October 15, Refco placed under the protection of the American law on bankruptcy (the famous chapter 11). It was just three months after the introduction on the stock exchange company orchestrated by Goldman Sachs, which had valued Refco at more than 4 billion.
Refco, the name was little known to the general public, but unavoidable in the universe of the raw materials and commodities futures markets ("future markets" in English). In 2004, Refco had dealt with 654 million contracts on the major markets of the world to Chicago, London, New York, Paris or Frankfurt, or 10 to 15 of all of the volumes exchanged on these markets. Refco was a "broker", i.e. an agent of change (or an agent registered as they were called once in France). Holds seats on the market, it was on behalf of its client 200,000, by buying or selling their name of raw material or financial futures contracts. In its main activity (70 of revenues), Refco was only an intermediary, taking no risk on transactions upon which he was paid a Commission. Nothing to do with an Enron who did not hesitate to take positions and do operations on his own account ("proprietary trading"), which precipitated his fall. Refco was indispensable, but non-strategic part in mechanics markets derivatives of the planet.
Refco was founded in 1969 by a dealer in animal products of Chicago and its development was that of the futures markets these last 30 years. Very specialized on the amenities in contrast to the other "brokers", Refco had built an international network of 2,400 employees, had place in China, where the futures markets are booming, and even sign the redemption of the specialized subsidiary of Cargill, the largest company in the world of commodities trading. The volumes processed by Refco, the size of its balance sheet (75 billion dollars), assets and debts (48 billion) should not be illusion. In the world of international finance, Refco was a large SMEs in leader in a niche whose margins were severely limées.
That has happened Refco had mesh with the regulation of financial markets, but authorities, apparently for minor faults. It was thus, through the Agency of Refco in Arkansas, that a certain Hillary Clinton had realized some steamy shots on cattle contracts in Chicago. But nothing which, apparently, could worry. The introduction on the stock exchange, August 11, was well past. The capital was controlled by the pattern of enterprise, Philip r. Bennett, for 34 and 38 by private firm Thomas h. Lee Partners. It seems that, in early October, the financial management of the company has "discovered" that a $ 430 million had "loaned" to one or several companies related to Philip Bennett. Was it a scam pure and simple (but which are incorrectly perceived motivation) or even the makeup of previous losses that had been hidden to Refco auditor, Grant Thornton In the climate created in the United States by the case of Enron, and then by WorldCom, by the implementation of the Act, Sarbanes-Oxley financial transparency, the direction of Refco responds quickly by preventing the authorities and by dismissing Bennett (who had yet to repay its debt). Charged, he was arrested the same evening. But the confidence, the essential criterion for financial markets, is running out quickly: the main customers of Refco summer their account to save what could be. The company was forced to place themselves under the protection of the Bankruptcy Act. Finally Refco should be sold by apartments.
Some outside us still: where exactly was this loss How to explain the presence of a small Austrian Bank (the Bawag, which the owner is the main Union of Austrian employees...) that at the last moment lent Bennett the 430 million that allowed him to repay its debt The Bawag now appears as the first creditors of Refco, which is ironic for a Bank of deposits that had no activities outside the Austria. Many questions, so, without yet logical answers, but some lessons that can already be drawn.
First, it should be noted the speed with which American justice acted: in 15 days the Refco matter was almost complete. The only threat of the Sarbanes-Oxley Act allowed to iron in the wound and deal with the case hot. There is no less that there is also failure to listeners, who for several years, have been unable to identify such a fraud. It must be conceded that, despite the persnickety controls, branch of a company who wants "to hide under the carpet" will always one step ahead.
However, there was not was earthquake in Chicago, Wall Street or London. Refco was a key element of course, but not really strategic, which is already and already replaced. There was no systemic risk such as could mislead in his time (1998) the fall of the famous investment LTCM Fund. This case highlights the bottom simply the need for increased controls global markets and thought less at companies such as Refco to investment funds too often located in tax havens of the world.