Magazine article Modern Trader

Too Big to Fail?

Magazine article Modern Trader

Too Big to Fail?

Article excerpt

A few days after the news broke about Refco Inc.--CEO Phillip Bennett had been hiding a $430 million debt on the balance sheet that once discovered caused Refco stock to drop precipitously and eventually put it into Chapter 11--someone I spoke to at the firm noted dryly: Well, when the CEO is the one doing the fraud, that's pretty much as bad as it can get.

[ILLUSTRATION OMITTED]

As I write this, various parts of Refco are being auctioned off. Although the futures division reportedly lost almost 50% in segregated fund business, it was not included in the Chapter 11 filing and most likely will survive--at press time it looked like Man Financial would be the buyer. The forex business may be purchased also; this is good news for those customers who had been in limbo because as part of the agreement the buyer would make all of them whole. And as for the rest of the business now in Chapter 11, who knows?

The futures industry went into high gear once the news broke, big producers moving their customers to "safe" clearing firms and introducing brokers trying to decide where to take their business (see Refco coverage in Trendlines, page 14). But the confusion was massive, and the surprise throughout the industry was notable.

There were two views on the Refco failure: one was the shock and fear of a huge firm like Refco going down, and the other was a more cynical view that the firm got what it deserved. The latter view is perhaps the cost of doing business in an incredibly competitive arena. It also comes from resentment built up over years by various Refco practices. Brokers today who were picking up some of the business were shocked by some of the pricing and deals Refco gave its customers.

If nothing else, Refco was an aggressive behemoth that, despite moving into the securities field in more recent years, never quite lost its wild west maverick image in the futures business. …

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