Is your money under your mattress?

I don't pretend at all to understand the world of hedge funds, derivatives and other such fancy financial instruments. But hey, when a billion dollar company goes mammaries up in less than a week and a half, I kind of wonder what's going on.

Refco, a previously rather reputable commodities trader went from the darling of the money changers to a piece of road kill on the monetary highway in a rather short period of time. Trouble surfaced October 10th when Refco managers, made an announcement that a rather sizeable amount of it's assets, 430 million dollars worth, were owed back to the company through a company controlled by Refco's CEO, who had hid some bad debt from shareholders and regulators.

The announcement kind of created a modern day rush of the bank, as shareholders voted with their feet, until the boom was lowered and the SEC had a halt put on all Refco withdrawals.

Since then, the folks at Refco filed for bankruptcy and have seen a number of what are known as vultures come to pick over the remains of the financial growth organization.

Much like the world of internet stocks of the late nineties and around 2000, I never quite understand what people are buying when they sign on to the hedge funds and derivatives culture. When the Tech stocks tumbled into the abyss a few years ago, many an investor was left holding nothing but worthless papers and no explanation of what they really owned. The tech boom was akin to selling air, you can't see it but we're told its there and is good for us, trust us they said. Not that all of that mattered at the time, in the early boom there was money to be made hand over fist, at the time of the crash many a bank account had taken a sizeable hit with nothing to show for it. As Gordon Gekko would say "Greed is good", as long as you get out before it becomes bad.

A classic example for Refco and its unfortunate shareholders, is the tracking of the share price, before and after. Prior to the October 10th announcement Refco shares had been offered for 22 dollars a share when they launched their public IPO, as the company implodes upon itself, that share price has plummeted to 87 cents per share. Lucky stars and four leaf clovers to the lucky investors who may have exited on October 9th!

Daniel Gross traces the demise of Refco in Slate quite nicely, it makes for an interesting look into the world of easy credit and how the quick buck ethic has taken root in the world's economy. With daily news coming out now about previously rock solid companies filing for bankruptcy or shedding thousands of jobs, or both, one wonders if the run on Refco is not a symbol of all that has gone wrong with the economy.

If nothing else it's a worrisome sign that things haven't changed very much in the business world, Refco is now just another entry in a lengthy list of scandal destined to remove even more confidence in the way the business world seems to work.

Update--the dominoes continue to tumble after the Refco fiasco, now other fund managers are putting holds on their investment fund properties, due to the amount of money they invested in Refco. The result is that some investors can't get their money out of other funds that may have had exposure to the Refco products.