MF Global Holdings and one of its United States subsidiaries filed for Chapter 11 protection on Monday.
Notably absent from the filing was MF Global, the registered broker-dealer subsidiary of the MF Global parent company. The broker-deal will presumably file a Securities Investor Protection Act proceeding in the coming days to facilitate the sale of the brokerage divisions, perhaps with some other assets. Skadden, Arps, Slate Meagher & Flom is representing the company as bankruptcy counsel in the case, but a different law firm would be appointed as trustee in the SIPA proceeding.
In short, we are seeing Lehman Brothers play out again, in miniature. MF Global reported assets of about $41 billion, as compared with some $700 billion for Lehman, but they are following the same basic template. All of which shows how little has changed with regard to the resolution of distressed financial institutions in the United States, despite the passage of Dodd-Frank.
Obviously things would have changed a great deal if the Treasury Department had decided to invoke the new Orderly Liquidation Authority. But MF Global was probably not big enough, and more important there is a general sense that the authority is not quite ready for prime time. In particular, if the authority is ever going to work it is going to depend on regulators working with financial institutions to rationalize their corporate structures. This will be a contentious process and is nowhere near complete – it has hardly been undertaken, as best as I know.
There is also the matter of the international dimension to most financial institutions. Obviously a Congressional statute can’t do much to solve this problem: Instead, we must await an agreement among regulators, a treaty or something like Chapter 15, which allows for some international cooperation in corporate bankruptcy cases.
MF Global’s case will play out pretty much like Lehman’s in Britain as well. Many hedge funds were shocked to find out that the British process was nothing like the SIPA process in the US, and that its claims would be settled as part of a process that looked more like a Chapter 7 liquidation than either a SIPA or Chapter 11 case.
Britain has enacted a new Special Resolution Regime, which is similar to Dodd-Frank’s Orderly Liquidation Authority, but like the authority, it is only to be invoked in extreme circumstances and only with regard to depository institutions. MF Global is probably not a depository institution, and rules regarding investment banks remain a work in progress. In short, if MF Global ends up in a proceeding in Britain, it seems likely to be quite similar to the Lehman administration proceeding, although now with somewhat better protection for client funds.
The trick this time is that while the Federal Reserve was able to provide financing to Lehman’s broker-dealer pending a sale, the legal and political environment has changed so much that such financing would seem unlikely this time around. That means that MF Global will either have to self-finance to continue operating, or it will have to be financing by the acquirer.
MF Global has filed a motion to use “cash collateral,” which may suggest they are going the self-financing route.
All of which points to an even shorter timeline on a potential sale of the company – perhaps even shorter than the one-week sale seen in Lehman.
©2011 The New York
Times News Service
