Many Alarms Rang Before MF Global Crashed

David Goldman for The New York TimesJon Corzine, second from right, held a morning meeting on the trading floor of MF Global’s Manhattan office last year.

A little before 2 a.m. on Monday, Jon S. Corzine was in MF Global’s offices in Midtown Manhattan, scrambling to cut a deal to save his firm. Haggard from too little sleep, at times pacing the hallways, he at least had a handshake agreement with one suitor for the firm.
Then the chief executive was interrupted to handle a brief conversation that would stop the deal talks cold: hundreds of millions of dollars in customer funds, he was told, could not be located.

Three hours later, the board of MF Global, with no bidders or options left, voted to file for bankruptcy, the largest failure on Wall Street since Lehman Brothers in 2008.
While the commodities and derivatives brokerage firm fell apart with ferocious speed, the collapse came after regulators raised warning flags for more than four months. They told MF Global it needed to raise more capital, and they asked about risky transactions involving European debt.
Yet Mr. Corzine resisted, lobbying to persuade regulators that the firm did not need to raise capital, according to people briefed on the discussions. MF Global did improve its capital position, but it was not enough to save the firm.
The details that have emerged about MF Global’s final 72 hours — drawn from dozens of interviews with people who participated in the weekend discussions or were directly briefed by people who did — illustrate that three years after the financial crisis, Wall Street executives are still fighting regulators’ demands.
It also shows that even when the watchdogs sound the alarm, it is not necessarily enough to save a firm. Now, multiple regulators and the Federal Bureau of Investigation are examining the firm’s collapse, trying to determine what went wrong and where the missing money, now suspected to be roughly $630 million, went.
The CME Group, a major exchange where MF Global traded until this week, said on Wednesday that Mr. Corzine’s firm had appeared to transfer client money sometime last week “in a manner that may have been designed to avoid detection,” a serious violation of Wall Street regulations. MF Global did not disclose the shortfall in client money to CME or to regulators until early Monday morning, shortly before the firm filed for bankruptcy.
A person close to the company said it was not aware of any audit by the CME Group. Neither Mr. Corzine nor MF Global have been accused of any wrongdoing.
One of the first signs of trouble for MF Global came in June, when regulators reviewed its recent financial statements, according to a person with direct knowledge of the matter. In a footnote, MF Global disclosed that it had bought debt from Italy, Ireland and other troubled European nations.
The disclosure alarmed the Financial Industry Regulatory Authority, Wall Street’s self-regulator, which worried that MF Global lacked enough capital to support the trades.
Finra called MF Global, pushing it to raise its capital levels, but Mr. Corzine fought back, according to the person with knowledge of the matter. Frustrated, Mr. Corzine decided to go over Finra’s head to the Securities and Exchange Commission, the person said. In July, Mr. Corzine traveled to Washington to state his case to S.E.C. officials at their offices near Union Station in Washington. Mr. Corzine chalked up their concerns to undue jitters over Europe’s ballooning debt crisis, the person said. The S.E.C. and Finra wouldn’t bend, and in August, the firm increased its capital cushion.
MF Global declined to comment; Mr. Corzine did not respond to a request for comment.
The move offered only short-term relief. By mid-October, MF Global’s European gamble was being widely discussed on a nervous Wall Street. Rumors spread that Moody’s Investors Service was considering a cut to MF Global’s credit rating. Finra resumed regular talks with the firm, questioning whether anxious customers, investors and trading partners would drain the firm’s liquidity.
Late on Oct. 24, Moody’s did move to cut its rating on the firm, to just one notch above junk status, citing in part the European bond holdings.
That proved to be a watershed moment: the downgrade led MF Global’s trading partners to demand extra collateral, draining the firm’s cash supply.
Under mounting pressure from Washington and Wall Street, MF Global moved up its scheduled quarterly earnings announcement by two days, reporting on Oct. 25 that it had recorded a $186 million loss, its fourth loss in six quarters. The share price of MF Global went into free fall, tumbling 67 percent over the course of that week. The firm also started drawing on its credit lines.
Mr. Corzine quickly hired the investment bank Evercore Partners to help him find a buyer for part or of all of the firm. MF Global also contacted BlackRock, the giant asset manager, to help it wind down its balance sheet — including efforts to sell its holdings of European debt. Eventually, MF Global brought bankruptcy lawyers on board to prepare for the worst.
Mr. Corzine had other fires to put out.

Joshua Roberts/Bloomberg NewsThe Commodity Futures Trading Commission, led by Gary Gensler, is said to have become concerned in late October.

Last Thursday, regulators from several agencies arrived at MF Global’s offices in New York and Chicago. What they saw over the course of the next few days troubled them, according to people knowledgeable about the matter who spoke only on condition of anonymity. The Commodity Futures Trading Commission, led by Gary Gensler, became concerned that MF Global had not kept customer money separate from company funds, a fundamental rule on Wall Street.
MF Global assured regulators at the time that the money was in order, these people say.
On Saturday, Mr. Gensler reached out to H. Rodgin Cohen, a partner at Sullivan & Cromwell who has long served as Wall Street’s go-to lawyer in a crisis. During the tumultuous days of 2008, Mr. Cohen advised a number of embattled Wall Street executives, including Richard S. Fuld Jr. of Lehman Brothers. He now found himself counseling Mr. Corzine.
“We need more documents,” Mr. Gensler told the lawyer, according to people briefed on the conversation. The call set off a scramble at MF Global as employees tried to locate the documents regulators were demanding.
Other issues about the quality of the firm’s bookkeeping were being spotted by employees from BlackRock, who had arrived to value the MF Global portfolio, according to a person with knowledge of the matter.
Yet even as questions about MF Global’s records were beginning to surface, talks on a possible sale were getting under way. Two main bidders quickly emerged — the Interactive Brokers Group and Jefferies Group. Jefferies, a brokerage house based in New York, has a futures trading business and the idea of expanding it is said to have appealed to its chief executive, Richard Handler. A small team of Jefferies executives arrived at MF Global on Friday and were escorted into a windowless conference room. The executives returned the next day as well.
They sorted through stacks of information about MF Global’s operations. While they didn’t notice anything out of order with MF Global’s books, they left that Saturday without making a bid. Jefferies, a person with knowledge of the matter said, concluded it simply needed more time to complete such a complicated acquisition — time MF Global didn’t have.
That left Interactive Brokers. The Connecticut brokerage firm was also huddled in a separate windowless conference room not far from where the Jefferies team was holed up.
Mr. Corzine, who ran Goldman Sachs in the 1990s before serving as a Democratic senator from New Jersey and then New Jersey governor, was the lead negotiator for MF Global. One person who saw him Saturday said he looked “pained” at the events unfolding around him.
Around 2 p.m. on Sunday, Mr. Corzine and an Evercore banker, Jane Gladstone, were able to call regulators and brief them on the sale talks. They sounded optimistic, saying that they were confident a deal would get done.
That hope grew into the evening.
As Interactive Brokers continued its dive into MF Global’s books, signs of exhaustion among the participants grew. J. Christopher Flowers, the MF Global investor and former Goldman executive, was spotted at the talks on Sunday wearing mismatched shoes.
Just before 1:45 a.m., Mr. Corzine received the information telling him that customer funds were missing. That alarmed Interactive Brokers, and the firm walked away from the bargaining table.
An MF Global executive then notified the regulators, who were still camped in the firm’s Manhattan offices. Commodity Futures Trading Commission officials called Mr. Gensler, waking him around 2:30 a.m. to join a conference call with MF Global and other regulators.
MF Global executives could not stay on the phone for long — they needed to convene the board and prepare for a bankruptcy filing.
But the phone line remained open for several hours, as regulators discussed how to handle the first major financial failure of the postcrisis era.
Azam Ahmed contributed reporting.

It’s All Connected: An Overview of the Euro Crisis

European leaders are dealing with growing debt problems that are rattling investors worldwide. Here is a visual guide to the crisis.

• It’s All
  Connected
• The Immediate
  Trouble
• The Risk
  of Contagion
• A Possible
  Scenario
• Continental
  Contagion
• Global
  Reverberations

GermanyFranceItalyGreeceIrelandJapanUnited StatesBritainSpainPortugal

Arrows show imbalances of debt exposure between borrowers in one country and banks in another; arrows point from debtors to their bank creditors. Arrow widths are proportional to the balance of money owed. For example, French borrowers owe Italian banks $50.6 billion; Italian borrowers owe French banks $416.4 billion. The difference — their imbalance — shows France's banking system more exposed to Italian debtors by about $365.8 billion.

The risk to countries’ debts and economies is indicated by color:

   

More worrisome

Greece amassed a huge debt that it has scant hope of repaying. A chaotic Greek default could hurt all European banks and pension funds that have extended Greece credit and cause a wider bank panic. A financial firewall might halt contagion by backstopping the credit of four other shaky nations — Ireland, Portugal, Spain and Italy.

If there is no firewall or if it is inadequate, it would be easy to imagine a run on banks. The euro zone’s single currency makes it easy to shift money across borders from risky economies to safer ones. That and the lack of central banks in each country -- those went away in 1999 with the arrival of the euro — make the euro zone “the ultimate contagion machine,” says Kenneth Rogoff, a Harvard economist.

Euro Zone

If no preventative measures are taken, a chain of events like this could unfold: In reaction to a Greek collapse, investors become worried about their exposure to other risks in the region. Borrowing costs rise for Ireland, Italy, Portugal and Spain, adding to their debt loads.

Italy may not be able to protect its banks if there is a loss of confidence. French banks, burdened with all manner of Italian debt, could totter. Money could flee to safer countries like Germany in a matter of hours.

Losses could extend to American banks, which have large exposures to debt in France and Italy. On top of this, American exports to the European Union — collectively the biggest American trading partner — could suffer if the crisis slows European growth and causes the euro to depreciate against the dollar. Exposure to French banks could lead to other losses beyond the Continent.

Note: The B.I.S. data used here do not include debts between non-bank entities.
Figures show amounts that bank systems, based in or controlled from one country, are exposed to debts from borrowers in other countries.

By XAQUÍN G.V., BILL MARSH, ALAN McLEAN and ARCHIE TSE; Seth W. Feaster, Nelson D. Schwartz and Tom Kuntz contributed reporting. |

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Sources: Bank for International Settlements (bank exposure data; table 9D of Preliminary International Banking Statistics Report, released Oct. 20, at www.bis.org); Simon Johnson, Massachusetts Institute of Technology; Kenneth S. Rogoff, Harvard University; International Monetary Fund (G.D.P. size and general government debt-to-G.D.P. ratios); Congressional Research Service (American bank exposure)

Tracking Europe's Debt Crisis

The European Central Bank lowered its benchmark interest rate, as the new president, Mario Draghi, sought to address a looming recession and acute tension caused by the sovereign debt crisis. Prime Minister George Papandreou of Greece called off a planned referendum on a new European debt deal. Got an idea for an update? Send a suggestion by e-mail.

Country	Latest developments	Coming events	Vital statistics	Recent articles
France	Nov. 1: President Nicolas Sarkozy, who is facing a reelection fight, was criticized by political opponents for seeking support from China.		Debt/G.D.P.: 81.7% Unemployment, Aug. 2011: 10.0% S. & P. Rating: AAA	French Economy: Hope Is to Cut While Still Fostering Growth (Financial Times, Nov. 2)
Germany	Nov. 3: German Chancellor Angela Merkel urged Greece's Prime Minister George Papandreou to clarify whether his country would proceed with the rescue plan agreed upon last week.		Debt/G.D.P.: 83.2% Unemployment, Aug. 2011: 5.9% S. & P. Rating: AAA	Merkel and Sarkozy Halt Payments to Athens (Spiegel, Nov. 3)
Greece Updated	Nov. 3: Prime Minister George Papandreou called off his plan to hold a referendum on Greece’s new loan deal with the European Union.	Mr. Papandreou is to face a no-confidence vote in Parliament on Nov. 4.	Debt/G.D.P.: 142.8% Unemployment, June 2011: 16.4% S. & P. Rating: CC	Greece: Papandreou’s All-In Bet (Business Week, Nov. 2)
Ireland	Nov. 1: Ireland said that its 2010 debt was lower than previously estimated because of an error in accounting.		Debt/G.D.P.: 96.2% Unemployment, Aug. 2011: 14.9% S. & P. Rating: BBB+	Ireland May Seek Ancillary Rewards from Greece’s Debt Failure (Bloomberg, Oct. 27)
Italy Updated	Nov. 3: Italian 1-year bond yields rose sharply, then dropped, as concerns about the Greek bailout plan fluctuated.		Debt/G.D.P.: 119% Unemployment, Aug. 2011: 6.8% S. & P. Rating: A	Italian Banks May Rely More on ECB Funding, Bank of Italy Says (Bloomberg, Nov. 3)
Portugal	Nov. 3: Portugal wants to negotiate more flexible terms for repaying bailout funds, Prime Minister Pedro Passos Coelho said.		Debt/G.D.P.: 93% Unemployment, Aug. 2011: 12.3% S. & P. Rating: BBB-
Spain	Nov. 3: Yields rose in an auction of Spanish bonds.	Spain will sell 10-year bonds on Nov. 17.	Debt/G.D.P.: 60.1% Unemployment, Aug. 2011: 20.5% S. & P. Rating: AA	Greek Uncertainty Galling for Diligent Spain and Portugal (Reuters, Nov. 2)

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Stocks Climb After Interest Rate Cut in Europe

Stocks rose strongly in the United States and in Europe on Thursday after the European Central Bank, concerned about an economic slowdown, cut its benchmark interest rate and Greece abandoned a planned vote on a bailout deal.

Equity markets in Europe accelerated gains and Wall Street opened up on the move by the European Central Bank which came after the Organization for Economic Cooperation and Development earlier this week added its voice to the chorus calling for lower borrowing costs to stimulate growth. Bond prices fell.
Hours later, Prime Minister George Papandreou of Greece called off his plan to hold a referendum on Greece’s new loan deal with foreign creditors, after the head of the main opposition party in Greece said he would support it. Mr. Papandreou also withdrew an offer to resign and opened talks on a unity government with his conservative opponents.
The developments came as President Obama and other leaders from the Group of 20 nations gathered in the south of France for a summit meeting focused on the European sovereign debt crisis.
The Euro Stoxx 50 index, a barometer of euro zone blue chips, closed up 2.5 percent, with Germany’s DAX up 2.8 percent and the CAC 40 in Paris up 2.7 percent. The FTSE 100 index in London rose 1.1 percent.
About two hours before the close of the trading session in New York, the Standard & Poor’s 500 index and the Dow Jones industrial average gained 1.7 percent, and the Nasdaq rose 1.9 percent.
Treasury prices fell. The United States Treasury’s benchmark 10-year note was up to 2.061 percent in yield from 1.99 percent on Wednesday.
Investors are closely watching some of the more highly indebted countries with struggling economies in Europe.
The Italian bond yield rose to a high of 6.353 percent on Thursday before pedaling back to 6.167. Spanish bond yields were 5.463 percent, slightly higher than on Wednesday.
“It is obvious that the E.C.B. has caught the crisis virus and is trying everything it can to prevent a full-fledged recession,” Carsten Brzeski, an economist with I.N.G. in Brussels, wrote in a report.
The question now, he added, “is whether the E.C.B. is also willing to do everything to prevent a further escalation of the sovereign debt crisis, becoming the unconditional lender of last resort of the euro zone.”
The sovereign debt troubles have overshadowed global markets for more than a year. Most recently, equities markets have bounced around since an agreement reached in Europe last month, staging a strong rally before falling back as uncertainty grew about the details of the plan.
While the latest developments in Greece were seen as supportive for stocks, “the big thing was the European rate cut and that is what is driving the market,” said Doug Cote, chief strategist at ING Investment Management. “Investors are going to start nibbling around and going back to risk.”
The E.C.B had raised its benchmark interest rate twice this year, to 1.5 percent from 1 percent. On Thursday, the bank cut it to 1.25 percent.
Stanley Nabi, the chief strategist at Silvercrest Asset Management Group, said the E.C.B. had made a mistake when it raised rates, and was now correcting it in the context of a rapidly deteriorating situation in Greece and economic troubles in Europe.
“To an increasing degree every one of the countries in the euro zone is now experiencing a sluggish economy or is on the precipice of a recession,” he said. “I think what they are trying to do is just in case Greece pulls out of the euro zone or is thrown out, they want to build a moat around the other countries so that it won’t have a very deep impact on the global economy and European economies.”
Asian shares closed mostly lower. The Sydney market index S.&P./ASX 200 fell 0.3 percent. In Hong Kong, the Hang Seng index fell 2.5 percent. Shanghai bucked the trend, with the composite index rising 0.2 percent. Tokyo markets were closed for a national holiday.
Officials meeting in Cannes were grappling with the growing possibility that Greece will leave the euro zone, leaving a trail of scorched lenders in its wake and possibly shifting the focus of market turmoil to bigger countries like Italy and Spain. But even as they address those questions, the disarray in Europe threatens to weigh more broadly on the global economy.
On Wednesday, the Federal Reserve offered a sobering outlook for growth in the United States, predicting the economy would expand 2.5 percent to 2.9 percent in 2012, down from its prior forecast of 3.3 percent to 3.7 percent. It said the unemployment rate would probably remain at 8.5 percent or above through the end of next year.
The euro was at $1.3826 from $1.3747 late Wednesday in New York.

David Jolly reported from Paris. Jack Ewing contributed reporting from Frankfurt, and Rachel Donadio and Niki Kitsantonis contributed reporting from Athens.

Less Than $26 Billion? Don’t Bother.

Everyone — conservative and liberal — agrees that $2.6 trillion a year is too much to spend on health care, and that we have to cut costs. But they don’t agree on who is to blame or what is to be done.
Everett Dirksen, the Republican senator from Illinois, reportedly said, “a billion here, a billion there, and pretty soon you’re talking about real money.” But health care spending in the United States typically increases by about $100 billion per year. Cutting a billion here or there from something that large is undetectable. In health care, you have to be talking about tens of billions of dollars before you are talking about real money. A useful threshold for savings is 1 percent of costs, which comes to $26 billion a year. Anything less is simply not meaningful.
Where can you find that kind of money? Conservatives mostly point to frivolous lawsuits that encourage doctors to order unnecessary tests and procedures, and extremely expensive patients like premature infants. Liberals target drug companies and for-profit insurers. Although each of these cost-saving targets has some merit, malpractice reform and cutting back on drug and insurance company profits would be insufficient and a distraction from the real efforts necessary to control costs.

These claims have some merit, but they are a distraction from the real efforts necessary to control costs.

According to many on the left, health insurance companies are sleazy and unethical, making obscene profits by charging high prices to sick people, giving physicians and patients the runaround to avoid paying bills, and rescinding policies just when people who paid in good faith get cancer, while their executives often walk away with millions in compensation.
Last year, health insurance companies did rack up big profits, but it turns out that the combined profits of the country’s five largest for-profit health insurance companies — United, WellPoint, Aetna, Humana and Cigna — were $11.7 billion, only 0.5 percent of total health care spending. Even confiscating every penny of those profits would add up to less than half of the cost-saving threshold. And even not-for-profit insurance companies need to have an operating margin — a profit by another name. There just isn’t enough money there to make a dent in health care spending.
Drug companies, too, are seen as greedy. Recent increases in prices for new drugs and biologics — antibodies and other proteins — especially for cancers like lymphoma and prostate are a real cause for worry. Many of these drugs cost $100,000 for a course of treatment, even when the benefits are neither a cure nor improved quality of life, but only a few months of added survival.
One proposal to limit drug company profits is to encourage the use of generic rather than brand name drugs. But that has already happened. Between 2004 and 2009, generic drug use rose from 57 to nearly 75 percent of all prescriptions. Paradoxically, over those same years, the total amount Americans spent on drugs actually increased by 31 percent — the same rate as overall health care expenditures. Even the best estimates suggest that savings from expanding generics’ use even further are, according to the Department of Health and Human Services, “likely to be small relative to total spending on drugs.” And substituting generics is not always possible; many important drugs are still patented and have no generic equivalent yet.
Importing brand name drugs from other countries, particularly Canada, is another favorite liberal cost control proposal. Many have criticized President Obama for not having fought harder to include it in the Affordable Care Act. It is true that brand name drugs cost substantially more in the United States than they do in Europe, Australia and Canada. A 2005 study in Annals of Internal Medicine found that Americans could save an average of 24 percent on brand name drugs if they were allowed to buy them from Canada. But overall this doesn’t add up to much. According to an evaluation by the Congressional Budget Office, the “reduction in drug spending from importation would be small.” How small? Pharmaceutical costs account for roughly 10 percent of total health care spending, some $260 billion in 2010. Importing brand name drugs from abroad would cut about 2 percent from that — $5 billion per year. Another cost control disappointment.
Are the conservatives’ proposals any better? Their favorite fix is to reform medical malpractice by limiting noneconomic damages, statutes of limitation and lawyers’ fees. In its favor is the fact that doctors’ fear of medical malpractice lawsuits is legitimate. According to a recent study in the New England Journal of Medicine, about 7.4 percent of doctors get sued each year. By age 65, even those in “low risk specialties” like pediatrics and dermatology face a 75 percent chance of being sued. It’s no wonder doctors order M.R.I.’s for routine headaches and monthly ultrasounds for normal pregnancies, despite these procedures not being required or recommended by professional guidelines.

Previous Article

Spending More Doesn’t Make Us Healthier

Few understand how much we spend on health care, how much we need to spend to provide quality care, and the difference between the two.

But in 2009, the Congressional Budget Office did a comprehensive assessment of the potential cost savings from medical malpractice reforms. Its conclusions: A package that included a $250,000 cap on noneconomic damages, a $500,000 cap on punitive damages and a one-year statute of limitations for claims by adults would save about $11 billion a year — 40 percent from reduced malpractice premiums and the rest in the form of fewer defensive procedures like M.R.I.’s.
Frankly, $11 billion is not insignificant. As part of a broader package, some kind of malpractice reform probably makes sense — although it is important to do it carefully and caps are probably not the best approach. There is woefully little research on how caps affect the quality of medical care, but at least one study, published in Health Affairs in 2004, suggested that caps may have lowered quality of care. The ideal reforms would make it easier for victims of medical errors to get fair compensation — while weeding out the gold diggers — and would protect from lawsuits doctors who can document that they adhered to clinical guidelines and used computer programs to help them follow recommended care. But at less than half the $26 billion threshold, malpractice reform is certainly not a cost savings magic bullet either.
Another conservative proposal — to restrict health care spending on exorbitantly expensive patients — would both save less money and cause more harm. The paradigmatic case seems to be infants who are born prematurely and end up in intensive care on breathing machines for months, before requiring feeding tubes, constant nursing care, multiple medications and follow-up procedures for kidneys, heart or other complications. If we just stopped paying for these “million dollar babies,” the argument goes, the health care system could save a fortune.
But we only know who the “million dollar babies” are after we’ve spent the million dollars. We could screen every patient whose costs are going over, say, $50,000, but then what? Send them to a “death panel” that would choose whether to continue care? Even if we could identify them, there are too few to make a substantial cost difference. An unpublished analysis of nearly 20 million commercially insured patients — provided to me by an insurance company — showed that there were only 255 patients who consumed over $1 million in 2010. Together they spent 0.5 percent of all costs — a very large number for so few patients, but just half the 1 percent threshold for cost-saving that matters. And not all of those costs could be saved.
There are some savings in medical malpractice, drug costs, insurance company profits and “million dollar babies,” but not nearly enough. Next week I will explore where the real savings are.


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This is the second in a series of articles about the cost of health care. A version of this column will appear in print on Sunday, Nov. 6, 2011.

European Central Bank, Under New Chief, Cuts Key Rate

Ralph Orlowski/Getty Images

Mario Draghi, the new president of the E.C.B., signaled with the decision that he may be more willing than his predecessor, Jean-Claude Trichet, to tolerate inflation in the name of growth and economic stability.

By JACK EWING

Mr. Draghi, assuming office at one of the most dramatic points in the history of the euro zone, signaled with the decision that he may be more willing than his predecessor, Jean-Claude Trichet, to tolerate inflation in the name of growth and economic stability. The bank cut the benchmark rate to 1.25 percent from 1.5 percent.

Speaking to reporters after overseeing a meeting of the E.C.B. governing council for the first time, Mr. Draghi put the emphasis on risks to growth rather than prices. He warned that the bank was likely to make a “significant downward revision” in its forecast for euro zone growth and that data signals a mild recession.
“In such an environment, price, cost and wage pressures in the euro area should also be moderate,” he said. “Today’s decision takes this into account.”
But Mr. Draghi disappointed those who want the E.C.B. to aggressively buy European government bonds, using its ability to print money to overwhelm the market and stamp out the debt crisis. He stuck to the E.C.B. position that the bond purchases are temporary and limited, and justified solely as a way for the bank to maintain its control over interest rates.
Rather, it is up to national leaders to regain investor confidence by controlling spending and removing excessive regulations and other obstacles to growth, Mr. Draghi said.
“The first and foremost responsibility for maintaining financial stability lies with national economic policies,” he said.
European stocks and U.S. index futures both rose sharply after the E.C.B. rate announcement. The Euro Stoxx 50 index climbed 3.1 percent, helped by signs that Greece would move ahead with the bailout plan, was up 2.19 percent late Thursday. The euro traded at $1.3773, up from $1.3747 late Wednesday in New York.
The official annual inflation rate in the euro zone is 3 percent, well above the E.C.B.’s target of 2 percent. But many economists argue that, with factories producing below capacity and ample data pointing to a downturn, there is little threat of sustained inflation.
Analysts were divided ahead of the meeting Thursday on whether Mr. Draghi would oversee a rate cut only two days after taking office. Some said the cautious Mr. Draghi would avoid any bold moves and seek to establish his credentials as an inflation fighter. He must cope with German members of the E.C.B. governing council who regard price stability as sacred, and who probably opposed a cut.
But others argued that Mr. Draghi, who earned a doctorate in economics at the Massachusetts Institute of Technology, would realize that the danger of a downturn was much greater than the risk of price increases. In addition, they argued that Mr. Draghi would want to show that the E.C.B. will be a defender of euro zone growth and stability in contrast to the disarray of euro zone politics.
Mr. Draghi said the decision to cut rates was unanimous, a surprise considering the reverence with which German members of the E.C.B. governing council regard price stability.
Mr. Draghi assumes office as Greece appears close to leaving the euro zone and the very survival of the common currency is in doubt.
He rejected suggestions Greece could leave the euro zone, saying there is no legal provision for the country to do so. “It’s not in the treaty,” he said. “I have nothing to add to that.”
Mr. Draghi’s first meeting of the E.C.B. governing council as president also coincided with a meeting of Group of 20 leaders in Cannes, which is being dominated by Greece and the debt crisis.
Mr. Draghi plans to meet with G-20 leaders Thursday night in Cannes, but said he will attend only in his capacity as chairman of a panel that makes recommendations on bank regulation.
Before taking office, Mr. Draghi said little about his intentions. So there has been intense speculation about how energetically the E.C.B. will continue to intervene in government bond markets to hold down borrowing costs of stricken countries, including Mr. Draghi’s native Italy.
Italy has emerged as the greatest threat to the euro because of its political turmoil, poorly performing economy, and debt equal to 120 percent of annual economic output.
Measures by the E.C.B. to help Italy will be politically sensitive for Mr. Draghi, who was previously governor of the country’s central bank. He may be anxious to demonstrate that he will not give preference to Italian problems.
The E.C.B. is also vulnerable to criticism that Italians now have undue influence on the governing council. In addition to Mr. Draghi, Lorenzo Bini Smaghi is a member of the E.C.B. executive board as well as the governing council. Ignazio Visco, Mr. Draghi’s successor as governor of the Bank of Italy, is a member of the governing council, as are all 17 central bank chiefs in the euro zone.
No other country has more than two representatives on the 23-member council.

Greek Leader Calls Off Referendum on Bailout Plan

Yiorgos Karahalis/Reuters

Prime Minister George A. Papandreou of Greece arrived for a cabinet meeting on Thursday in Athens.

By RACHEL DONADIO and NIKI KITSANTONIS

ATHENS — After a tumultuous day of political gamesmanship, Prime Minister George Papandreou called off his plan to hold a referendum on Greece’s new loan deal with the European Union, opened talks on a unity government with his conservative opponents and vowed to continue in office despite rumors he would resign.

 

In an address to his party’s central committee on Thursday evening, Mr. Papandreou said there was no need for a referendum now that the opposition New Democracy Party had said it would back the debt deal. He invited that party to become “co-negotiators” on the new deal.
“The question was never about the referendum but about whether or not we are prepared to approve the decisions on Oct. 26,” he said, referring to the European Union debt deal. “What is at stake is our position in the E.U.”
Shortly afterward, the finance minister, Evangelos Venizelos, confirmed the cancellation of the referendum and added that the government would now seek approval of the loan deal from a full majority of 180 in Parliament, rather than the simple majority of 151 that has supported previous measures.
The developments re-established a tentative stability in Greece that still could be dashed. Mr. Papandreou must sweat out a vote of confidence scheduled for Friday, the outcome of which is far from assured. If he survives that, he and the opposition leader, Antonis Samaras, will have to negotiate their conflicting visions for the future. Mr. Samaras would like to see a transitional government of technocrats leading to early elections, perhaps in two months, while the prime minister prefers a coalition government that would rule for at least six months.
The decision to drop the referendum came after Mr. Samaras switched course and decided to back the loan deal, which would involve a 50 percent write down of Greece’s debt. Earlier, Mr. Samaras had been content to sit on the sidelines and score political points by opposing the deal and previous bailouts.
Speculation had been rife all day Thursday that Mr. Papandreou would abandon the referendum plan if the opposition would back the European deal. Before going into a brief emergency cabinet meeting, Mr. Papandreou suggested that he was prepared to walk away from the referendum proposal, saying that it “would not have been necessary if there had been consensus with the opposition.”
At first, Mr. Papandreou was said to have offered to resign before the confidence vote on Friday. By late afternoon, however, Greek news media reported during the cabinet meeting that he not only was refusing to resign but was in fact calling off the referendum plan. He only did so later in the day.
Mr. Papandreou had said the referendum was aimed at broadening consensus, which meant forcing the opposition to back the loan deal. Analysts said that he may have been happy to drop the idea once that goal was accomplished on Thursday.
After the cabinet meeting ended, Mr. Papandreou spoke with Mr. Samaras by phone.
Even if he survives the coming hours or days in office, the prime minister is widely seen as having expended nearly all his political capital. Ever since Greece asked for a bailout from the European Union in April 2010, he has struggled to satisfy seemingly irreconcilable constituencies: the Greek electorate and Greece’s foreign lenders, who have insisted on tough austerity measures in exchange for aid, pushing Greek democracy to the breaking point.
Mr. Papandreou had stood by his referendum plan when he met with European leaders in Cannes, France, on Wednesday, where they were gathering for the Group of 20 summit. The referendum announcement on Monday angered European leaders and threw the entire debt deal into chaos, causing turbulence in world markets.
Divisions within Mr. Papandreou’s government flared into the open on Thursday when Mr. Venizelos, and his deputy broke ranks with the prime minister to oppose a referendum, saying it could jeopardize Greek membership in the single currency euro zone.
Faced with the growing insurrection among his own ministers, who only a day earlier appeared to have rallied around the referendum plan, Mr. Papandreou called the urgent cabinet meeting on Thursday afternoon.

Steven Erlanger contributed reporting from Cannes, France, and Alan Cowell contributed reporting from Paris.