Yeah ... what the heck is that all about?
Posted on 10/16/2005 5:23:56 AM PDT by dennisw
Refco was a train wreck just waiting to happen
URBANE banker or crook, call Phillip Bennett what you want, but those who have met him are starting to realise they never knew the man beneath the sharp suits.
Until last weekend Bennett was chairman and chief executive of Refco, one of the world’s biggest futures brokers. Today he is chairman of nothing, under house arrest and the former dollar billionaire will be lucky if he is left with a billion dimes.
The British-born Cambridge graduate is at the centre of a scandal that could turn his firm to vapour. It floated two months ago for more than $2.8 billion (£1.6 billion), but thanks to Bennett its figures were a con.
Underneath it all, Refco is a sound business — trading futures is one of the financial market’s growth areas, expanding at about 25% a year.
Unfortunately, Bennett seems to have cooked the books, and therefore its value was grossly inflated. It appears he let the good trades go through to profits and in effect hid the bad ones — totalling $430m — in a cupboard.
Refco has always had a reputation as a sharp trader — it gave low-grade clients aggressive margins, and had a chequered regulatory history and poor compliance. At the same time some clever people joined the firm and left pretty swiftly.
But in a rising market, investors are prepared to overlook such matters and they dived in, comforted by the fact that Bennett was not selling shares.
It has been a painful lesson, but the collateral damage Refco’s collapse will cause is of equal concern. Grant Thornton, the accountant, is yet again in the thick of it. This time it is the American, rather than the Italian office. Refco’s advisers, Goldman Sachs and Credit Suisse First Boston, face long legal battles, and the fragile trust between financial advisers and investors will be stretched even further.
The fall-out is not limited there. New York and London have been waiting for just such a train wreck, and this will highlight the ridiculously thin margins some banks are prepared to lend at. The head of the Austrian bank that agreed to take Refco shares to enable Bennett to pay off the debt should stick to yodelling.
Refco is a parable for our times. Its business involves broking layers of financial derivatives. But the man in the street would be amazed by the speed with which it collapsed and how a firm based on hundreds of millions of dollars of goodwill is worth nothing if a key member of staff plays foul.
Exchange of views
CLARA FURSE, chief executive of the London Stock Exchange, is not a woman who is easily ruffled. She has already seen off the takeover advances of her German peer Deutsche Börse, and the putative attempt by Euronext, its continental rival, to merge with the LSE also looks to be running into a strong headwind.
But Macquarie, the Australian bank created out of the embers of Hill Samuel — the former London investment bank — could prove harder to deflect. Furse and her chairman Chris Gibson-Smith have so far failed to demonstrate to investors that they have an independent growth strategy.
And by not sharing their vision, they can only strengthen Macquarie’s hand.
This Australian bank plays in the big league and the LSE, which has a market value of £1.3 billion, fits perfectly into its model: reliable income streams, returns above 15%, huge growth opportunities and a management team it could buy and retain. Up to now it has always scouted for such opportunities via the ownership of airports, toll roads and other infrastructure projects. But now it is spreading its wings.
Unlike the LSE’s rival exchanges, Macquarie, which has funds under management of about €18 billion (£12.2 billion), offers no threat to its name or moving its centre of operations to the Continent.
If Furse wants to stay independent she has to tell Macquarie to put up or shut up. She has to spell out a solo growth strategy and demonstrate that a bidder has to shell out at least 700p against the present price of 534p. Don’t be surprised if Macquarie already has a stake through the ownership of contracts for difference.
Designer price tag
DESIGNER labels come with designer prices, so the pay deal announced with Angela Ahrendts’s appointment as Burberry’s chief executive should perhaps have come as no surprise.
Ahrendts, currently at Liz Claiborne in New York, stands to make £16m over the next five years and will probably be the highest-paid female executive in Britain. Traditionally the British have had a very different attitude to pay from the Americans. Too much is often not enough for US bosses. But in recent years shareholders have become more sceptical.
Those justifying Ahrendts’s package point out that her pay is in line with her peers.
But last week the American pay expert Graef Crystal said Ahrendts’s pay deal was unfashionably large. Burberry’s annual profits are roughly $1 billion and of the 55 chief executives measured with profits of between $750,000 and $1.5 billion, her pay deal outstrips all but 12.
The average salary in the group was $680,000. Ahrendts’s base salary before bonuses and other allowances (including $25,000 for clothes and $610,000 a year in “overseas allowance”) is $1.3m. There is a lot of performance-related pay in the deal, but even if she fails miserably she will be one of the highest-paid bosses on either side of the Atlantic.
Crystal said: “My problem with discretionary bonuses is that the amount of discretion usually associated with them can only be measured with the help of an electron microscope.”
If Burberry works out for Ahrendts, the pay may not be such a big deal. If it doesn’t, it will take more than a mac to cover that outsize pay packet.
Back off, punchy
MY advice to Sir Chris Evans, the biotech king whose company, Merlin Biosciences, is at the centre of a Serious Fraud Office (SFO) probe, is keep your mouth shut. Last week he ranted that he was ready to punch people in the face for getting his firm into such a mess.
Grow up Evans. Merlin, where investors have entrusted you with millions of pounds, is at the centre of a criminal investigation. You won’t say what the charges are and you have yet to be interviewed by the police.
One of two things will now happen. The SFO will drop the probe or arrest people. That could take months, but if I were you I would soothe my investors rather than spoil for a fight. This looks a messy situation and Evans needs to make some friends, not more enemies.
That's why I liked them but do resent being called low-grade :)
I should be so lucky.
Ping
Yeah ... what the heck is that all about?
"this will highlight the ridiculously thin margins some banks are prepared to lend at..." Years ago a friend described how his, big deals only daughter, flew on a bank jet to a huge defense contractor's office to get 5% of their business at sub-prime. Yet this same business bank would not take an equal amount of money and put it into SBA loans at prime+ 2. Not much has changed, idiots at banks chase fast bucks, high profiles and cry like babies when they lose 50 million - except they make it up by raising credit card interest to pay for their greed - errors.
Refco has had a crooked reputaion as well. Run a Google on "Hillary Clinton Refco" and see what pops up.
"low-grade clients" = Hillary
Austrians don't yodel, the Swiss do.
I can't remember the refco broker's name who used to move paper in the CBOT pit, but he was sleazy as everything. On ANY good trade it was never just doing the trade, I always went back to him in 30 secs or so and repeated "I bought 30 cars dec wheat at a half, right?" and then again "30 dec at a half at 11:20, and we are good?" I saw him deliberately lie and set up an outtrade with so many locals that I eventually quit hitting his bid/offers, unless I was bracketed by others who would confirm they did the same thing.
They have gone to electronic trading cards nowadays, but you can always get around stuff, if you are smart. I wouldn't trust any of those people with my money. Mann, Refco, the whole lot of em.
Austrians yodel too when pressure is applied in the right places.
This is what's been reported. Uncollected debt from third parties, not proprietary trading.
Thanks for the ping.
That's lucky indeed. The author of the article is not too sharp.
Bennett tried to recoup through the IPO; the mkt put a multiple on his shares, which he promptly pledged to a bank for a loan to pay off the dinger. When $430 mio of putative 'assets' are both nonexistent to start and subsequently created in this fashion, the technical term for such a situation is 'securities fraud'. This is even less subtle than what Bernie Ebbers tried, btw, and Bennett is in for a long visit to the Graybar Hotel.
The interesting question is: since Bennett could not have pulled this off by himself, who else will get to enjoy a stay in chokey? Thornton? That would seem likely. Grant? Maybe, hard to say at this point. REFCO Capital Markets compliance people? A good bet, some of them.
The sequel here should be fascinating.
Some are saying the $430 million is related to an illegal practice of naked short selling which REFCO implemented on behalf of clients. I don't know what REFCO did, so I will link here in case it may be helpful to you and others. http://bobosrevenge.blogspot.com/
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