James Giddens has been appointed as the trustee in the liquidation of the MF Global (MF) broker-dealer business by the FDIC. He has set up a website, mfglobaltrustee.com, to keep customers apprised of the status of the liquidation proceedings. The website is quite informative, and includes the entire docket for the liquidation, allowing users to download whatever document interests them. Customers can and should check this website frequently as the trustee will be posting information as to what successor firms will be taking over MF Global accounts.
About 150,000 customer accounts were frozen Monday when the parent company filed bankruptcy. About a third of those are believed to be commodity oriented. The trustee has indicated that the transfer of accounts to other brokers will go slower this time, as opposed to the situation when Lehman Brothers collapsed. Back then, they had a ready buyer, Barclays (NYSE:BCS), to whom the accounts were transferred. But, now, with money allegedly missing from customer segregated accounts, things are more complicated. A potential buyer, Interactive Brokers, shied away from the deal because of the discrepancies.
The trustee will now need to find a variety of new homes for MF Global clients because, according to him, the diversity of the account types means that no one broker will be able to handle them all. Be that as it may, while this process plays out, customers will be in a terrible position. Many were forced to liquidate positions they would not otherwise have wanted to sell, while liquidation orders were being allowed. Others, as stated above, have had their trading funds frozen.
Derivatives based upon European debt were the torpedoes that sank MF Global. The failure of MF Global illustrates the dangers of leveraged trading, even to experts in the field. The dangers elsewhere are exponentially greater. Some are outlined in a previous article by this author here. MF Global was a mid-sized financial institution that regulators did not see as posing any systemic threat. Yet, its failure exacted a toll upon financial markets. What will happen when and if a significant part of the derivatives held inside the FDIC insured units of financial institutions like JPM, BAC, GS, and HBC ever go bad?