KETR

MF Global A U.S. Casualty Of EU's Debt Crisis

Nov 1, 2011
Originally published on November 1, 2011 11:43 am
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STEVE INSKEEP, HOST:

MF Global has collapsed. That's the securities firm run by former New Jersey Governor Jon Corzine. It filed for bankruptcy protection yesterday in New York. Now, MF Global is not a huge player on Wall Street. But some of its creditors are, including JP Morgan Chase and Deutsche Bank.

The company got into trouble over bets on the European debt crisis, and that might not be the only trouble for MF Global. Last night, the New York Times reported that MF Global is under investigation after it was discovered that hundreds of millions of dollars in customer money cannot be accounted for.

Zoe Chace with our Planet Money team reports on the biggest American casualty of Europe's sovereign debt crisis.

ZOE CHACE, BYLINE: Pride goes before a fall. That sums up the sad tale of MF Global, a brokerage that wanted to play with the big investment banks on the street, like Morgan Stanley and Goldman Sachs, which is why, according to market analyst Debra Borchardt, they hired a former head of Goldman Sachs to run their investments - former New Jersey Governor John Corzine.

DEBRA BORCHARDT: When they brought in Jon Corzine, that was to build up their investment banking business.

CHACE: Now, New Jersey has long been a betting state. And Jon Corzine acted in his state's tradition.

BORCHARDT: What ended up happening was he, the company, basically made a bet on the European sovereign debt. They bought $6 billion worth of this debt.

CHACE: Buying a country's debt is another way of saying lend a country money. What countries?

BORCHARDT: They had Spain, Portugal, Belgium, Ireland, Italy.

CHACE: That's a pretty audacious bet to make. These countries are not known for their fiscal responsibility. But MF Global bought the debt in spades.

BORCHARDT: Hoping that it would pay off - buy it really cheap, they'll get bailed out and the price would go up.

CHACE: There's a scene about a bet like this in the movie "Swingers." Mike's at the blackjack table. The dealer takes his money and gives him a $100 chip.

(SOUNDBITE OF MOVIE, "SWINGERS")

CHACE: Rather than lowering the stakes, Corzine doubled down.

(SOUNDBITE OF MOVIE, "SWINGERS")

BORCHARDT: That's the kind of trade, that if it works, you look brilliant.

CHACE: But in order to cover their risky position, Borchardt says, they had to take riskier bets. They took out a $300 million loan a month ago, then spent it. Finally, last week, even as it looked that European leaders were near a deal, the stock of MF Global plummeted. Investors were fleeing the ugly scene. Corzine was left holding the bag.

BORCHARDT: It's your uncle that has run out of money, you know, betting on the ponies, and now he asks you for just $300 more and he's going to be fine. And you give him that three, and it's still not enough. And now it's over.

CHACE: European leaders are hoping that the package they passed last week will make investors more likely to finance their troubled countries. Last week was far too late for MF Global.

Zoe Chace, NPR News. Transcript provided by NPR, Copyright NPR.