Reply #53: What About the Rest of Refco? [View All]

[UpInArms]

http://www.businessweek.com/bwdaily/dnflash/oct2005/nf20051017_2707.htm

Selling the futures brokerage is a solution for only half of the tainted firm's business. The other half is where things could get messy


Now that Refco (RFX ) has an agreement to sell its futures brokerage, which is about half its operation, the firm's remaining units are facing rapid liquidation in bankruptcy, people familiar with the firm's restructuring efforts say. And that could leave hedge funds and other big investors scrambling to get their money out (see BW Online, 10/17/05, "Refco's Painful Lesson for Investors").

The once-formidable derivatives broker said late on Monday, Oct. 17, that it had reached a $768 million deal to sell its futures unit, Refco LLC, to a group of investors led by hedge fund J.C. Flowers & Co. Because Refco has more than $1 billion of debt on its balance sheet as of May 31 -- and other creditors like landlords are likely to clamor for the money -- the Flowers deal isn't expected to aid Refco shareholders much, if at all. Goldman Sachs (GS ) and boutique investment bank Greenhill & Co. advised Refco. The completion of the deal also marked the end of the assignment for Goldman, which has been criticized for its involvement, given its work as an underwriter on Refco's IPO.

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Whether the freeze will harm any customers is yet to be seen. Hedge funds that borrowed money by putting up Treasury bonds as collateral, a common transaction known as a repurchase agreement, or repo, could be stuck. I wonder how many of those Treasury RePos that were "unexpectedly high" belonged to Refco? "It's clearly good news that nothing bad has happened so far, but it doesn't mean that you're out of harm's way," says Leslie Rahl, president of New York-based Capital Market Risk Advisors, which advises financial firms on risk-management practices.

Unwinding trades that went through Refco or those with other brokers that depended on earlier trades that did go through Refco will take time, she added. "I don't think we'll really know until we see the second- and third-order effects. That could easily take several weeks to unravel."

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