Inside the "First" MF Global Collapse

In 2005, my colleague and I partnered with Refco which at the time was the largest commodities brokers in the world to launch a new product in India…what could go wrong? I landed into India on October 1, 2005 and on October 10 a press release was issued that the CEO was resigning because of “accounting irregularities”. Whenever you hear “accounting irregularities” you can safely assume the worst possible outcome, a week later Refco filed chapter 11 bankrupty. Listening to the reports over the past two weeks about the impending collapse of MF Global was like déjà vu for me, this is actually their second collapse.

The latest collapse is even more sinister then the first one. At least during the Refco collapse Phil Bennett took a loan to cover his proprietary trading (aka prop trading). However, it appears MF Global took customer segregated funds to shore up their losing prop trades on bonds which is hugh no-no. The reports are still filtering in as to what exactly happened and who knew what. However, this quote from a lawyer really ticked me off “To the best knowledge of management, there is no shortfall”. A very carefully worded statement which essentially says “don’t hold the management team accountable”.

When working with Refco during the transition to Man Financial (which eventually became MF Global) it was surreal. I just landed into India with plans to stay for 6 months while we got everything up and running. And within 10 days my dreams turned to despair. I had a great vantage point as I was sitting next to Vineet Bhatnagar, MD of Refco-Sify India, as everything was collapsing around the world for Refco. We would hear reports of what was happening via the newswire or rumors from the “New York guys” but during all this craziness Vineet was calm and cool throughout the entire ordeal. He gave interview after interview saying how the India operations were “ring-fenced” and things would be back to normal. Certain parts of the business came back to normalcy faster then others, it was a trust thing. I think the institutional guys understood their money was safe but many retail clients didn’t care what was being said.

In any event, our new fund was completely crushed…100% wanted their money back NOW. All the investors got their money back and said they would re-invest once the dust had settled. Sadly, some of India’s most prolific investors who were in the first fund did not return for the second fund which we started in March 2006 under the Man Financial banner.

Right now there are two types of people that exist at MF Global-Sify India, people that witnessed the first collapse and the “new guys.” Anyone who was there during the first collapse is a little concerned but have seen this movie before. The “new guy” is probably shitting in his pants. Having worked with the Indian management team there is no doubt they are top notch and everything continues to be above the board. There was a report in DNA Money newspaper that Vineet “had put in his papers”, I almost choked on my morning coffee when I read that. Not because “oh my god he is leaving” but rather “oh my god he would NEVER leave India”. Of course, people love sensational headlines and the MF Global collapse definately provides it.

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