Does MF Global Get To Survive On Its Own? (MF, BCS, GS, JPM, C)

To say that MF Global Holdings Ltd. (NYSE: MF) is in trouble might be the understatement of the year.  The commodities and derivatives broker has reportedly been caught on the wrong side of trades and now the reports are growing that customers are moving funds out of the company and that trading partners are backing away from facing the company in transactions.  The good news is that MF Global is not a too-big-to-fail institution.  The bad news is that it is impossible not to think that this another Bear Stearns or a another Lehman Brothers on a smaller scale.

We do not want to contribute to any rumor-mongering.  It was rumor-mongering on top of serious underlying problems and on top of serious financial leverage which helped to expedite and exacerbate the situations at Bear Stearns and at Lehman Brothers ahead of and during the financial meltdown.  We also want to note on thing: it is Friday and any ‘stabilization rumors’ would probably greatly change the very negative pre-market tone we are seeing this morning.

There have been loose reports that Jon Corzine had sought a deal with Barclays PLC (NYSE: BCS).  Frankly, the odds seem very low considering that U.K., European, and American regulators are not keen on banks and brokerage firms getting larger.  Bloomberg also reported that MF Global has drawn down on its credit lines this week as its credit ratings were cut to “junk” by both Moody’s and Fitch.

Dick Bove of Rochdale went on record this week saying that Goldman Sachs Group Inc. (NYSE: GS) may be interested in buying the company, but he clarified that this might not be an equity purchase.  He noted that it could be a reorganization purchase, which implies nothing for existing shareholders.

We also cannot expect that Jamie Dimon from J.P. Morgan Chase & Co. (NYSE: JPM) nor that Brian Moynihan of Bank of America Corporation (NYSE: BAC) will be willing at all to step in as they did during the financial crisis.  After all, these banks are being “encouraged” to limit their risk-taking activities.  Both banks, along with Citigroup, Inc. (NYSE: C), are said to be lenders in that prior Bloomberg report.

We have seen analyst downgrades this week from Keefe Bruyette & Woods as well as from Raymond James.

MF Global’s most recent earnings were no harbinger of great things.  Revenues were down by a double-digit percentage drop, compensation ratios were higher on lower revenues, charges hit the GAAP results, and even the adjusted earnings showed a loss. The company noted, “As of September 30, 2011, MF Global maintained a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity), including Belgium, Italy, Spain, Portugal and Ireland. The laddered portfolio has an average weighted maturity of October 2012 and an end date maturity of December 2012, well in advance of the expiration of the European Financial Stability Facility in June 2013.”

As of yesterday’s close, MF Global had a market cap of almost $236 million.  It does need to be noted that Evercore Partners Inc. is advising the company on options for MF Global’s brokerage operations and for other options.

On Monday this was a $3.55 stock.  Shares fell to under $2.00 after earnings to close at $1.86 on Tuesday after the report.  Shares have slid each day: $1.70 on Wednesday and $1.43 on Thursday.  There are over two hours until the market opens this Friday morning and shares are indicated down close to 12% at $1.26.  Shares were down as much as 15% earlier this morning.

JON C. OGG