S&P and Moody's lower credit ratings for MF Global:

Discussion in 'Wall St. News' started by crgarcia, Feb 29, 2008.

  1. Lehman Brothers, Credit Suisse and UBS lower share recommendations because of the poor order entry control:

    MF Global Falls as Analysts Cut Stock, Credit Ratings (Update1)

    By Edgar Ortega

    Feb. 29 (Bloomberg) -- MF Global Ltd., the futures brokerage that yesterday set aside $141.5 million to cover losses from ``unauthorized'' trading, tumbled as much as 34 percent in New York after at least three analysts cut their ratings on the stock.

    Lehman Brothers Holdings Inc., Credit Suisse Group and UBS AG today lowered their recommendations on shares of Hamilton, Bermuda-based MF Global. Standard & Poor's and Moody's Investors Service also lowered credit ratings on the brokerage, citing the risk-controls breakdown that let an employee's wheat-market bets exceed the company's limit.

    MF Global lost as much as half of its market value after setting aside funds to cover a pretax loss of about $80 million resulting from a broker's trades in wheat futures. Chief Executive Officer Kevin Davis called the company's lapse an ``aberration,'' and opened a review of risk controls to quell investor concerns.

    ``We do not yet have confidence that there are no other lapses,'' Lehman's Roger Freeman, who cut his rating to ``equalweight'' from ``overweight,'' wrote in a report to clients today. ``The perception around MF, at least in the interim, will now include a greater notion of balance-sheet risk.''

    MF Global fell $4.28, or 20 percent, to $16.91 at 1:20 p.m. in composite trading on the New York Stock Exchange, and traded as low as $14. The stock yesterday fell 28 percent. The slump has erased about 44 percent of the company's market value since it went public in July.

    Inefficient Controls

    A broker at MF Global's branch in Memphis, Tennessee, was able to exceed trading limits because electronic controls in a retail order-entry system weren't operating, Davis told analysts yesterday. Controls at the branch were deemed inefficient because they could slow handling of customer orders, he said.

    ``In some cases, we allow an office to not have the buying power control,'' Davis said yesterday. ``Clearly, that was a mistake, and it's one which we have rectified.''

    MF Global, which handles trading in currency, interest-rate and commodity futures in more than 12 countries, extended the trading-limit controls to all brokers and customers. The move will have little impact on MF Global's trading business, wrote Keefe Bruyette & Woods analyst Niamh Alexander.

    The company hired Baltimore-based FTI Consulting Inc. to review its risk-management procedures, the Wall Street Journal reported today. Diana DeSocio, an MF Global spokeswoman, didn't return a message seeking comment.

    Clearing Broker

    As a clearing broker, MF Global is responsible for transactions when customers don't have sufficient cash. The unauthorized trades were all for U.S. wheat futures, and were entered and liquidated the morning of Feb. 27. The $141.5 million loss equals about 30 percent of MF Global's commission revenue in the quarter ended Dec. 31, and about 6 percent of the brokerage's total equity.

    ``The magnitude of the trading loss is clearly disconcerting to us and calls into question the degree of risk- taking and management at the franchise,'' Credit Suisse analyst Howard Chen wrote in a note to clients today. He cut his rating to ``neutral'' from ``outperform.''

    While MF Global has benefited from increased trading because of the volatility in commodity markets, the wider price swings in U.S. wheat futures helped magnify losses. Unprecedented swings this week capped a period in which wheat futures prices more than doubled in the past year on the Chicago Board of Trade.

    `Jungle Gym'

    ``The moves are that much more damaging because we're at price levels that are way outside of historical ranges,'' said Dennis Stuart, a vice president at FCStone Group Inc., a commodity risk-management company in Kansas City, Missouri. ``It's as if in the past we were in a juggle gym that was only three feet off the ground. Now we are 12 feet off the ground.''

    MF Global, formerly the brokerage unit of Man Group Plc, the world's largest publicly traded hedge-fund manager, was spun off in a $2.92 billion initial public offering in July. Man Group, based in London, retained an 18.6 percent stake in the company.

    To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net .
    Last Updated: February 29, 2008 14:39 EST