The last minute bailout of FXCM with a $300 million loan from Leucadia may turn out to be only a bandaid as the stock of FXCM plummeted when details of the deal were announced, according to Bloomberg. The trouble began for FXCM when the Swiss Central Bank announced that it would not longer cap the Swiss Franc against the euro. This spelt trouble for FXCM, which was in danger of breaching capital requirements, which would have forced a shutdown of the company.
The stock fell to $1.63 although it was riding at $12.63 last week, and perked up to $4 when the bailout was announced. In exchange for lending FXCM the needed $300 loan, repayment would be at an interest of 10% and could rise to 17%. Leucadia would have a sizeable share of dividend increases, and would have a large stake if FXCM would sell itself, which is becoming increasingly likely. Analyst Willliam Katz of Citigroup said the Lecuadia loan, negotiated by CEO Richard Handler, “essentially wiped out” the value of FXCM shares. However, Katz explained that FXCM didn’t have a lot of options, and each one threatened the value of the company. FXCM is a cautionary tale in having exposure only to foreign exchange markets, as Katz told Bloomberg, “Things happened so quickly. That’s the lesson of having a lot of leverage in a retail FX trading account. It doesn’t leave a margin for error.”
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Meanwhile, CEO Richard Handler is having his own problems with Jefferies as shareholders think Leucadia underpaid when it bought Jefferies. Shareholders demand $70 million. They blame Richard Handler for having negotiations which didn’t not include Jefferies’ independent directors, and allege that Handler, who is chief executive of both companies, wanted to grab power. Leucadia already owned 29% of Jefferies prior to the deal and paid $2.5 billion. Mr. Handler denies allegations, but says he is settling, “solely to eliminate the uncertainty, burden and expense of further protracted litigation.”
