MF Global bond offerings make case for requiring ultra transparency

In his Bloomberg column, William Cohan looks at the reasons that investors in MF Global bonds felt duped.

Had MF Global been required to provide ultra transparency and disclose on an on-going basis its current asset, liability and off-balance sheet exposure details, each of the ways that investors might have been duped would have gone away.

On July 28 and again on Aug. 3, MF Global raised $325 million by selling bonds -- the first a 3.375 percent convertible-note offering, due 2018; the other a 6.25 percent senior note offering, due 2016.... 

Not surprisingly, in addition to all the other lawsuits that MF Global executives and board of directors are facing, one brought by the buyers of these notes is wending its way through federal court in the Southern District of New York. 

The plaintiffs make a compelling argument that they were duped by the public statements of Jon Corzine, MF Global’s former chief executive officer, and the company’s Securities and Exchange Commission filings.

Had their been ultra transparency, the investors would not have had to rely on MF Global's representations.  They would have had the information they needed to verify the facts for themselves.

The class-action complaint claims that MF Global’s collapse was caused by management’s “wholesale disregard for its purported risk management and internal controls as MF Global sought to transform itself from broker-dealer to a full service investment bank at all costs.”... 

the plaintiffs cite the statements MF Global made in its 2011 Form 10-K about its abundant liquidity as evidence that the company was intentionally misleading investors. 

“Our policy requires us to have sufficient liquidity to satisfy all of our expected cash needs for at least one year without access to the capital markets,” reads the form. “To manage our liquidity risk, we have established a liquidity policy designed to ensure that we maintain access to sufficient, readily available liquid assets and committed liquidity facilities.” 

The plaintiffs argue these statements were false. “MF Global was suffering from severe liquidity pressures” -- as quickly became evident -- “based on its exposure to the European debt crisis through its enormous holdings of European sovereign debt,” according to the complaint. “MF Global was materially undercapitalized.”

With ultra transparency, it would have been easy for the investors to see if MF Global was experiencing severe liquidity pressures.

Further, the plaintiffs claim, whereas the offering documents for the bonds claimed that the use of proceeds would be partly for “general corporate purposes” -- a typical catch- all -- MF Global management knew that large chunks of the $650 million were “desperately needed to provide required liquidity and working capital given the then-deterioration in value of MF Global’s $6.4 billion holdings of European sovereign debt.”...

Again, with ultra transparency, investors could have determined with the market value of MF Global's $6.4 billion holdings of European sovereign debt was and seen that most of the proceeds would be used to plug the hole between the cost of these securities and the then current market value.

And few tears should be shed for sophisticated investors who miscalculate the risks of owning securities in companies that are highly leveraged and have new management intent on changing business plans. (By last summer, it was certainly no secret that Corzine intended to change the way MF Global conducted its business by making big bets with other people’s money. He said as much publicly on several occasions.)

It is one thing for investors to miscalculate risk when they have access to all the useful, relevant information in an appropriate, timely manner under ultra transparency and quite another when the true condition of the firm is hidden by opaque reporting practices.

Still, the level of deception by MF Global’s executives and board members demands that they be held personally accountable for the losses suffered by these bondholders -- just as they should be held personally liable for the losses suffered by MF’s customers. 

It seems to me, demanding this level of accountability -- which, of course, their lawyers will say is unjustified -- is the only way Wall Street executives will begin to take seriously their fiduciary duties to their customers, counterparties and creditors. 

At the moment, though, that is just a columnist’s fantasy. No MF Global executives have been held accountable for their actions, more than six months after the firm’s collapse and billions of dollars of other people’s money have been lost. 

Come to think of it, no one else on Wall Street has been held accountable for blowing up our economy, either. How can this still be the case?

Ultra transparency brings accountability to Wall Street.  With this information, market participants are able to exert discipline on Wall Street.  Particularly when their is a gap between what they represent as the condition of their firm and what is the actual condition.