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Generational Dynamics Web Log for 15-Oct-05
Friday evening collapse of brokerage firm Refco sends regulators scrambling to prevent market meltdown

Web Log - October, 2005

Friday evening collapse of brokerage firm Refco sends regulators scrambling to prevent market meltdown

It took only four days for the world's largest commodities and futures dealer to go from a high-flying success to almost certain bankruptcy, with the potential of creating a chain reaction with widespread effects.

Ebullient Refco execs at Stock Exchange a month after the August IPO <font size=-2>(Source: Bloomberg)</font>

Ebullient Refco execs at Stock Exchange a month after the August IPO (Source: Bloomberg)

Regulators, well aware of these potential dangers, have moved rapidly to contain the damage. On Thursday, regulators at the Chicago Mercantile Exchange and Commodity Futures Trading Commission asked several financial firms, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. to buy or assume financial responsibility for Refco's trading operations, to stabilize the situation. However, Goldman, at least, has decided against being part of a potential bailout.

On Friday evening, the Securities and Exchange Commission (SEC) stepped in and shut down most trading operations.

Just Monday, Refco was thought to be in great financial shape. But then it was revealed that CEO Phillip Bennett had been hiding $430 million in bad debts, and that the company's financial statements since 2002 could not be relied upon. Bennett was arrested on Tuesday for securities fraud, and he's now free on bail, but is no longer Refco's CEO.

Refco's lightning fast collapse has caught investors and financial institutions by surprise. Some investors say that the collapse should have little impact on the rest of the market, pointing out that, unlike Enron, Refco was merely a broker, not a principal in its major transactions.

Other analysts, however, point out that the collapse has already weakened some commodities futures prices, and that some weaker hedge funds may be battered. Any chain reaction from the Refco collapse would probably occur as the result of concerned and panicking investors pulling their money out of hedge funds, causing further collapses in the highly interlocked hedge fund industry.

Refco has more than 200,000 customers, including corporations, government agencies, hedge funds, pension funds, financial institutions and retail and professional traders. All of these customers are mulling over their strategies over the weekend, and we'll see the results when business opens on Monday. (15-Oct-05) Permanent Link
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Generational Dynamics Web Log for 15-Oct-05 Friday evening collapse of brokerage firm Refco sends regulators scrambling to prevent market meltdown

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Generational Dynamics Web Log for 15-Oct-05
Friday evening collapse of brokerage firm Refco sends regulators scrambling to prevent market meltdown