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
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
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.
Archeologists Uncover Ancient Race in the
Great Lakes Region: Remains Of Ancient Race Of Job Creators Found
In Rust Belt. Read the story here.
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.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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