James Koutoulas, a lawer representing clients of MF Global who lost an estimated $1.2 billion, reveals the ugly truth behind what caused MF Global to declare bankruptcy.
- MF Global moved investment funds to the United Kingdom, where there is no limit to the leverage that can be used in rehypothecating client assets.
- MF Global then invested those funds in European debt futures, leveraged perhaps 40-times, believing the troubled nations like Greece would eventually be bailed out. (Note that higher leverage means tighter margins.)
- Then, with the extreme volativity in the latter part of 2011 when there were weeks of rumors coming out of the media hinting of both defaults and bail-outs, the investment went sour as margin calls forced MF Global to pony up more cash. They had no other option but to go into their segregated client accounts and allegedly steal cash to cover the margin calls.