When MF Global filed for bankruptcy yesterday, it not only became the eighth largest corporate bankruptcy in U.S. history. It also became the first U.S. company taken down by the troubles afflicting European sovereign debt. How big of a problem all of this represents depends on whether or not you think the MF Global demise reflected a unique set of circumstances or whether it reflects something deeper. Either way, there are some things about MF Global’s collapse that are worth thinking about.
First, although MF Global is the first U.S. company claimed by the European Sovereign debt crisis, at least one other company has also been imperiled by these circumstances. MF Global’s bankruptcy comes just three weeks after the bailout and restructuring of Dexia, S.A., the Belgian-French banking institution became was the first casualty of the crisis after writing down the value of the Greek debt it held on its balance sheet.
Second, though like Dexia what took down MF Global was its exposure to European sovereign debt, unlike Dexia, MF Global was not exposed to Greek debt. MF Global held the debt of other European countries. Its assets include $6.3 billion of Italian, Spanish, Belgian Portuguese and Irish debt. More than half of the total was Italian. It was the company’s exposure to these debts that led to regulatory scrutiny, downgrades, and margin calls that threatened the company’s liquidity.
Third, MF Global is far from the only victim of its demise. Its shareholders likely have lost the full amount of their investment. (Refer here for a run down of affected investors). In addition, there are creditors and others who have suffered a loss as a result of MF Global’s bankruptcy. Among others, investment bank J.C. Flowers reportedly stands to lose about $48 million due to MF Global’s collapse.
Fourth, the collapse of both Dexia and MF Global came quickly. Dexia’s crisis came less than three months after European stress tests had found Dexia one of Europe’s safest banks. MF Global’s bankruptcy filing came only about a week after the rating agencies initiated a series of downgrades of MF Global.
The speed of these companies’ collapses adds a layer of urgency to asking the question whether or not there are other companies similarly exposed – and as MF Global’s example shows, not just exposed to Greek debt but exposed to any of the troubled economies on the Europe’s periphery. The fact MF Global’s exposure to debt from Italy, one of the world’s largest economies, contributed to its demise is particularly troublesome. For that matter, the list of European countries whose debt could be a problem may not be limited just to the countries whose debt MF Global had on its balance sheet. As this European crisis evolves, there could be other problem counties added to the list.
Moreover, in thinking about which companies will have problems from all of this, the inquiry cannot stop just at those companies with exposures to European sovereign debt. There is also the question of which companies are exposed to companies that are exposed to European sovereign debt.
It is possible that MF Global’s collapse represents a unique set of circumstances, unlikely to be repeated (particularly given the late developing reports of supposed deficiencies in customer accounts, the discovery of which may have hastened MF Global’s bankruptcy). On the other hand, it is possible there are other companies who may also suddenly be perceived as over exposed to European sovereign debt and that may collapse just as quickly as MF Global did.
The uncertainty over how big of a problem all of this represent is not just a difficulty for investors. It also poses a challenge for regulators – according to news reports, regulators may also be investigating MF Global’s collapse and may even face criticism for not acting more quickly.
And though the larger problems for the global financial marketplace clearly are of a higher order, it is also worth mentioning here that these issues also pose a challenge for D&O insurance underwriters. As noted above, there is not just the question of whether or not a company is exposed to European sovereign debt. There is also the far more difficult to discern question of whether or not a company is exposed to a company that is exposed to European sovereign debt. As MF Global’s rapid demise illustrates, these concerns are sufficient to send a company into bankruptcy. My guess is that the events at MF Global sent a chill through all of the offices of D&O underwriters everywhere, particularly (but not exclusively) at those carriers that are active in the financial sector.
There is no way to know for sure, but I suspect that before all is said and done, there will be a lot more to be said here on the topic of European sovereign debt risk.
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This Week in San Diego: This week I will be in San Diego for the PLUS International Conference. I am looking forward to seeing many of you there. If you see me at the conference, I hope you will take the time to say hello, particularly if we have never met before. While I am in San Diego, the pace of blog post publication may slow down. The normal publication schedule will resume next week.