Fears of ‘baby-Lehman’ as US broking giant MF collapses

The bankruptcy makes MF Global the first big American casualty of the European drama, threatening 700 jobs at its offices in London’s Canary Wharf among a global headcount of 2,000. It also raised echoes of the collapse of US banking giant Lehmans in the financial meltdown of 2008.

Group chief executive Jon Corzine, former boss of Goldman Sachs, hopes Chapter 11 will give MF time to sell large parts of its business. However, one leading possible buyer, Interactive Brokers Group in Connecticut, is understood to have walked away after judging a deal too risky.

MF ran into trouble amid escalating market fears over the $6.3 billion (£4bn) of bonds it holds issued by debt-laden European countries, including Italy, Spain, Portugal and Ireland.

Analysts said yesterday that, under Corzine’s leadership, MF’s fate had been sealed via big “proprietary” trades on such eurozone sovereign debt, where a company bets its own capital.

The dramatic Chapter 11 move followed rumours last week that MF was no longer taking new positions in equities, derivative contracts and bonds after it posted a $191.6m second‑quarter loss and revealed its sovereign debt had ballooned.

However, market traders predicted yesterday that the company’s relatively smaller size made it less of a potential systemic threat than the downfall of Lehman.

Michael Epstein, a restructuring adviser with CRG Partners in the US, commented: “Ultimately it [MF] will have lost all the confidence of its investor base. In some respects, it’s a baby Lehman.”

One market trader in London said: “To put it in perspective, MF is certainly smaller than Lehman or Bear Stearns [the busted investment bank acquired by JP Morgan for a bargain basement $236m in early 2008]. I believe it employs about one‑tenth of the staff of Goldman, for instance.

“But even a mini Lehman will have negative knock‑ons. These things are never isolated. Other people will suffer from the sovereign debt hole MF has got itself into.”

The Financial Services Authority, Britain’s financial regulator, confirmed yesterday that, parallel with Chapter 11 in the US, the British subsidiary MF Global UK Ltd had been put into administration. The FSA said Richard Fleming, Richard Heis and Mike Pink of KPMG have been appointed as administrators.

MF’s credit rating had recently been slashed to junk status by two agencies, pushing up its borrowing costs. The broker is the second big recent victim of the eurozone debt crisis after Dexia, the Franco‑Belgian bank. Dexia was recently nationalised amid fears over its lending to debt-ridden euro zone nations.

Kathleen Brooks, at currency trader Forex.com, said: “Both are mid-sized financial institutions, too small to be systemically important, but that doesn’t mean that the rot will not spread.

“The risk is that as banks try to bolster their balance sheets there won’t be many ready buyers for MF Global’s businesses, which could lead to another disorderly default in the financial sector.”

Corzine became chief executive of MF last year after losing his governorship of New Jersey. The company was spun out of hedge fund operator Man Group in 2007.

Shares in MF had halved when news of its problems emerged last week, and were suspended by the Wall Street authorities yesterday.