The markets were haunted this Halloween by the ghosts of the past financial crisis.
With MF Global filing for bankruptcy on Monday, investors pummelled many financial stocks, fearful that problems were lurking on the books of other Wall Street firms. It was a crisis of confidence, not unlike in 2008 when the markets punished stocks on mere speculation of trouble.
On Monday, companies with perceived exposure to MF Global bore the brunt of the pain. The Jefferies Group, which issued a statement saying it had a minimal stake in the brokerage, fell by nearly 10%. The Fortress Investment Group, which proactively disclosed that it had “literally zero” exposure, dropped by more than 11%.
MF Global made a risky bet in a tumultuous market. Recently, the firm revealed that it had $6.3 billion of sovereign debt in troubled countries like Italy and Spain. The position was nearly five times the firm’s equity of more than a billion dollars. As the sovereign debt crisis reached a peak in October, two rating agencies cut the grades on the company’s debt, saying they questioned the firm’s risk controls given the size of the position.
The downgrades sent the company into a tailspin. Trading partners asked the firm to post more money against their portfolio. Adding to the jitters, MF Global reported a third-quarter loss, which further eroded its stock and made its capital position even more tenuous. The firm drew down a $1.3 billion credit line as it fought to stay afloat. But it proved insufficient, and MF Global was forced to file for bankruptcy.
After Moody’s downgrade last week, MF Global sent a letter to clients trying to reassure them of the firm’s strength. On Monday, as some clients called to ask questions and liquidate their accounts, MF Global was not picking up the phone. NYT