunted by Refco's Mess


Private-equity investor J. Christopher Flowers is leading a group of investors who want to salvage at least half the troubled derivatives broker Refco. Flowers' group, J.C. Flowers & Co., agreed on Oct. 17 to put up $768 million for Refco's futures brokerage, Refco LLC, while the parent company and other parts of the company filed for Chapter 11 bankruptcy protection.

A former Goldman Sachs (GS) partner, where he ran the M&A effort for the financial-services firm, Flowers left Goldman in 1998 to start his own outfit. He has made billions for his fund and co-investors in deals for Japan's Long-Term Credit Bank and bankrupt Conseco's Green Tree Financial unit, among others.

Now Flowers seeks to ward off other Refco bidders and possibly buy the rest of the company to bring it out of bankruptcy. He recently spoke with BusinessWeek correspondent Aaron Pressman. Edited excerpts of their conversation follow:

Given your experience with previous financial messes, how does Refco compare?

For the damage one man can [allegedly] do to a fine company, it's right up there (see BW Online, 10/17/05, "Refco's Painful Lesson for Investors"). But in the case of Refco, it's fundamentally a terrific company -- and we're highly confident that we can put Refco back on its feet, and we're keen to do that.

Refco's problem, the CEO's hidden debt, doesn't actually have much to do with the company's business, does it?

Exactly. It had nothing to do with the businesses they're in. Often, when you see a company in bankruptcy, not to pick on any particular company, but it's some old, creaky industrial company that finally bites the dust. Here, there's nothing wrong with this company.

But how does Refco keep customers from fleeing? What are you doing to keep customers?

People were at Refco for a reason -- they had a terrific product, terrific service, and a long history of relationships. Obviously, the last of those have been damaged, but we hope that customers will stay and new customers will come because of what Refco has to offer. We thank the customers who have stuck with Refco.

Second, the key to this is restoring confidence. We think confidence is justified for a number of reasons. One is the regulated entities that we're buying are not bankrupt. They're solvent and doing normal business every day with customers, and customers' money is safe.

[Also], we're bringing substantial capital and substantial managerial energy and experience to bear on this. We're absolutely determined to make Refco what it was before.

What's the status of customers leaving the firm?

Of course, Refco has lost a fair number of customers. Certainly far less than the majority, but a fair number. Our expectation is that with the announcements we've made and the work we're doing, this will stabilize.

You have a memorandum of understanding to buy the futures business. What are the odds that someone else approaches the bankruptcy court with a higher bid?

The bankruptcy process will provide other people that opportunity to bid on this, as it must. I think it's not the easiest thing in the world to do, but who knows, maybe someone will bid more, and maybe they'll win.

You have an option to purchase the rest of Refco. What's your analysis of what's left after you buy the futures business?

What we know is that we want Refco to be in all the businesses it was in before. If we could wave a magic wand, we would recreate the old Refco. Its [foreign-exchange] and securities businesses have been damaged by the bankruptcy.

Some of those entities -- unlike what we're buying, which is not in bankruptcy -- are in bankruptcy. But we plan to go back in to those businesses. As a result of that, it may well be that there are assets out of Refco that we'll want to buy. They're a natural fit, and Refco was very successful in them (see BW Online, 10/18/05, "What About the Rest of Refco?").

What's your view of the financial-services industry? Is there a lot more consolidation to go?

As a generalization, that's true. I also think companies are doing extremely well and valuations are extremely strong (see BW Online, 10/18/05, "J.P. Morgan: Banking-Stock Maverick"). Generally, where we do business, companies are strong, and people are optimistic.

You've been involved in a number of orchestras in New York. What's your interest in music?

I've been interested in music all my life. I'm currently a trustee of the New York Philharmonic Orchestra. It's a lot of fun, and if you like music, it's a fun way to be involved. I do play the piano, but the New York Philharmonic has not asked me to perform.


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