If Refco Isn't Scary, What Is? By GRETCHEN MORGENSON, NYT

verfasst von CRASH_GURU, 17.10.2005, 08:00

-->October 16, 2005
If Refco Isn't Scary, What Is?
By GRETCHEN MORGENSON
SECURITIES regulators and pundits say that there will be no financial market tremors emanating from Refco Inc., the enormous commodities and financial services firm that, after more than 30 years in business, hit the skids last week. Maybe so, but it seems incomprehensible that a financial domino this big can topple without making a sound. Refco, after all, was one of the largest players in commodities, derivatives and United States Treasury markets, operating in 14 countries and serving more than 200,000 clients.

Financial market tremors or not, there is plenty to be afraid of in the Refco mess. First, of course, is the frightening spectacle of the company's chief executive, Phillip R. Bennett, hiding a personal loan from Refco worth almost half a billion dollars from his shareholders, as described by prosecutors in their suit charging him with securities fraud. Then there is the inability of Refco's auditors or investment banks to notice the repeated shuffling of this loan on and off the company's balance sheet.

Watching a company that went public just two months ago sink from sight is also disquieting, of course.

But scariest of all may be the fact that supposedly savvy institutional investors who are fiduciaries - TIAA-CREF and Oppenheimer Funds, for example - bought Refco's shares in spite of the hair-raising risk factors detailed in the prospectus.

One example was the disclosure that Refco's internal auditors reported two significant deficiencies in its internal financial controls. Refco, for example, lacked"formalized procedures for closing our books." Sounds like a big deal, no?

Refco also said that it was found to be deficient in its ability to prepare financial statements"that are fully compliant with all S.E.C. reporting guidelines on a timely basis."

This is the way investors live now: a financial services company's inability to prepare its own financial statements does not preclude financial institutions from buying its stock.

Wait, there's more. Refco told prospective investors that it was under investigation by both the United States attorney in New York and the Securities and Exchange Commission. The S.E.C.'s inquiry centered on Refco Securities, its brokerage subsidiary, and its chief executive, Santo C. Maggio.

At the time of the offering, the prospectus said, Mr. Maggio was near a resolution of the matter and was ready to accept an order from the commission suspending him from any supervisory duties at the firm for one year. Nevertheless,"while complying with the restrictions of such supervisory suspension, Mr. Maggio would continue to work for us and Refco Securities in his current capacities," the prospectus said.

Isn't Wall Street wonderful? Where else would a chief executive about to be suspended for a year by his regulators keep the top job?

Such nightmare risk factors as those enumerated by Refco might not have been a deal breaker for potential investors if they liked what they saw on its financial statements. But warnings signs showed up there that the sophisticated investors shrugged off.

For example, as of February 2005, Refco Inc. had just $150 million in equity supporting $49 billion worth of assets. That's one thin slice of equity: 0.3 percent of assets. Equity at Bear Stearns by comparison was 3.5 percent of assets last year.

Readers of Refco's offering statement also found that the company had significant - and growing - derivatives contracts, carried off its balance sheet. As of February 2004, those arrangements totaled $69 billion and were made up of currency contracts, swaps and options. In February 2005, the contracts totaled $127.5 billion, and in May they stood at $150 billion. Given that Refco admitted to difficulties in preparing its financial statements, how confident could a prospective investor be in the company's ability to track the value of these contracts?

The company's capital expenditures of $14 million last year also seem ludicrously low. This is a company that has to manage information for hundreds of thousands of accounts, and as a serial acquirer of companies, was integrating many new systems into its own. All this would require sophisticated financial management systems.

Compare Refco's capital expenditures with those of Lehman Brothers, for example. Lehman spent $400 million on capital expenditures in 2004, or 3.4 percent of net revenues. Refco's $14 million in capital expenditures last year represented 1 percent of net revenues.

Neither did Refco's buyers seem to question why the company's chief financial officer, Robert Trosten, left the firm last October, just a few months before his company was to go public. Mr. Trosten was in line for a big payday on the underwriting, as other Refco executives were. The fact that he was willing to leave"to pursue other financial interests" might have made an alert investor wonder. And what about Refco's inability to find a new chief financial officer for two months? No problem.

Don't bother us with details. We are, after all in the anything-goes era where shareholders condone excessive executive compensation, accept massive dilution of their holdings from stock option grants and cheerfully buy into the corporate spin that masks operational realities. Why is it a surprise that investors chose to ignore the warts hidden in plain sight in Refco's prospectus?

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gesamter Thread:

• If Refco Isn't Scary, What Is? By GRETCHEN MORGENSON, NYT - CRASH_GURU, 17.10.2005, 08:00
  • Mehr als Scary - politico, 17.10.2005, 08:34
    • Genau! Refco Skandal schwappt nach Ã-sterreich über - Der Einarmige Bandit, 17.10.2005, 10:16
      • Lehrgeld??? - politico, 17.10.2005, 11:07
  • "Everything is fine at REFCO" - J.Sinclair's Sinn für Ironie - BillyGoatGruff, 17.10.2005, 13:00