MF Global Holdings (NYSE: MF) became the first U.S. casualty of the European sovereign debt crisis, filing for Chapter 11 bankruptcy on Monday. Chairman and chief executive Jon Corzine has yet to acknowledge shared culpability leading to the financial ruin of the commodities, equity and financial derivatives broker-dealer. And whether he will abandon contractual claims to millions in potential severance payments owed to him is still unknown.

A past senator and governor from New Jersey, Corzine took the helm at MF Global in March 2010. He immediately set out to reverse a string of quarterly losses by transforming a company previously known mainly as a traditional commodities and derivatives dealer (dependent on third-party trading volumes and commissions) into a global investment bank. Accustomed to risk-taking, the erstwhile co-chief at Goldman Sachs (NYSE: GS) reset MF Global’s business strategy, shifting firm resources disproportionately toward proprietary trading, including gambles on distressed European sovereign debt.

Road to Bankruptcy, Driven by Corzine

Prior to bankruptcy, MF Global maintained a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity). Simply put, Corzine used leverage to magnify gains, betting big that coupon yields on distressed debt would outstrip interest on margined holdings until Europe recovered — at which point the bonds could either be held to maturity or sold for outsized profits. As of September 30, 2011, Italy, Spain and Portugal accounted for 51%, 18% and 16% of total sovereign debt held, according to regulatory filings.

“We remain confident that we have the resources and expertise to continue to successfully manage these exposures to what we believe will be a positive conclusion in December 2012,” reported Corzine on the company’s second-quarter earnings release on October 25.

Corzine’s judgment that European leaders would resolve the euro crisis, leading to a rebound in the value of MF Global’s holdings, proved dead wrong. As European Union leaders worked last week on a signatory deal to rescue the euro, it became apparent that bondholders (like MF Global) would be forced to eat big losses on held debt.

“The structure of the transaction themselves essentially eliminates market and financing risk,” Corzine coolly lectured analysts on the conference call last week. Wrong — highly leveraged, with limited liquidity, MF Global was unable to meet margin calls or the demands from regulators to boost capital reserves. An eleventh-hour attempt last weekend to raise more capital or find deeper pockets (a buyer for the entire company) failed, leaving protection under bankruptcy the only viable option.

In hindsight, credit agency Moody’s noted that “weak core profitability” led Corzine to order his traders to increase the firm’s speculative exposure in recent quarters.

Multimillion Dollar Severance Package

Incredibly, despite decimating the company, had Corzine succeeded in selling MF Global to a third-party, he would have been entitled to a $12.1 million severance package, according to the terms of his employment contract. Ironically, thanks to the last Republican in the White House, George W. Bush, Corzine is unlikely to receive any going-away gifts.

“Occupy Wall Street” — are you listening? In April 2005, then President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act, which among other things, severely limited a Chapter 11 debtor’s ability to make severance and retention payments to insiders. As a practical matter, Corzine can no longer collect more than a fraction of his “golden parachute.” Nor is he eligible to receive a $1.5 million retention award (payable in March 2014). Ergo, as of November 1, like JPMorgan Chase (NYSE: JPM) and Deutsche Bank (NYSE: DB), Corzine became just another unsecured creditor.

Board’s Role in Oversight?

The board has alleged claw-back policies are in place to discourage excessive risk taking, according to proxy info from its compensation committee. Sadly for shareholders and creditors alike, it appears that actual oversight and compliance at MF Global was nothing more than another case of the fox watching the henhouse:

• The company knowingly permitted Corzine to direct proprietary trading that established a portfolio of $6.3 billion in European sovereign debt — without parallel trades in foreign currency or derivative hedges, save for $1.5 billion in shorted French bonds.
• Directors professed little concern for risk mitigation as Corzine’s buying spree strained an already leveraged balance sheet. MF Global’s sovereign risk exposure was more than five times shareholder equity of $1.2 billion when the curtain came down.

Instead of reigning-in the new chief executive’s lust for risk taking, the board encouraged it: Corzine received a sign-on bonus of $1.5 million in March 2010 and 2.5 million stock options (worth an estimated $11 million, though now worthless). He received reimbursement, too, for $384,000 in attorney fees spent on negotiating his employment contract.

Citing Corzine for his “exemplary performance” in 2010 and 2011, the board also authorized payment of another $1.25 million in incentive cash bonuses back in March 2011. Ergo, given tacit and sometimes explicit endorsement of Corzine’s aggressive trading strategies, it is doubtful the board will enforce existing recoupment measures.

Corzine is another Obama Democrat, a multimillionaire (like Nancy Pelosi) with a penchant for delivering “class warfare” speeches. In a talk before students at Princeton University last September, Corzine echoed hackneyed calls for better wealth distribution. “The staggering redistribution of wealth (concentrated among the richest Americans),” said Corzine, “created a pretty toxic sense of inequity and a spiraling appetite for debt in our society.”

“The build-up of debt will have long-term economic implications,” Corzine then went on to say. “We’ve pretty literally been raiding our grandchildren’s inheritance.” When it comes to unchecked financial leverage and ruining inheritances, Corzine spoke of what he knows best.

David J. Phillips

The FBI may investigate the fall of MF Global (NYSE: MF). (Reuters)

Sony (NYSE: SNE) cuts its annual profit forecast by 90%. (Reuters)

PIMCO’s Bill Gross says U.S. banks must raise more capital. (Reuters)

Bank of America (NYSE: BAC) drops a plan for $5 a month debit card charges. (Reuters)

Facebook continues to struggle to attract large branded advertisers, which use member pages to generate interest. (WSJ)

Banks across the world begin sharp cost cuts. (WSJ)

Yahoo! (NASDAQ: YHOO) discusses a plan with PE firms that would allow them to take a modest interest but not gain control of the company. (WSJ)

Electronic Arts (NASDAQ: ERTS) begins to compete with Zynga. (WSJ)

Pfizer (NYSE: PFE) will market branded Lipitor after the drug goes off patent. (WSJ)

U.S. auto sales rise 7.5% in October, which is below expectations. (WSJ)

Many wealthy Chinese want to leave the country. (WSJ)

Transocean (NYSE: RIG) increases legal action against BP (NYSE: BP) from events arising from Deepwater Horizon. (WSJ)

New data show that the News Corp.’s (NYSE: NWS) Wall Street Journal had the largest circulation in the U.S. in the most recent half year measured, followed by Gannett’s (NYSE: GCI) USA Today and New York Times Company’s (NYSE: NYT) flagship paper. (WSJ)

Many S&P 500 companies issue weak Q4 guidance. (WSJ)

The most distressed commercial real estate begins to draw investors. (WSJ)

A vocal minority in Greece want the nation to return to its own currency. (WSJ)

Douglas A. McIntyre

China’s PMI trouble. China’s PMI showed manufacturing activity in the country fell to a low not recorded since early 2009. Economists were left to question whether this means the People’s Republic is in danger of moving toward recession, or if the news signals a tempering of China’s overheated economy. The recession argument is the more compelling of the two. China’s official PMI fell to 50.4 in October from 51.2 in September, the National Bureau of Statistics reported. The consensus among analysts was that the number would remain steady with September’s. Chinese officials said the weak economy in the EU caused the dip; the EU economy is the world’s largest by GDP — about 20% larger than the U.S. Europe is in recession, so China’s manufacturing problem has just begun.

MG Global New Woes. MF Global (NYSE: MF) filed for Chapter 11 after its gambles on the financial fate of Europe turned out to be wrong. The filing may only be the start of the company’s trouble. “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm,” the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission said in a joint statement. Somehow MF Global “mishandled” client accounts. Worse, it may have used client money to support trades that turned out to be untenable. That would almost certainly cause a number of civil and criminal charges to be brought against MF Global, and perhaps its CEO, former Goldman Sachs chief, Jon Corzine

The Fed will remain quiet. The Federal Reserve will announce its intentions after a two-day policy meeting. The market expects no change in the central bank’s major policies. This may be due to a battle among the Fed’s members. A minority believe that any Fed attempt to aid the economy will fuel inflation soon. Most members believe the central bank must keep rates as low as possible and perhaps begin a QE3 program. “I have never seen the Fed more deeply divided than it is at this moment,” said David Jones, head of DMJ Advisors and the author of books on the Fed, according to the AP. The muddle will cause more uncertainty about the future of the economy and markets. A house divided against itself cannot stand.

Douglas A. McIntyre

Nomura (NYSE: NMR) posted a loss of $591 million last quarter and said it would triple the size of planned cost cuts to $1.5 billion. Analysts who watch the company expect thousands of layoffs in the Japanese firm’s European operations.

Credit Suisse Group (NYSE: CS) reported that it would need to cut 3% of its staff, which will take total layoffs announced by the bank to 3,500 this year. The financial firm said its investment bank business is in trouble.

Bank of America (NYSE: BAC) will lay off 30,000 people. Goldman Sachs (NYSE: GS) also will cut staff. The announcements now stretch from banks to investment houses and from U.S. firms to those based outside America.

The personal tragedy of the layoffs is coupled with a realization that the financial industry’s problems have started to worsen again. Companies within the industry appear to be ready to cut costs through this year into next. That certainly will happen if current earnings forecasts for many firms within the industry are correct.

Bank earnings are, to some extent, a proxy for the health of the entire credit and financial system. Bad bank results means that corporations and individuals that do business with banks have begun to struggle in greater numbers. Each time a bank cuts a worker, it is a sign that there is some problem with a set of that bank’s customers. Banks may make money or lose money when they trade for their own accounts, but their primary role is to fund people and enterprises across the entire economy.

Bank layoffs are not just bad for banks. They are an omen for the financial prospects of the rest of the economy.

Douglas A. McIntyre

China’s PMI falls to the lowest level since early 2009. (Reuters)

Chemical and defense companies hit by cyber attacks. (Reuters)

The MF Global (NYSE: MF) bankruptcy damages futures exchanges around the world. (Reuters)

Credit Suisse (NYSE: CS) to fire 1,500 more people after a weak Q3. (Reuters)

Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN) set distribution deals with Disney (NYSE: DIS). (Reuters)

China’s equivalent of Groupon files for a $100 million IPO. (Reuters)

Nomura (NYSE: NMR) lost money in the past quarter and will sharply cut costs. (WSJ)

Toyota (NYSE: TM) and Honda (NYSE: HMC) face trouble because of the value of the yen and poor choices on model lines. (WSJ)

Mortgage foreclosure settlements between the government and large banks could cost the financial firms $25 billion. (WSJ)

Obama sets a plan to improve shortages of critical drugs. (WSJ)

Eurozone jobless numbers hit a record. (WSJ)

The OECD forecasts weak growth among its members. (WSJ)

A judge rejects the Tribune Company’s proposed restructuring plan. (WSJ)

October was the best month in nine years for U.S. stock markets. (WSJ)

SunTrust Banks (NYSE: STI) and Regions Financial (NYSE: RF) to discontinue fees charged for debit card use. (WSJ)

Time Warner (NYSE: TWX) will cut overhead to further invest in content businesses. (NYT)

The EU debt crisis could hurt growth in Asia. (Bloomberg)

Douglas A. McIntyre

The company issued a one sentence press release this morning saying, “MF Global today confirmed that the New York Federal Reserve has suspended MF Global’s designation as a primary dealer.”

• UPDATE: After 10:15 AM EST reports were coming out that MF Global is filing for Chapter 11 under bankruptcy protection. 

Now there are reports that MF Global traders are not being allowed to access the CME trading floor by CME Group Inc. (NYSE: CME) and additional reports that IntercontinentalExchange, Inc. (NYSE: ICE) is only allowing close-out transactions to be made by MF Global traders.

This is unfortunately one of those situations where a company is dying on the vine.  If financial firms cannot transact business, they are out of business.

Former New Jersey governor Jon Corzine was shown over the weekend to be instrumental in the bets that have brought the firm down.  Killing a big public financial company won’t be a great thing for what was otherwise a great career.

JON C. OGG

Beacon Power (NASDAQ: BCON), backed by U.S. funds, goes bankrupt. (Reuters)

Young and well-educated Greeks begin to leave the country. (Reuters)

Panasonic (NYSE: PC) cuts its annual earnings forecast. (Reuters)

MF Global’s (NYSE: MF) holding company may go bankrupt, with some assets sold to Interactive Brokers Group (NASDAQ: IBKR). (Reuters)

Many EU-based businesses have cut earnings forecasts as trouble in the region hurts the economy. (WSJ)

The U.S. may not sell more AIG (NYSE: AIG) stock until the share price rises. (WSJ)

Wells Fargo (NYSE: WFC) will not charge debit card fees similar to Bank of America’s (NYSE: BAC). (WSJ)

Gamestop (NYSE: GME) to sell PCs. (WSJ)

Google (NASDAQ: GOOG) has a new product to compete with Groupon. (WSJ)

Natural gas shale drilling  in Pennsylvania  prompts fight over who owns rights and land. (WSJ)

Sentier Research reports that American’s do not feel the recession is over. (WSJ)

Harley-Davidson (NYSE: HOG) increases marketing messages to women. (WSJ)

Porsche posts strong earnings. (WSJ)

Aol (NYSE: AOL) wants to catch the balance of mobile portal products creators. (WSJ)

Honeywell (NYSE: HON) throws off substantial cash but is unlikely to add new employees. (WSJ)

Federal Reserve members are at odds about whether the central bank should do more to help the economy. (WSJ)

Cable companies continue to block use of web TV. (WSJ)

Nebraska may try to block the construction of a huge pipeline that would run from Canada to the southern U.S. (WSJ)

Large corporations to lobby the G20 for more unity on economic issues. (FT)

Microsoft (NASDAQ: MSFT) will begin to use Xbox Kinect to deliver more than game services. New software may create medical devices. (FT)

Italian Prime Minister Silvio Berlusconi says he can set budget cuts to balance Italy’s books and that new elections are not necessary. (Bloomberg)

Honda’s (NYSE: HMC) numbers miss forecasts and it eliminates earnings estimates. (Bloomberg)

Douglas A. McIntyre

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

EU officials not expecting China to invest in the region’s bailout, despite reports to the contrary. (Reuters)

Hewlett-Packard (NYSE: HPQ) to keep its PC unit. (Reuters)

MF Global (NYSE: MF) loses clients because of reports of its poor performance. (Reuters)

Samsung smartphone sales move ahead of Apple’s (NASDAQ: AAPL) and the Korean company says it expects a strong Q4. Samsung had 23.8% of the global smartphone market in the third quarter, 9 points higher than Apple. (Reuters)

Water use is growing faster than the world’s population, according to the World Resources Institute. (Reuters)

Yahoo! (NASDAQ: YHOO) and potential bidders are at odds over a complex nondisclosure agreement. (Reuters)

Baidu’s (NASDAQ: BIDU) earnings rise sharply as search revenue in China climbs. The local search engine now has 80% of the market. (Reuters)

Research In Motion (NASDAQ: RIMM) sets up a surveillance system in India to help the government track BlackBerry use. (WSJ)

JPMorgan Chase (NYSE: JPM) will not charge customers who use their debit cards for purchases. (WSJ)

Ahead of IPOs, the heads of Groupon and Zynga set up share systems that will give them more voting rights. (WSJ)

Brocade (NASDAQ: BRCD) may try to find a buyer. (WSJ)

Poor results put Avon’s (NYSE: AVP) CEO Andrea Jung under pressure. (WSJ)

The NYSE and Nasdaq increase their competition for IPO listings. (WSJ)

Warner Music Group (NYSE: WMG) is close to a deal to buy EMI. (WSJ)

Chrysler posts a $212 million quarterly profit. (WSJ)

A study by the Carsey Institute at the University of New Hampshire shows relocations in the U.S. have slowed. (NYT)

Time Warner Cable (NYSE: TWC) loses both voice and cable subscribers. (FT)

France may have to make more budget cuts to keep its AAA rating. (Bloomberg)

Douglas A. McIntyre

Private financial firms have positive reactions to the Obama plan to aid more homeowners with underwater mortgages. (Reuters)

Research In Motion (NASDAQ: RIMM) faces consumer suits over an outage of its BlackBerry network. (Reuters)

Sony (NYSE: SNE) buys the 50% of the Sony Ericsson smartphone that it does not already own. (Reuters)

Democrats’ $3 trillion budget reduction plan would reduce some Medicare benefits. (Reuters)

Nintendo reports a quarterly loss and cuts forecasts. (Reuters)

Sprint-Nextel (NYSE: S) may have to raise money to pay for its costs to offer customers the Apple (NASDAQ: AAPL) iPhone. (Reuters)

RIM delays update of BlackBerry OS. (Reuters)

Bank of New York Mellon (NYSE: BK) faces more charges on its fees for currency trading. (WSJ)

Credit card agencies offer programs to predict consumer behavior. (WSJ)

Freddie Mac CEO resigns. (WSJ)

UAW members approve a deal with Chrysler. (WSJ)

China rejects any efforts to raise the value of the yuan. (WSJ)

Ford’s (NYSE: F) sales efforts in Europe and Asia produce few results. (WSJ)

Dan Burke, former president of Cap Cities/ABC, dies at 82. (WSJ)

Walmart (NYSE: WMT) closes its fashion operations as it moves back to basic apparel. (WSJ)

Boeing (NYSE: BA) raises its full-year order forecast. (WSJ)

Nokia (NYSE: NOK) releases its first phone powered by Microsoft’s (NASDAQ: MSFT) Windows mobile OS. (WSJ)

Troubled MF Global (NYSE: MF) may offer itself for sale. (WSJ)

AIG (NYSE: AIG) to sell part of its piece of AIA Group. (WSJ)

New rules will force large hedge funds to disclose their financial positions. (NYT)

BP (NYSE: BP) gets approval to drill again in the Gulf of Mexico. (NYT)

EU banks will have to raise 106 billion euro as part of the region’s refinance plans. (FT)

Nintendo predicts its first annual loss in 30 years. (Bloomberg)

Douglas A. McIntyre