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Refco collapse in US poses some troubling questions
The demise of US brokerage firm Refco has sent a tremor through financial circles, posing the question as to whether this is merely a “one off” event caused by circumstances peculiar to the company, or a symptom of bigger problems to come.
Refco, which has been in the commodities and financial services business for more than 30 years, all but collapsed last week when it was revealed that the company’s chief executive, Phillip Bennett, had hidden a $430 million personal loan from the company. The existence of the loan, which was repaid last Monday, was not revealed in the company’s accounts. This has raised immediate questions about why the company’s auditors and its backers among investment bankers failed to notice it.
Bennett, who has been charged with securities fraud, enjoyed the support of some of the top names on Wall Street, including Goldman Sachs and Credit Suisse First Boston.
While the loan has been repaid, there could still be repercussions. Bennett used his 34 percent stake in the company, valued at more than $1 billion before it collapsed, as security for a loan. The source of the loan appears to be the Austrian bank Bawag which admitted on Sunday that it was exposed to Refco, having issued credit lines worth almost $510 million. Bawag confirmed that it had made a loan but did not specify to whom it was issued.
In its statement, the bank, which is owned by Austrian trade unions, said the loan was against “recoverable assets” and that for the “remaining credit volume there are securities which we assume to be recoverable”. That remains to be seen as efforts are made to assemble a rescue package able to salvage at least some parts of Refco’s operations.
While the consensus in financial circles appears to be that Refco’s demise will not severely affect the broader market, there are concerns over how the collapse took place and what it signifies for the future.
“Even without any significant damage to the broader market,” the Financial Times noted, “Refco’s nightmare week has left a trail of destruction.” Apart from Bawag, the company’s shareholders could be big losers. General Motors Asset Management, for example, is believed to have a stake once valued at almost $50 million. The total loss in value if the company goes broke could be as much as $1.5 billion, with up to 2,400 employees threatened with the loss of their jobs.
New York Times financial writer Gretchen Morgenson pointed to a number of disturbing features about the company’s demise, in particular the circumstances of its initial public offering (IPO) last August.
“Securities regulators and pundits,” she wrote, “say that there will be no financial market tremors emanating from Refco Inc. ... Maybe so, but it seems incomprehensible that a financial domino this big can topple without making a sound. Refco, after all, was one of the largest players in commodities, derivatives and United States Treasury markets, operating in 14 countries and serving more than 200,000 clients. Financial market tremors or not, there is plenty to be afraid of in the Refco mess.”
Apart from the failure to notice the outstanding $430 million loan, there was the willingness of “supposedly savvy financial investors” to purchase Refco shares in spite of “hair-raising risk factors” detailed in the prospectus which accompanied its IPO.
Read More
http://www.wsws.org/articles/2005/oct2005/refc-o18.shtml
Bennett, who has been charged with securities fraud, enjoyed the support of some of the top names on Wall Street, including Goldman Sachs and Credit Suisse First Boston.
While the loan has been repaid, there could still be repercussions. Bennett used his 34 percent stake in the company, valued at more than $1 billion before it collapsed, as security for a loan. The source of the loan appears to be the Austrian bank Bawag which admitted on Sunday that it was exposed to Refco, having issued credit lines worth almost $510 million. Bawag confirmed that it had made a loan but did not specify to whom it was issued.
In its statement, the bank, which is owned by Austrian trade unions, said the loan was against “recoverable assets” and that for the “remaining credit volume there are securities which we assume to be recoverable”. That remains to be seen as efforts are made to assemble a rescue package able to salvage at least some parts of Refco’s operations.
While the consensus in financial circles appears to be that Refco’s demise will not severely affect the broader market, there are concerns over how the collapse took place and what it signifies for the future.
“Even without any significant damage to the broader market,” the Financial Times noted, “Refco’s nightmare week has left a trail of destruction.” Apart from Bawag, the company’s shareholders could be big losers. General Motors Asset Management, for example, is believed to have a stake once valued at almost $50 million. The total loss in value if the company goes broke could be as much as $1.5 billion, with up to 2,400 employees threatened with the loss of their jobs.
New York Times financial writer Gretchen Morgenson pointed to a number of disturbing features about the company’s demise, in particular the circumstances of its initial public offering (IPO) last August.
“Securities regulators and pundits,” she wrote, “say that there will be no financial market tremors emanating from Refco Inc. ... Maybe so, but it seems incomprehensible that a financial domino this big can topple without making a sound. Refco, after all, was one of the largest players in commodities, derivatives and United States Treasury markets, operating in 14 countries and serving more than 200,000 clients. Financial market tremors or not, there is plenty to be afraid of in the Refco mess.”
Apart from the failure to notice the outstanding $430 million loan, there was the willingness of “supposedly savvy financial investors” to purchase Refco shares in spite of “hair-raising risk factors” detailed in the prospectus which accompanied its IPO.
Read More
http://www.wsws.org/articles/2005/oct2005/refc-o18.shtml
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