Why did MF Global collapse and what went wrong?

MF Global Holdings, which filed for bankruptcy protection this week, became the US’ first casualty of the 17-member Eurozone debt crisis.

The company, led by Jon S Corzine, former Goldman Sachs head and US senator, took bets on bonds floated by Italy, Spain, Belgium, Portugal and Ireland in 2010, a time when US financial companies were actually exiting risky investments and cutting down on proprietary trades, by which they take exposure to bonds, commodities and equities on their own books.

Unfortunately, for MF Global, its bets backfired as yields on the sovereign debt it held spiralled, taking the bond prices down, a bond’s price moves inversely to its yield as the troubled countries found the gap between their revenues and expenses widening due to social spending and came close to defaulting on their interest payments.

What exactly went wrong?

Unconfirmed reports suggest MF Global invested billions of dollars in euro area debt, which it is unlikely to recover.

The collapse of MF Global is attributed to the company using its own funds to trade in bonds floated by weak eurozone economies such as Portugal, Spain, Ireland, etc, which may not be able to service their debts unless these are rolled over and investors agree to take a partial loss on their investments.

The company late last month reported a quarterly net loss of close to $200 million, its ninth loss in eleven quarters and was downgraded by ratings agency S&P after it filed for Chapter 11 bankruptcy protection in the US on Monday.

How does MF Global’s collapse affect its India operations?

MF Global Holdings owns over 70% in its Indian unit, MF Global Sify Securities, which offers equity trading and has set up a wholly-owned commodity brokerage that is a member on local commodity exchanges like MCX and NCDEX.

Since the Indian unit’s parent has gone under and a local rating agency has downgraded the local unit’s capacity to service its debt, customers may prefer to close their accounts with MF Global Sify and MF Global Commodities India and move to other brokers, said some of the brokers rivals.

Worse still, unconfirmed reports suggest a few Indian investors, in circumvention of law, placed bets on gold and silver futures traded on overseas commodity exchanges through friends and relatives who opened client accounts with MF Global overseas.

Source: http://articles.economictimes.indiatimes.com/2011-11-03/news/30355163_1_bankruptcy-protection-sovereign-debt-eurozone

Leave a Reply

Your email address will not be published. Required fields are marked *