Bloomberg on Refco’s Troubles

Bloomberg has a lengthy article about Refco, Refco’s Collapse Reveals Decades of Quarrels With Regulators. It is the best article I’ve seen that relates the fascinating history of Refco and its trading travails.

It was a firm that had a history of taking BIG positions and riding them as high or as low as they could; deciding at the end of the day which clients to award with winning trades and which the losing trades; and in 1996 deciding to loan a trader, who was into Refco for $28 Million, the money so that Refco’s capital wouldn’t be impaired.

From April to July 1996, the face value of Zahid’s (Zahid Ashraf, the Eastern Trading’s managing partner) sterling futures and options trades ballooned to $4 billion. Finally, in July 1996, Refco liquidated Eastern Trading’s account and recorded a debit balance of $28 million.Undisclosed Loss

Rather than book that $28 million as a loss, Refco Capital shifted its own money into Eastern’s depleted account, without the Dubai firm’s knowledge, according to the opinion. Bennett’s firm asked Eastern to write a promissory note committing the Dubai firm to repaying that sum to Refco. That way Refco wouldn’t have to disclose the loss to the CFTC in its capital requirement reports.

That was the start of loans to losers to cover up capital impairment issues and balooned to $430 Million. Refco had gone from a trader of its own account to a facilatator of trades and “bank” for institutional traders.

The part of the Bloomberg article that interests me (and the article hints at more to come) is the unregulated side of Refco’s business.

In the U.S., brokers of exchange-traded futures are regulated by the CFTC. Domiciled in Bermuda and operated out of New York, Refco Capital Markets brokered over-the-counter derivative and currency trades and was therefore beyond the reach of U.S. regulators.`Fertile Ground’

“These unregulated parts of the industry offer fertile ground for fraud, manipulation and other shenanigans,” says Randall Dodd, director of the Derivatives Study Center, a Washington-based research and policy group.

More revelations may be at hand. The CFTC is still conducting its investigation of Refco and its finances. The U.S. Securities and Exchange Commission is in the midst of its own, separate probe. (emphasis added)

Here you have a firm with a history of problems with regulators, playing in the unregulated derivatives market. That’s like lighting a match to see if you have gas in your tank; that’s like putting a pedophile in charge of a kindergarten; that’s like putting a practicing alcoholic in charge of the OLCC!

Refco derivatives Mover Mike

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