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Is Refco as Bad as It Seems?


Controlling risk is paramount, especially when operating with incomplete information

Here is our take on Refco (RFX), although like everyone else we are dealing with incomplete information.

We think Bennett was basically trying to accomplish two things:

1. Take bad receivables off the books in the name of customers, and refresh the dates from a new entity that hadn't owed the obligation as long, so it looked like their receivables cycle was shorter. No more or less recovery at the end of the day, but makes their statements look better, looks like they turn over receivables more frequently.

2. This creates a potential upside for Bennett personally since most of the receivables were probably already carried at very, very low levels, and he had a chance to collect more and make some money himself.

This all is a bush league move, for sure. Auditors will be fired and sued, it creates a big news story with lots of clean-up, but in the long run it probably won't impact the actual business and the net impact on previous financials; from earnings standpoint, the effect should be small. The big risk is if reputation concerns cause the company to lose accounts, but it looks like the company will quickly address this situation and REFCO has been around a long time.

So in the end this is mostly a public relations situation, so we think it is a good risk for reward. But because we don't have complete information, we have sized the trade accordingly.

It is all about risk control for there will be many of these in the years to come, but we can't let any one of them blow us up.
Position in RFX

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