March 26, 2023

DealBook: A Year After MF Global’s Collapse, Brokerage Firms Feel Less Pressure for Change

Jon S. Corzine, the former chief of MF Global, at a House panel in 2011.Alex Wong/Getty ImagesJon S. Corzine, the former chief of MF Global, at a House panel in 2011.

When MF Global toppled a year ago, chaos engulfed a Chicago trading floor. Customers were locked out of their accounts, later discovering that about $1 billion of their money had disappeared.

The debacle, which played out on the evening of Halloween, prompted federal authorities to immediately bear down on the brokerage firm and the broader futures trading industry.

But a year after a federal grand jury issued subpoenas and regulators vowed reforms, the largest bankruptcy since the financial crisis has begun to fade from Wall Street’s memory.

Related Links

Federal authorities have all but cleared MF Global’s top executives of criminal wrongdoing, people briefed on the matter say. The government has yet to usher in a wider overhaul of futures trading rules, save for certain piecemeal policy changes. And the profit-making exchanges that rely on brokerage firms for business still police the futures industry, presenting potential conflicts of interest.

The slowing momentum for change has provided relief for the brokerage firms that dominate the futures trading industry. The Chicago companies, which largely dodged the humbling losses that scarred Wall Street in 2008, continue to cast MF Global as a fleeting distraction rather than a permanent black eye for their business.

“We haven’t seen a dramatic change,” said Terrence A. Duffy, executive chairman of the CME Group, the giant exchange that oversaw MF Global.

But the aftermath, Mr. Duffy noted, has left some customers wary.

Farmers and ranchers traded futures contracts through MF Global to protect themselves from the price swings of their crops. While the clients have received 82 percent of their missing money, they are still owed millions of dollars.

With the prospect of a full recovery unlikely, some traders are sitting on the sidelines. Others who continue to trade are seeking added assurances that the brokerages will follow the law.

“Every conversation with clients is about safety and sanctity of customer funds,” said Mike O’Callaghan, a managing director of business development at Knight Capital’s futures business.

Futures customers — and the integrity of the industry — were dealt a further blow this summer when another firm collapsed after misusing customer money. The chief executive of the firm, the Peregrine Financial Group, attempted suicide before eventually pleading guilty to carrying out a nearly 20-year scheme to raid customers’ accounts.

The problems have taken their toll on customer confidence.

“The general tenor is fear,” said James L. Koutoulas, chief executive of Typhon Capital Management, a hedge fund client of MF Global and the head of the Commodities Customer Coalition, a group of customers fighting for the return of their missing money.

Mr. Koutoulas and other customers are eager for a reckoning. They have questioned why authorities have not taken a harder line with Jon S. Corzine, the former chief executive of MF Global. Criminal investigators have largely concluded that chaos and porous risk controls at the firm, rather than fraud, led to the disappearance of the money.

“You can’t raid customer accounts and get a slap on the wrists,” Mr. Duffy said. “There needs to be stiffer penalties.”

MF Global executives might still face legal repercussions. The Commodity Futures Trading Commission, the industry’s federal regulator, could level an enforcement action against Mr. Corzine, even though such an action would be weeks or months away.

“It must be frustrating to people not to have a final outcome for what may appear to be malfeasance,” said Bart Chilton, a commissioner at the agency. “But investigations take time and we need to ensure that we’ve done a thorough review.”

As authorities continue to build a regulatory case, a Congressional investigation into MF Global’s collapse is drawing to a close. The chairman of the House Financial Services Committee’s oversight panel announced Wednesday that he would release an investigative report about MF Global in the next “few weeks.” Randy Neugebauer, Republican of Texas, said the report would serve as an “autopsy of how MF Global came to its ultimate demise and what policy changes need to be made to prevent similar customer losses in the future.”

MF Global was also a topic of conversation Wednesday at an annual industry conference in Chicago. Futures firms there planned to discuss new ways to protect customer cash and restore confidence in their industry.

A regulatory effort, while incomplete, has generated new measures that aim to protect customer funds.

The CME Group, which has started a $100 million protection fund for farmer and ranchers, has stepped up its surprise audits of brokerage firms. The CME and the National Futures Association, another self-regulatory group, also championed the so-called Corzine rule, which forces top executives to approve any transfer of more than 25 percent of the funds sitting in a customer account. And last week, the trading commission voted unanimously to propose new customer protections aimed at closing loopholes.

For their part, many MF Global employees remain chastened by their firm’s collapse. Lawmakers hauled Mr. Corzine, a former senator from New Jersey, to Washington three times to testify before Congressional committees. Some MF Global employees remain unemployed while others took major pay cuts to work for the trustee unwinding the firm’s assets.

Several MF Global employees planned to gather on Thursday for drinks at a Midtown Manhattan bar, just blocks from their old firm, to commiserate on their trying year. They canceled the event after another disaster, Hurricane Sandy, left some people stranded without power.

Article source:

Across Globe, Traders Brace for a Downturn

Traders and bankers are braced for another volatile week in global markets — and the wildest ride is likely to be in stocks, not the Treasury bonds that were downgraded by Standard Poor’s on Friday.

The initial shock waves from the downgrade of the government’s credit rating were felt in stock markets over the weekend. Shares plunged in the Middle East on Sunday and were expected to open sharply lower in Asia.

On Wall Street, traders and strategists trekked to their offices on Sunday in scenes reminiscent of the fateful weekend before Lehman Brothers collapsed in 2008. Bank of America Merrill Lynch, Barclays, Credit Suisse and Morgan Stanley all hosted conference calls for anxious investors, and traders plotted strategy for what they expected to be a tumultuous day on Monday.

In Israel, shares fell 7 percent on Sunday, the worst drop since 2000. Investors placed so many sell orders that the Tel Aviv Stock Exchange delayed the opening of trading.

In early trading on Monday, Japanese and Australian stocks fell more than 1 percent. Gold prices were soaring, with spot prices approaching $1,700 an ounce, and the dollar weakened in early trading. In futures trading on Sunday night, major United States stock indexes were down more than 2 percent, although futures are not always reliable indicators of how stocks will open the next day in New York.

One factor that might bolster stocks is the announcement by European leaders on Sunday that they were planning huge purchases of Italian and Spanish bonds in an attempt to reassure nervous investors.

S. P. — the rating agency that issued a historic downgrade of United States Treasury securities to AA+ from AAA on Friday night — is expected this week to downgrade a host of other securities linked to Treasuries. Those include bonds from insurers as well as debt from Fannie Mae and Freddie Mac, the government-controlled mortgage giants.

Like Treasuries, notes issued by Fannie and Freddie are considered to be among the safest investments, so even a modest downgrade could rattle investors.

“What they did on Friday is a big deal,” said Peter Fisher, the head of fixed-income portfolio management at BlackRock, the giant asset manager. “We’re all waiting to see how they follow through in terms of the knock-on effect.”

At the Newport Beach, Calif., headquarters of Pimco, the world’s largest bond fund manager, the co-chief investment officer, William H. Gross, met with senior money managers and traders as Asian markets prepared to open, and also gathered a skeleton crew of employees to staff the trading desks.

It was the first Sunday that he had gathered his team at the office since Lehman’s collapse in September 2008, Mr. Gross said, adding that he was planning to be back at work at 3:30 Pacific time on Monday morning to gauge the market action in Europe.

“It’s a series of events that comes close to Lehman in terms of the anticipation, and the sleeplessness is similar,” Mr. Gross said. While he said he did not expect stocks or bonds to necessarily plunge this time, volatility reminiscent of the days of the financial crisis might be in store.

Mr. Gross said he expected that investors in only about 1 percent of his firm’s accounts would sell Treasury securities.

At the Manhattan offices of BlackRock, which has $3.6 trillion under management, Mr. Fisher was also at his desk Sunday. He said he did not expect that investors would automatically sell Treasury bonds as a result of the downgrade, but that they might unload riskier assets like stocks and lower-rated bonds.

“If you think the world is a risky place, you start at the outer edges, not what’s least risky,” Mr. Fisher said.

On both sides of the Atlantic, the twin worries of staggering amounts of government debt and slowing economic growth dominated the broader discussion, prompting European leaders to announce the purchases of Italian and Spanish bonds.

For American investors, the downgrade by S. P. comes at an especially jittery moment.

By the time the rating agency acted late Friday, Wall Street had suffered its worst week since the financial crisis, with the Dow Jones industrial average falling 5.75 percent, a slide punctuated by a 512-point drop on Thursday.

Even more than the standoff over raising the federal debt ceiling, the stock market’s plunge was caused by increasing fears that the economy has lost its momentum and could even be on the verge of another recession.

Those worries, compounded by the downgrade, could add up to a one-two punch for stocks.

“Investors who are still on the fence may begin to think a recession is more likely,” said Sam Stovall, chief investment strategist at S. P. Equity Research, which operates independently of S. P.’s ratings division. “There are a lot of things investors now have to contend with. They have to decide whether the global economy has stepped on a soft patch or on quicksand.”

To be sure, not everyone on Wall Street was calling for doom and gloom. In a note on Sunday, Barry Knapp, a strategist at Barclays Capital, said his firm remained bullish. Stock valuations, he insisted, remain appealing.

Still, in a sign of the anxiety coursing through Wall Street all weekend, nearly 4,000 investors dialed into a conference call organized by Morgan Stanley’s research team. “That’s the most I’ve ever heard of for a Sunday in August,” said Adam Parker, the firm’s chief United States equity strategist.

Echoing Mr. Fisher’s statements, Mr. Parker said that the Morgan Stanley team did not expect Treasuries to take a hit as a result of the downgrade.

But, as fear rises, riskier assets like stocks are likely to suffer, he said. He is recommending that investors avoid the consumer discretionary sector, which means companies like restaurants, retailers and apparel sellers, as well as industrial companies. A safer harbor might be health care companies and utilities.

“With the market having come down this fast, that in and of itself could increase the probability of a recession,” Mr. Parker said.

Bettina Wassener contributed reporting.

Article source: