MF Global (MF) is a broker that trades for its clients and on its own behalf. Yesterday, MF Global filed for bankruptcy! On the day before its filing, three of the eleven analysts covering the company rated the stock as a “Buy” while not one analyst rated it a “Sell”.
Analysts are not stupid, so what gives The culprit is leverage. When leverage is high (90+% of MF’s invested capital is funded by debt), it’s really hard to tell what the equity is worth. This is because even a small change (or perceived change, as the case may be) in the value of the assets can make the equity worthless.
The analysts who rated this a “buy” may have been overconfident or they may have been herding, but in the end they were just wrong.
Disclosure: No position
