WASHINGTON Just days before it declared bankruptcy on October 31, MF Global concluded it could remain solvent even if a major ratings downgrade limited its access to funding, according to an internal "break-the-glass" plan obtained by Reuters on Tuesday.
The report, which was undated but appeared to be drafted before October 20, shows how the firm was furiously mapping out scenarios as markets started losing confidence in the futures brokerage.
The document played out four different scenarios that could occur after the firm reported its second-quarter loss on October 25, two of which involved "business as usual" and two of which called for a contingency plan if MF Global started having trouble funding itself.
Even under these latter scenarios, the document concluded "there is sufficient liquidity to manage through one month under a severe stress event."
The 23-page plan included a "key message": "We remain solvent."
MF Global filed for bankruptcy after it was forced to disclose it bet $6.3 billion on European sovereign debt. That disclosure caused ratings downgrades and saw nervous investors and customers begin to flee the firm.
It desperately tried to find a buyer, but a revelation that hundreds of millions of dollars in customer funds had gone missing killed negotiations.
Investigators are trying to determine whether the customer funds were diverted to firm accounts to counter a liquidity crisis, a major violation of industry rules.
The scenarios included in the document were dependent upon action from rating agencies, equity market reaction and ability of the firm to obtain financing.
It said management would have "a relatively short amount of time" to revise its strategy and that weak credit ratings might require a "reshaping of current business model and strategic direction."
The plan touched on emergency methods for drawing down bank lines of credit and for exiting complex repo-to-maturity loans engineered by then-Chief Executive Jon Corzine.
MF Global anticipated that within 30 days of a downgrade from two or more credit agencies, it would begin rebuilding its franchise and possibly sell strategic assets.
It believed it would have excess cash freed up from a contraction of its balance sheet.
The plan also spelled out workflows for various parts of the company.
The finance department was to keep "all hands on deck from an accounting and analysis perspective," the document said, to ensure that customer fund segregation calculations were done with "completeness and accuracy" on a daily basis.
Corzine, who resigned from MF Global early last month, was questioned about the document at a Senate Agriculture Committee hearing on Tuesday, during which Republican Senator Pat Roberts asked if it contained plans to tap customer funds, if needed.
"There certainly were contingency plans that I think fall under the rubric that you were talking about, break the glass," said Corzine.
"To my knowledge and understanding of that report it was not ever the intent to recommend tapping into segregated customer funds," he said.
(Reporting by Christopher Doering in Washington with additional reporting by Jed Horowitz in New York; Editing by Karey Wutkowski and Tim Dobbyn)