Good News on MF Global

I received an email from the MF Global bankruptcy trustee this morning indicating that they would be returning another $685 million to customers. Of this amount, $600 million will go to customers who traded on US exchanges, $50 million to those who traded on foreign exchanges, and $35 million who were holders of physical metals. That would enable them to increase their payout on cash funds owned by the former US customers of MF Global to 80%.

I was suspecting that something like this would come along soon, as I recently was solicited by a couple of East coast hedge funds offering to buy out my existing claim at a discount. Now I hear that a private exchange it setting up in Connecticut which will buy and sell such claims, of which there are thought to be more than 10,000.

When MF Global filed for bankruptcy last year, it was the eighth largest in US history with debts of $40 billion. It is believed that the company lost $6.3 billion on ill-timed long positions in European sovereign debt. As is so often the case in these situations, it was the distressed liquidation of the MF portfolio that made the final bottom in that market. If MF had only been able to hold on a few more weeks, they would have made a fortune. For example, Italian ten year bond yields have fallen from over 8% to under 5% since then, creating massive capital gains.

The bankruptcy triggered a mini financial crisis just in the midst of a global selloff. It cast a pall over the agricultural markets from which they have yet to recover as thousands of farmers saw capital tied up. That left them unable to come out of existing hedges or roll into new ones. Even those who stored physical metals with MF, like gold and silver, were only given partial payouts.

Initially, the finger pointed at CEO John Corzine, once a Goldman Sachs co-chairman, US senator, and governor of New Jersey. I never believed it for a second. It now looks like a mid-level manager accidently sent $150 million to JP Morgan, which refused to return the funds before the bankruptcy was filed. A further complication is the conflict between US and UK bankruptcy law which assign different rights to creditors. The matter will no doubt be tied up in the courts for years.

I believe that that beleaguered MF customers will eventually get 100% of their funds returned. There are still substantial assets to be liquidated at far better prices than prevailed in the fall and paid out to customers. This was not a negative net worth bankruptcy, and customers are at the very top of seniority of claims. But it could be a long wait. However, their confidence on the US financial system is almost certainly gone for good.