Originally published November 4 2005
Refco is the latest casualty among trading firms
by Mike Adams, the Health Ranger, NaturalNews Editor
Commodity trading firm Refco has been left for dead, thanks to the shenanigans of its CEO, Phillip Bennett, who concealed a debt totaling nearly $430 million.
The proximate cause of the meltdown was the surprise disclosure on Monday, Oct. 10, that an entity controlled by CEO Phillip Bennett had owed $430 million to the company.
A week later, trading of the stock has been halted and vultures are picking over Refco the way hyenas gnaw on the remains of wildebeest.
Refco was a model 21st-century business---a highly digitized, high-tech services company that traded complicated financial instruments on behalf of customers all over the globe.
Rather, this extremely modern company depended ultimately on the kind of assets that built American capitalism in the 19th century: trust, integrity, and the personal reputation of executives.
Nothing material changed in Refco's financial situation when it announced that Bennett had secretly owed money to the company, or when it provided more details the next day about how Bennett had hid the debt.
Any company operating in this environment relies on liquidity---the ability to access vast stores of credit instantaneously and cheaply---and on the willingness of other institutions to act as counterparties, to wait a day or two before receiving payment.
Once the trouble was announced, Refco's customers wondered whether it was wise to do business with a company whose internal controls were so weak that it didn't know its own CEO was hiding a nine-figure debt.
An auto-parts company that gives its customers 30 days to pay it and has 30 days to pay its suppliers can function quite well.
But if a few suppliers become worried that the company might have difficulty paying its bills, and demand to be paid in 10 days, that company could go bankrupt in a matter of days.
These days, you don't have to be a bank---or even a liquidity-dependent finance firm---to suffer a run on the bank.
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