MF Global is first big US victim of Europe crisis

WASHINGTON – The European debt crisis has claimed its first big casualty on Wall Street, a securities firm run by former New Jersey Governor Jon Corzine.

MF Global Holdings Ltd., which Corzine has led since early last year, filed for bankruptcy protection Monday. Concerns about the company's holdings of European debt caused its business partners to pull back last week, which led to a severe cash crunch, the company said in its filing.

Corzine, the former head of investment banking giant Goldman Sachs Group Inc., 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. A regulator complained last month that it was overvaluing European debt, forcing it to raise more money, according to the papers it filed with U.S. Bankruptcy Court for the Southern District of New York.

MF Global's bankruptcy is the eighth-biggest ever in the U.S., according to the research firm BankruptcyData.com. It's bigger than Chrysler LLC's in 2009 and smaller than those of financial-crisis casualties Lehman Brothers Holdings Inc., Washington Mutual Inc. and CIT Group Inc.

Last week, MF Global reported its biggest ever quarterly loss, and rating agencies downgraded its debt. Its stock plunged 66 percent. Spooked business partners required it to post more money to guarantee its trades.

Soon short of cash, MF Global looked for outside investors or buyers, but no alternative emerged before regulators' Monday deadline, the company told the court. Trading in shares of MF Global Holdings Ltd. was halted early Monday.

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."

In a statement, the Securities and Exchange Commission and the Commodity Futures Trading Commission said that they and other regulators had been closely monitoring MF Global's situation for several days "in anticipation of a transaction that would include the transfer of customer accounts to another firm."

MF Global told the regulators early Monday that it hadn't reached an agreement on a deal and it reported "possible deficiencies" in customers' futures trading accounts, the two agencies said.

They said they have determined that a bankruptcy proceeding overseen by the industry-funded Securities Investor Protection Corp., whose mandate is to protect investors when a brokerage firm fails, "would be the safest and most prudent course of action to protect customer accounts and assets." SIPC, which can provide up to $500,000 for each customer of a failed brokerage, announced separately Monday that it is beginning the liquidation of MF Global under its customary procedures.

MF Global's big bet on Europe might not have happened before Corzine joined. Until he joined, the company was known mainly as a dealer in derivatives, which are investments based on the value of some underlying asset. Corzine wanted to build MF Global 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.

Proprietary trading was responsible for much of MF Global's quarterly loss, it said in court papers.

As of last week, MF had amassed net exposure of $6.29 billion in debt issued by Italy, Spain, Belgium, Portugal and Ireland. Of that, $1.37 billion was from Portugal and Ireland, which already were bailed out by European authorities. More than half was from Italy, whose borrowing costs increased in recent days as investors grew concerned about its finances.

By comparison, Morgan Stanley's net exposure to those countries was only $2.1 billion as of Sept. 30, according to its latest quarterly filing. Morgan Stanley's stock was battered last month because of concerns about its exposure to European debt.

Corzine was hopeful that European leaders would solve the crisis and protect the value of MF Global's holdings before investors grew wary. Last week, he said he expected the firm to "successfully manage these exposures to what we believe will be a positive conclusion in December 2012."

MF Global turned a profit just three quarters out of the past 12.

Corzine also is a top fundraiser for President Barack Obama. Corzine has helped raised at least $500,000 for Obama's re-election campaign since April, according to records released by the campaign.

At worst, MF Global's bankruptcy could roil credit markets and make financial companies reluctant to lend to each other. But the impact on markets will likely be muted, said Karen Shaw Petrou of Federal Financial Analytics.

"It appears their exposure to risk was particularly acute," she said.

MF Global's bankruptcy has prompted comparisons to Lehman Bros., whose 2008 failure touched off a global credit crisis. Even though Lehman was bigger and more intertwined with other companies, investors appeared worried Monday about other financial companies' possible losses, either from deals with MF Global or unrelated losses on European debt.

Bank stocks fell sharply on Wall Street after the bankruptcy filing. Morgan Stanley lost 8.7 percent, Citigroup 7.5 percent, Bank of America Corp. 7.1 percent and Goldman 5.5 percent.

Including its subsidiaries, MF Global has assets of $41.05 billion and liabilities of $39.68 billion, according to its bankruptcy petition.

Petrou said other firms holding European debt might survive the market turmoil if European leaders can convince the world that they are on track to solving the problem.

"It will work as long as the market has confidence in it," she said. "That's what makes this whole situation so spooky — it's all driven by market confidence, or lack thereof."

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AP Business writers Pallavi Gogoi and Chris Kahn in New York and Associated Press writer Ken Thomas and AP Business Writer Marcy Gordon in Washington contributed to this report.