MF Global claims, 90+ cents on the dollar?

As you are probably aware, MF Global filed for bankruptcy on Oct. 31, 2011 after sustaining substantial losses and using client money to pay for losses. In total, $1.6 billion dollars of client money was unaccounted for. Banks are now vying for these claims, with Barclays leading the charge.

What might be surprising at a cursory glance is the amount offered per dollar on these claims. Offers are as high as $0.9125 cents on the dollar for US Exchanges and $0.6625 for Foreign Exchanges. You might think that these banks are sure sticking their neck out to make a relatively small and uncertain return, but there's more than meets the eye.

http://www.reuters.com/article/2012/03/16/mfglobal-customerclaims-idUSL2E8EFBFO20120316

Roughly $3.9 billion dollars have been paid back to the US Exchange customers, equalling about $0.72 on the dollar of the claims. Furthermore, there's a plan for a distribution of $600 million in the next two months, another ~$.11 on the dollar.

Thus if you are offering $.90 on the dollar, you are really paying 18 cents (.90-.72) to receive 28 cents (1.00 - .72). Factor in a distribution of 0.11 cents on the dollar in the next two months, and with a couple assumptions the IRR looks pretty sweet. Even if you're not going to get 100 cents on the dollar, that is still a great return.

Another point that many people bring up is that if you're a big bank sitting on a pile of cash that was paid to you from MF Global, you:

1. Know where the missing money is
2. Will be forced to pay it back, so you might as well make some money in the process

After you buy up all the claims at $.72, take a look under your seat and find x millions of dollars from MF Global. You gladly return it knowing that it'll come right back to you.

I think it's a solid trade and the banks prove yet once again how clever they can be.