Regs

MF Global purchased European bonds and then used these bonds as collateral to borrow money and then used the money to purchase more bonds and so on. This is called a repo, short for repurchase. On these repo’s MF was required to hold them to maturity called repo to maturity. Bonds held to maturity pay a higher interest rate.
The interest rate it had to pay on the money it borrowed was lower than the interest it was earning on the bonds so it was profitable
Whenever you get a return you take a risk and there were two risk involved here. First was the solvency risk. If the European government defaulted then MF would not have the interest from the bonds to repay the money it borrowed to buy the bonds. In order to cover that risk MF took a short position on 1.3 billion in French bonds. Short position means the owners make a profit if the bond value goes down. The next risk was the liquidity risk. Would they have enough money to pay any customers who wanted to cash out? Like most investment companies they did not have enough money on hand to pay all investors and so when rumors stated that something was wrong investors began to bail. MF had all of their money tied up in bonds that they had to hold to maturity so they couldn’t get their hands on money by selling bonds and the word spread that they were going broke. This caused other investors to cash out and then Corzine tried to sell the company to get money to pay the investors but no buyers came forth. He then declared bankruptcy. It was later discovered that large amounts of customer money had disappeared. Recall in these companies you must keep the investor’s money separate from the company money and some 1.2 billion of the investor’s money is unaccounted for. It is speculated that Corzine used some of this money in a panic to try and hold off bankruptcy. The courts will decide this.