Refco may be split as Goldman Sachs seeks takeover offers


Refco Crisis Spurs
CFTC, Regulators
to Take More Active Role

By Adrian Cox and Ann Saphir
Bloomberg News Service
Saturday, October 15, 2005

U.S. regulators including the Commodity Futures Trading Commission
are stepping in to help prevent a collapse at Refco Inc., the
largest independent U.S. futures broker, over concerns it would
destabilize markets.

The CFTC was approached by brokers offering to guarantee Refco's
positions, Commissioner Sharon Brown-Hruska said in an interview
yesterday. Goldman Sachs Group Inc. also held talks with regulators
in its role as Refco's financial adviser, two people familiar with
the negotiations said. Goldman ruled out using its capital to bail
out or buy Refco, said the people, who asked not to be identified
because the talks are confidential.

Refco's business has been unraveling since the company disclosed
Oct. 10 that former Chief Executive Officer Phillip R. Bennett
covered up $430 million in bad debts. Regulators initially wanted
Refco to work its own solution. As the crisis deepened and
threatened to snowball, they moved in.

"It's a market liquidity issue," Brown-Hruska said. "Firms are
somewhat linked together."

Refco is the largest provider of customer-transaction volume to the
Chicago Mercantile Exchange, itself the biggest U.S. derivatives
exchange. The New York-based company processed 654 million
derivative contracts for the fiscal year ended February 28, 2005,
more than the numbers traded on the Chicago Board of Trade, the
Chicago Board Options Exchange, or the New York Mercantile Exchange
during the same period.

Trading in at global futures markets rose 31 percent in 2004 to
$1,144 trillion, according to the Bank for International

The nature of Refco's business puts other brokers and investors at
risk of getting hurt should the company become insolvent. As
counterparty, Refco is either on the buying or selling side of a
trade. If Refco runs out of cash to honor its side of the bargain,
the other party doesn't get paid.

Refco also maintains accounts for trading clients and lends them
money to make leveraged bets. If Refco runs short of cash as its
business deteriorates, it may not be able to make requests to
withdraw from those accounts.

Market regulators are getting involved "to stop some fears of a
cascade effect a bankruptcy will trigger," Michael Greenberger, a
former director of trading and markets for the CFTC who's now a law
professor at the University of Maryland. "There is every sign here
that this is a systemic problem and Refco is one of the dots that
needs to be connected."

The discussions with New York-based Goldman, the world's third-
largest securities firm, covered options for Refco including a
bankruptcy filing, accelerating the settlement of some contracts,
and prolonging a freeze on the company's assets, according to one of
the people familiar.

Goldman also helped underwrite Refco's $583 million initial public
offering in August. Goldman decided against being part of a
potential bailout of buying Refco outright because it wants to avoid
a conflict of interest and is concerned about risks, both the people
familiar said.

The CFTC didn't ask any firms to rescue Refco, said Alan Sobba, a
spokesman for the Washington-based agency.

"We didn't do that, nor would we do that, because that's not our
role," Sobba said. "CFTC is monitoring developments involving
Refco, and our primary interest is the protection of customer funds
and the integrity of the futures market."

On Oct. 13, Refco placed a 15-day moratorium on all business at its
Refco Capital Markets Ltd. and hired Goldman Sachs. Yesterday, Refco
Securities LLC, the company's biggest unit, "initiated the process
of unwinding proprietary and client positions" and won't seek new

Standard & Poor's cut Refco's credit rating for the third time in
four days and said "a payment default is highly likely." The U.S.
Securities and Exchange Commission barred Refco's owners from
withdrawing equity capital for 20 days.

Refco's bonds plummeted. The company's 9 percent notes due 2012, was
the most actively traded bond yesterday, dropping 9.5 cents on the
dollar to 30.5 cents, according to Trace, the bond- price reporting
system of the NASD. That drove up the yield to 38 percent, meaning
investors are betting Refco is a riskier bet than Delphi Corp., the
auto-parts maker that filed for bankruptcy on Oct. 8.

At the New York Stock Exchange, Refco's shares remain halted at
$7.90, 64 percent lower than their IPO price of $22 just three
months ago. Thomas H. Lee Partners LP, the Boston- based buyout fund
that bought its shares at $8 when Refco was still a closely held
company, is sitting on a 40 percent stake.

A coordinated probe of Refco by the SEC, the U.S. attorney's, office
and the CFTC expanded late last week. Investigators who initially
were focusing on the bad debts they believe Bennett, 57, was hiding
now are trying to determine if there was more misconduct or
potential fraud at the company.

Bennett, a U.K. native who joined Refco in 1981 and became CEO in
1998, was arrested Oct. 12. U.S. Attorney Michael Garcia accused him
of keeping $430 million in uncollectible debts hidden from lawyers
and auditors by using a series of matching loans between Refco, his
own holding company, and a customer.

The customer, Liberty Corner Capital Strategy LLC, a Summit, New
Jersey-based hedge fund, was unaware of Bennett's scheme, according
to its lawyer, Kevin Marino.

Refco officials including Peter McCarthy, president of Refco
Securities LLC, Refco Inc.'s CEO William M. Sexton and spokesman Rob
Solomon didn't return calls seeking comment. Bennett and his lawyer,
Jack Weinberg of Herrick, Feinstein LLP in New York, didn't return


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