MF Global: The Numbers And The Fallout

Nov. 1.11 | About: MF Global (MFGLQ)

It had to happen at some point. The announcement of MF Global's (MF) bankruptcy filing on Monday came as a surprise to few - but the devil is always in the details. Let's run through the available numbers on MF Global so we have a better idea of what to expect as a result of the firm's collapse.

Big Bets on Europe = Oh Dear

MF Global's history is relatively ordinary with roots dating back some 200 years to London. In 2010 however, the company's management changed and for whatever reason, the brokerage changed its investment style. Big bets were taken on European sovereign debt (whoops), mostly in the PIIGS economies.

Monday's bankruptcy filing demonstrates how those investments turned out.

So now for the numbers:

$6.3 billion = total bets on Euro debts.

$191.6 million = loss in Q3 reported on Oct 25th 2011.

These figures are stacked against:

$39.7 billion = total debt.

$41.0 billion = total assets.

$7.3 billion = liability to clients (client funds).

Don't forget, $41.0 billion in assets sounds lovely and certainly exceeds company debts. However, the reality is that book value of assets these days is rarely on par with the true realizable value of those assets - that is if you can actually sell them at all.

And therein lies MF Global's problem and hence its bankruptcy filing in a Manhattan Court.

And It Gets Worse

There's always a catch, isn't there. Revelations are now circulating the market that MF Global performed the ultimate no-no in corporate finance by mixing client funds with company funds. On a first glimpse of the bankruptcy filing financials, regulators balked at a $950 million hole in the books only to then figure out that they hadn't pushed the right buttons on their calculator (officially announced as an "accounting error") and narrowed the damage to $700 million.

Nevertheless, this still means that $700 million of client funds are unaccounted for - which is just not good.

As with all of these large-scale meltdowns however, more time will be required to sift through the complex web of financial entanglement to confirm whether the missing money is indeed... well... missing.

In the meantime, have they checked under the bed?

Contagion Risk

I'm not personally concerned about a spillover affect of this bankruptcy to other financial institutions. As of Monday, the applicable figures were:

$2 billion = amount owed to other banks - unsecured.

$6.3 billion = amount owed to other banks secured by Eurozone bonds.

So, really the only contagion effects here are $2 billion (pretty tame) and a whole lot of nervous investors (much more of a concern). This is, after all, the first official financial firm failure as a direct result of the Eurozone mess.

We have already seen a flow on effect in the equities markets - with a similar sized firm Jefferies Group (JEF) dropping 10% in Monday trade - despite an announcement that it has much less exposure to the eurozone. If this type of aftereffect continues, I might start to get a little more fidgety.

Final Word

Is this the beginning of 2008 all over again? Probably not. Is it something to keep an eye on in case the situation escalates and deteriorates? Absolutely.

I'll keep you posted.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.