Bankrupt brokerage showed appetite for risk - USATODAY.com
- Moody’s Investors Service said it saw no reason to change its rating of MF Global when Jon Corzine became CEO of the Manhattan-based brokerage in March 2010.
But while citing the “first-rate industry and leadership experience” of the onetime Goldman Sachs head, former U.S. senator and ex-New Jersey governor, the ratings agency posed a question.
“What will new management do to return MF Global to consistent, long-term profitability while keeping its risk appetite in check?” asked Alexander Yavorsky, a Moody’s vice president who has since left the firm.
After last week’s Chapter 11 bankruptcy filing by MF Global, a collapse triggered in part by the brokerage’s heavily leveraged, multibillion-dollar bets on European government debt, the question seems somewhat prescient.
Yet a series of other statements by ratings agencies, along with charges in lawsuits against MF Global, spotlighted serious questions and warnings that threatened the firm’s future before the implosion.
A costly bad trade
MF Global’s Memphis branch office was the epicenter for arguably the most significant previous financial tremor in February 2008. Evan Dooley, a broker there, placed an unauthorized wheat futures position while trading for his own account. His financial bet went $141 million bad.
Dooley had no apparent way to pay, so MF Global was forced to make good on the contracts. The brokerage and its insurers have been fighting in New York state courts ever since over whether MF Global’s policies should cover the incident. The brokerage initially prevailed, but the insurers appealed in April.
In an earnings conference call with Wall Street analysts after the incident, MF Global’s then-CEO Kevin Davis described the shortfall as an “aberrational” loss that had prompted “false rumors regarding our liquidity.” He also said “the worst is behind us.”
But by then, Moody’s had downgraded the brokerage’s long-term issuer rating from A3 to Baa1, a grade signifying moderate credit risk on Moody’s Aaa to C rating scale. Moody’s also placed the rating on review for a further possible downgrade.
“The failure of MF Global’s systems to prevent the placement of trades in an account with insufficient funds represents a serious breakdown of risk controls,” the ratings agency said, adding that it would re-evaluate the firm’s risk management.
