Wall Street Journal: Where was the CFTC?
From The Wall Street Journal
Thursday, November 3, 2011
How are the regulators going to explain this one?
MF Global, the failed firm whose chairman and CEO is Jon Corzine, has already destroyed the wealth of its investors and roiled the banking world. But now we are learning that it may have lost customer funds as well.
A major Wall Street broker in derivatives markets with $41 billion in assets, MF Global filed for bankruptcy on Monday after Mr. Corzine made disastrous bets on bonds issued by European governments. It initially appeared he was (only) gambling with his firm's own capital, but a federal official tells the Journal that MF Global has admitted diverting money out of customer accounts, which may be a violation of federal law.
This follows a report from futures exchange operator CME that MF Global was not complying with federal rules on segregating client funds. In bankruptcy court yesterday an MF lawyer said, "To the best knowledge of management, there is no shortfall" in customer accounts. But the Journal reported late yesterday that the FBI is investigating the matter.
If reports of missing funds are true, it's a significant embarrassment for the firm's regulators at the Commodity Futures Trading Commission. CFTC Chairman Gary Gensler has been leading the Beltway chorus for years in reciting the (false) story that the absence of regulation allowed AIG and its credit-default swaps to wreak havoc in 2008.
Never mind that the Treasury Department's Office of Thrift Supervision did regulate AIG, and that an OTS official testified before Congress that the agency signed off on the swaps because it didn't expect Armageddon in the housing market. Mr. Gensler nonetheless succeeded in gaining for himself and his agency broad new powers over the derivatives market as part of Dodd-Frank in 2010.
The MF Global case involves business that was unambiguously regulated by the CFTC long before Mr. Gensler built his new regulatory empire. In fact, the alleged MF Global failure goes to the basic regulatory blocking and tackling that the CFTC is supposed to perform, which includes ensuring that companies aren't raiding customer funds for their own trading.
It is also no small irony that MF Global was among the cheerleaders for Mr. Gensler's plans for new clearing arrangements under Dodd-Frank. Maybe if the regulators hadn't been so busy writing new rules, they would have checked if MF Global was following the old ones.
It was always fanciful to believe that the regulators who failed to prevent the last financial meltdown would somehow prevent the next one. The surprise is that this mirage of regulatory competence has been exposed so quickly.
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