The losses and mystery surrounding broken futures group MF Global, America’s biggest financial collapse in three years, continues to deepen with news this morning of a doubling in the amount of clients’ money missing to more than $US1 billion funds and another potential billion dollar-plus loss waiting in the wings.
A report released overnight from the trustee overseeing the wreckage of MF Global in the US said the “apparent shortfall” of supposedly segregated clients funds was now around $US1.2 billion, double the previous estimates of $US600 million.
“At present, the trustee believes that even if he recovers everything that is at US depositories, the apparent shortfall in what MF Global management should have segregated at US depositories may be as much as $1.2 billion or more,” the statement said.
The new estimate is equivalent to almost a quarter of the $US5.45 billion in client funds that the company was required to hold separately from its own funds. And this is just in the US. The financial picture of MF Global’s operations in the UK and Australia, two other major businesses, remains uncertain.
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The shortfall has undermined US futures markets and left upwards of 38,000 traders with insufficient margin deposits. Failure to separate customer and house funds is a violation under US law and Australian law. US commentators say it is becoming clearer that the company looted its clients accounts to “pretty up its financial position” to try and sell the business in the company’s last mad days in the final week of October.
It is clear that if this happened, US regulators were hoodwinked, or just ignored the rising tide of rumours about MF Global’s position (starting with the surprise third quarter loss and the Moody’s downgrading that week) and did nothing to check on how the group was travelling.
US regulators were obviously surprised by the speed of the company’s collapse, and by the news that huge amounts of funds were missing from client accounts. They had previously said that approximately $US600 million of funds in segregated accounts owned by former MF Global customers was unaccounted for at the time of the firm’s bankruptcy filing on October 31.
Now that seems to have been a serious under estimation and raises the question of their level of competence and ability to understand accounting and the law regarding client monies.
James W. Giddens, the trustee for the liquidating MF Global, said in his statement that to date about $US3.7 billion has been brought under his control, “all of which comes from the former US depositories of the broker-dealer”. He said that has has already distributed $US1.5 billion in collateral, and is now distributing $US520 million. He said that about $US1.6 billion remained.
“The previously announced next step, restoring 60% of what is in segregated customer accounts for US futures positions, would require approximately $1.3 to $1.6 billion to implement; that is, virtually all of the assets currently under the trustee’s control.
“If that was to happen, the investors would lose around 40% of the value of the amounts invested with MF Global, which could total more than $US2 billion. With the shortfall on segregated funds. the total loss from MF Global’s failure could top $US3 billion very easily.
“This next step (topping up segregated accounts to 60%) is subject to Bankruptcy Court approval, and will be done in close co-operation with the CFTC, SIPC, and the CME. The trustee expects this transfer to occur in early December, once the current transfer is complete and books and records are reconciled to allow it to happen.
“Efforts to collect other funds from US depositories continue around the clock, and it is expected that the US funds available to the trustee will increase in the coming weeks. At present, however, the trustee does not have access to other funds beyond the $1.6 billion on hand, and he is very close to exhausting the funds under his control. Further complicating matters, assets located in foreign depositories for customers that traded in foreign futures are now under the control of foreign bankruptcy trustees, and while the trustee will pursue them vigorously, it has been his experience that recovery of these foreign assets may take more time.”
That’s a reference to funds used to invest in futures markets and other products offshore in London and other futures markets, for example. It is unclear whether he is also referring to funds raised in other markets and used to invest on behalf of foreign clients.
He said efforts to collect these other funds from US depositories was continuing “around the clock,” but the recovery is complicated by assets located in foreign depositories. Recovery of such assets could take more time, and of course money. If he exhausts his funds topping up the segregated accounts to 60% and no more cash can be found, then the losses for clients and other creditors will balloon.