Refco seem pretty normal.
3 parts :
1) Futures business, regulated, intact, but accounts sort of frozen. This gets bought. Lots of retail and smaller clients, who tend to be long, and are almost certainly long oil, gas, etc. Account holders don't lose money, but trading tends to stop.
If you are long crude oil, and your account is at REFCO, you may decide not to buy more crude. If you can't sell your longs, you may open a futures account at another broker and short futures to get a flat position.
These acions have dragged down most commodity prices.
Eventully, this will resolve. Commodity prices will recover in a week or so, well before Refco settles all the details.
If you shorted crude early last week in another account to go flat, you might want to cover some of those positions to get net long...
2) Prime brokerage for hedge funds. Refco deals with the smaller (and in some cases sleazier) hedge funds.
Some of the hedge funds will be able to move, others will need to liquidate.
I expect these funds have a number of stocks in energy, metals, biotech, etc. They need to sell to reduce their margin borrowing.
3) Refco's own proprietary trading & their OTC (custom) derivatives business.
This starts to get opaque.
Other traders and funds are shooting at their positions - if Refco is long X, which is not very liquid, hedge funds will short some X, cover as Refco's holdings come to market. Make money at expense of Refco, just like they did with LTCM.
Some of the positions of the hedge funds using REFCO will also get this treatment.
I would guess REFCO was net long energy, metals, etc.
I will guess that GS bought a bunch of cheap puts on REFCO positions, then started selling. As prices dropped, GS used the puts to stick the put writers with stock from REFCO's holdings (Guess on my part)
The OTC derivatives business has potential for problems, but there have not been big moves in interest rates or credit quality in the past 3-4 weeks, so if their books were some what balanced, there should not be a big loss or big gain.
Something like Kirk Kerkorian's bid for GM could upset this, but so far, so good.
I expect most of the derivaties can be sold off piece by piece, if done right, should be for 90 cents on the dollar for most pieces. GS knows who the buyers are.
I expect that MOST of the due dilignce done before Refco did an IPO was examining these two areas, the prop trading and custom derivatives buisiness.
John Dizard in the FT points out that Goldman Sachs and the other IPO sponsors are on the hook, and they will have to make up any difference between IPO price and what shareholders recover.
Well, GS is a big player in the derivatives business, with a much bigger and deeper sales force than Refco, and a bigger book where they can net out exposure.
Even if Refco's prop desk and derivatives book is worth zero, GS has the funds to payoff shareholders.
It would only be if the REFCO positions created massive negative value that there would be a systemic problem, and in many cases that would be fixable by rolling forward some of obligations.
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It's like one of those TV nature shows, where the wild dogs and hyennas compete to chew on the carcass and pull off choice bits...
Unless there is another blow up in the next 2 weeks, the sky is not falling. (my opinion)
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Big question : how long does this go on ? Does it end with option expiration or later next week ?
Or did it end today at 3:45 pm ?
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fannie is about 20x the size of Refco. |
