Refco's worsening woes

13 October 2005 By Antony Currie Follow @AntonyMCurrie

The similarities to other scandals are striking. Regulators are crawling over Refco, customers are fleeing and ratings are being slashed. Whether Refco emerges as Salomon did from its Treasury scandal, or disappears like Drexel, may depend on who its friends are.

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Refco announced on Thursday that it was closing its capital markets division for 15 days because of insufficient liquidity to continue trading operations. The unit houses Refco's overthecounter businesses, including prime brokerage, foreign exchange, fixed income and stock lending. It was responsible for 31% of Refco's revenues for its 2005 financial year, and for 55% of earnings on an Ebitda basis.

Refco has also appointed as advisors to its board former SEC chairman Arthur Levitt and former US comptroller of the currency Eugene Ludwig. It has also appointed Goldman Sachs as its financial advisor.

The moves follow the disclosure at the start of the week that chief executive Phillip Bennett had hidden a loan from Refco to an entity he owns of $430m. Bennett repaid the loan on Monday, when he was also placed on leave by the company. He was arrested on Wednesday and charged with fraud. Standard and Poor's cut Refco's counterparty credit rating to B+ from BB. The NYSE halted trading in the stock, after it had dropped more than 60% from its Friday closing price of $28.56.

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