MF Global, a brokerage firm run by former Goldman Sachs chief and former New Jersey Governor Jon Corzine, filed for chapter 11 bankruptcy on Oct. 31, just days after disclosing a $6.3 billion bet on European government debt.
The brokerage reported its biggest ever quarterly loss since going public in 2007 last week, forcing credit rating agencies such as Moody’s to downgrade it to junk status. This resulted in a severe cash crunch that forced MF Global into bankruptcy.
According to Reuters, MF Global was supporting around $41 billion of assets with only $1.2 billion of equity. A swing in asset value would have left the brokerage technically insolvent and at high risk.
By Wednesday morning, MF Global’s stock had dropped 79% in heavy over-the-counter trading with more than 85 million shares traded by 10 a.m., according FactSet Research.
To add to the damage, the head of the Chicago Mercantile exchange said Tuesday that MF Global had broken rules that require it to keep client money and company funds in separate accounts.
“This all seems similar to moves made by top executives at Bear Stearns and Lehman Bros. before those two Wall Street firms collapsed,” said junior business major Aman Chopra.
An analysis by The Wall Street Journal also reports that MF Global may have, for the past two years, disguised its debt levels to investors by slashing the debt it was carrying before reporting its quarterly finances, an activity known in the financial industry as “window dressing.”
As of Wednesday, JPMorgan Chase, which holds all five of MF Global’s operating accounts, was seeking a lien on all of the brokerage’s assets.
“It’s worrisome that just a few years after such a devastating crisis largely brought on by Wall Street financial mismanagement, a similar event might be unfolding again,” said junior government and politics and economics double Major Alex Knobel.
According to the Wall Street Journal, MF Global’s bankruptcy is likely to the list of top 10 largest bankruptcies in U. S. corporate history, likely to rank eight behind Conesco’s 2002 $61.4 billion bankruptcy and ahead of Chrylser’s 2009 $39.9 billion bankruptcy.