The thousands of MF Global customers whose lives and businesses were derailed after $1.6 billion vanished in the collapse of the brokerage firm have now received offers to sell their claims and recoup nearly the entire shortfall, people involved in the negotiations said.
What was once thought to be a lost cause has erupted into a bidding war among Wall Street firms: Barclays , the Royal Bank of Scotland and the Seaport Group, a little-known firm that specializes in distressed assets, are all scrambling to buy MF Global customer claims.
On Monday, Barclays Capital, the investment banking unit of the London-based bank, agreed to purchase most claims for 90 percent of face value, the people said. R.B.S has said that it will pay 91 percent for the claims of institutions (but not individuals), according to a term sheet.
The possible turn in fortunes for MF Global customers began with a bid from Barclays that followed six weeks of negotiations between the bank and the coalition of customers. Its bid represented a belief that Wall Street investors have an appetite for claims, which customers filed last month with a court-appointed trustee. Other suitors soon followed Barclays.
The new investor interest is a coup for the brokerage firm’s clients, who include small farmers, grain operators and hedge funds . These investors had used MF Global to trade in commodities like wheat and corn . Their money was by law supposed to be off-limits to MF Global, but the brokerage firm violated that time-honored pledge.
After the messy collapse of MF Global on Oct. 31 and the disappearance of the customer cash, clients received only 72 percent of their money. Now, under the offers that have been made so far, customers are in line to get a much higher sum.
The banks do not plan to hold the claims on their books, but will sell them to hedge funds and other clients. Those investors are wagering that, when the dust settles, the trustee, James Giddens, will recover nearly all the money owed to customers.
The deal is not without risks. Giddens recently indicated that it would be a tough road to reclaiming the missing money.
And if customers do not jump on the current offers, the banks could later reduce them if the outlook for recovering money sours. Customers who sell their claims will also transfer their rights to collect proceeds from any class-action lawsuits stemming from the bankruptcy.
It is unclear how many customers will take the banks up on the offers, which are optional. Roughly 25,000 MF Global commodity customers have filed claims with Giddens, according to a recent court filing. Some who are significantly financially stressed because of MF Global’s collapse may leap at the offer of upfront cash. Others, however, may take their chances in the long and winding legal process, with the hope of a bigger payoff in the future.
“Ninety-one cents is pretty good,” said Don Laird, a retired investor in Texas who is still missing more than $100,000 after the MF Global bankruptcy. Laird said he could wait out the bankruptcy process, but noted that others might need the cash. “Who knows how long they might have to wait?”
The delay in recovering money has weighed on the firm’s customers. Some have said they can no longer pay their mortgages or utility bills, while others have vowed never again to trade in the commodities markets.
But for now, at least, the offers are a boost to the confidence of customers and the commodities brokerage industry, which was thrown into chaos after MF Global’s collapse. In a conference call on Monday, customers who are part of the negotiating group gave updates on where the offers stood.
Both Barclays and R.B.S. declined to comment. Messages seeking comment from Seaport were not returned.
The agreement with Barclays was negotiated by a network of customers led by James Koutoulas, a fund manager from Chicago who has been advocating for the full return of customer money. Koutoulas, 31, and others appeared on the scene shortly after MF Global’s bankruptcy on Oct. 31, filing motions in court, appearing in the media and giving voice to thousands of customers whose money had disappeared.
Barclays officials first floated a potential deal in January at a downtown Manhattan hotel, where aggrieved MF Global customers were facing off with Giddens at a hearing.
Through a spokeswoman, Koutoulas declined to comment.
Barclays was not the first big bank to position itself as a buyer and seller of the claims. Others have contacted customers individually.
For weeks, Credit Suisse was offering to buy claims at more than 80 percent, while Deutsche Bank was offering 89 percent, according to people briefed on the matter.
But the Barclays and R.B.S. offers represent the most significant progress yet — and the only formal pact with a coalition of customers, rather than ad hoc agreements that other banks and investors arranged with individual clients. The Barclays agreement also presents a wide swath of customers with the first chance at recovering nearly all their money.
Banks are also trading MF Global’s bankruptcy claims, which belong to the firm’s creditors, rather than the customers.
The offers to customers are expected to pay at least 90 percent of each claim filed with Giddens by commodities clients in the United States.
For customers who traded overseas, Barclays is offering to pay 65 percent of the face value of their claims, the people said. R.B.S. is offering 66 percent for institutions only. These customers, unlike those who traded in the United States, have yet to see a penny of their money returned by Giddens, as roughly $700 million is trapped in Britain, which has different bankruptcy laws than the United States.
Despite the brewing legal battle, Barclays and its clients appear confident that at least some additional money will be recovered through the courts.
Wall Street has a long history of scooping up bankruptcy claims. Hedge funds and other distressed investors, after financial disasters like the Lehman Brothers bankruptcy and Bernard Madoff’s Ponzi scheme, built lively markets around trading such claims. The investors wager that the claims will ultimately settle for greater sums than they now appear to be worth.
The MF Global debacle, however, presents an unusual challenge because the money is not merely caught up in the bankruptcy process. Much of it cannot be accounted for.