Corzine's MF Global declares bankruptcy; eighth-largest

— -- MF Global, the broker-dealer run by former New Jersey governor Jon Corzine, filed for bankruptcy protection Monday, overwhelmed by big bets on European debt.

The company had $41 billion in assets, ranking its bankruptcy the eighth-largest in U.S. history, just above Chrysler's $39.3 billion bankruptcy filing in 2009, according to BankruptcyData.com.

MF Global had about $6.3 billion in direct exposure to troubled European debt, issued by Italy, Spain, Belgium, Ireland and Portugal. The company was betting that European problems would be resolved and that it could profit from the bonds it bought when Europe emerged from its debt problems.

Despite the agreement announced last week on Greek government debt, MF Global wasn't able to cash in on its bet. So far, it's the largest U.S. victim of Europe's ongoing debt problems.

Standard & Poor's analyst Erik Oja says major U.S. banks aren't endangered, but the MF Global meltdown increases headline risk — the risk that investors will sell off financial stocks on any new bad news out of Europe.

As a long-term investment, MF Global's bet on European bonds could well have been correct, says Michael Lipper, president of Lipper Advisory Services. But the company used borrowing to amplify its position, which increased its potential rewards — and its risks.

As its lenders began demanding money back, the company was forced to file Chapter 11. "They couldn't afford to play the game they were playing with the resources they had," Lipper says. A larger player may have been able to handle a position the size of MF Global's, he says.

The company's slide started in earnest on Sept. 1, when the Financial Industry Regulatory Authority, or FINRA, ordered MF Global to increase its capital. Capital is the money a company can use to offset losses.

Moody's downgraded MF Global's debt last week because of its deteriorating financial picture. The company reported a second-quarter loss of $186.6 million Oct. 25, prompting further downgrades by Moody's and other rating agencies.

MF Global tried to find a buyer for some of its assets, but talks with Interactive Brokers, a potential match, collapsed over the weekend.

The biggest losers are MF Global's stockholders. Stock generally falls to zero in a bankruptcy.

In MF Global's bankruptcy filing, it listed the largest stockholders as of Sept. 30:

•Pyramis Global Advisors, an arm of Fidelity Investments, owned 8.3% of MF Global stock.

•RS Investments, 7.8%. It says it sold its stake after Sept. 30.

•Fine Capital Partners, a hedge fund, 7.4%.

J.C. Flowers II, a private-equity fund, owns more than 10% of MF Global preferred stock, according to the bankruptcy filing.

MF Global's bankruptcy filing lists JPMorgan Chase as its largest creditor. JPMorgan Chase is the trustee for $1.2 billion in MF Global's corporate bonds, but the bank has only $100 million in direct holdings of MF Global debt, according to S&P.

In addition to trading for its own account, MF Global cleared trades in the commodities futures market. The company had $7.1 billion in customer accounts as of Aug. 31, according to Standard & Poor's.

On Monday, CME Group, owner of the Chicago Mercantile Exchange, barred MF Global from trading. Also Monday, the Securities Investor Protection Corp. stepped in to liquidate MF Global. SIPC insures brokerage accounts up to $500,000.

MF Global also acted as a primary government securities dealer, meaning it was one of 22 official trading counterparties with the New York Federal Reserve Bank. The Fed suspended doing business with MF Global on Monday.

MF Global can trace its roots to an English sugar-trading company that began operations in 1793.

The Man Group spun off MF Global in 2007.

Corzine, 64, former co-chairman of Goldman Sachs, took over the company's reins in March 2010. Does this spell the end of his investing career?

"The Street loves recovering people," Lipper says. "A number of hedge funds have blown up and, 12 to 18 months later, can get new money. I wouldn't count him out."