Issue of the week: Were rules too lax for MF Global?
Jon Corzine was able to his influence to prevent regulators from establishing rules that would have reined in the firm's trades.
Jon Corzine “set out to create a mini Goldman Sachs” when he took over MF Global last year, said Daniel Wagner and Bernard Condon in the Associated Press. “In the end, he built a mini Lehman Brothers.” How could that still be possible three years after the financial crisis? MF Global declared bankruptcy last week under the weight of bets on European debt, and now the FBI is investigating the firm because more than $600 million of client money remains missing. The firm’s failure raises troubling questions about whether Wall Street regulators are still unable to effectively police risky behavior.
When will “negligent and clueless policymakers” learn their lesson? asked Jay Hancock in The Baltimore Sun. MF Global borrowed billions to make speculative bets, using the same “means and methods” that helped bring down Bear Stearns and Lehman Brothers in 2008. “Wall Street’s appetite for gambling hasn’t abated,” yet we’re still arguing over whether those methods should be banned. Indeed, even if the 2010 Dodd-Frank financial reforms were already in full effect, they “would likely have done little” to prevent MF Global’s collapse, said Alexandra Alper in Reuters.com. The proposed Volcker rule, which restricts how much risk firms that own depository banks can take, would not have applied to MF Global, and the firm was too small to be subject to strict oversight by the Federal Reserve.
This debacle shows that we need a lead regulator instead of “a crazy quilt of watchdogs” for nonbank financial institutions, said Francesco Guerrera in The Wall Street Journal. MF Global had “no fewer than four regulators keeping an eye” on it, but not one was monitoring day-to-day risks, and “the big picture fell between the cracks.” Financial-rule writers in Washington have been so focused on Wall Street’s too-big-to-fail banks that they’ve forgotten that financial risk is like “fluid filling a plastic pouch.” Squeeze it out of one corner where the big banks reside and it’ll head straight to smaller, less-regulated firms.
In fact, regulators did propose rules they could have used to rein in MF Global’s risky trades, said Azam Ahmed and Ben Protess in The New York Times. But they “faced opposition from an influential opponent: Jon Corzine.” As a former senator and governor from New Jersey, Corzine “personally pressed regulators to halt their plans.” In the end, the watchdogs relented, and Wall Street and Corzine “won another battle”—one that has now “come back to haunt him.”