MF Global Collapse has Many Victims

November 13th, 2011
in econ_news

investment-advice-bad Econintersect:  As the evidence is still being sought to try to find out just what happened to bring investment firm MF Global down in a sea of chaos (see GEI News article yesterday), little attention has been paid to the victims of this failure:  the investors whose money has disappeared and the everyday workers at the firm whose livelihood has vanished.  This past week it was announced that the entire staff (1,066 individuals) of the broker-dealer unit of the bankrupt company were terminated after the time stories of investors’ losses started appearing in the media.  (For larger image, click on cartoon or see end of article.)

Follow up:

In a move that seemed emblematic of the MF Global story of incompetence (or worse), the firings were accomplished through a press release that appeared in the media before the employees were notified, according to Bloomberg/Businessweek.

Some details were given by the New York Post:

The 1,066 employees will be paid through next Tuesday, and health benefits will run out at the end of November. Bonuses and other financial perks won’t be paid, workers said.

The terminations were mandated by the bankruptcy court as a result of the Chapter 13 filing by MF Global Holdings.  There are no severance packages.

The pain and suffering for investor clients of MF Global will be major.  According to Bloomberg:

MF Global’s bankruptcy, the eighth largest in U.S. history, is causing mayhem for customers that may surpass what brokerage customers of Lehman Brothers Holdings Inc. suffered. Though Lehman’s bankruptcy, the largest in U.S. history, sent the world financial system into a tailspin, its brokerage customers benefitted from Barclays Plc’s takeover of its accounts on Lehman’s second day in court.

More than 150,000 customer accounts have been frozen, totaling $5.35 billion.  About $593 million of this has not been accounted for.  The SIPC, a private government-sponsored company that insures brokerage accounts for up to $500,000 in securities (including up to $250,000 cash) may cover some of the missing capital, should it never be found or recovered.  However, MF Global investors included many futures traders and futures contracts are not generally covered.  Thus, missing money for some may be gone forever.  (This information is from Bloomberg.)

In an article at The Financial Express, the outright violation of standard practices for brokerage firms is described.  The following quote is from Stuart McClellan from the UK, an independent trader with more than 25 years of experience in the futures industry:

what they were doing with client funds is to me outrageous.  Using the excess collateral in clients' funds to trade is not illegal, but to my mind it's immoral. There is a huge risk, he said.

McClellan has over $110,000 in limbo at MF Global.

Michael Greenberger, a former director of the Division of Trading and Markets at the Commodity Futures Trading Commission (CFTC) and now a law professor at the University of Maryland, indicates in The Financial Express article that the mixing of customers’ funds as if all the money was in “some big cookie jar” is what is so “shocking” about the MF Global situation.

As The Financial Express says, the MF Global bust has eroded trust in brokerages.  This is not the kind of trust busting we need.

If you are wondering what to do with your money now, the following may help:


Cartoon from The Digerati Life.

Sources:  GEI News, Bloomberg/Businessweek, New York Post, The Financial Express and Bloomberg

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