It's been just over a year since MF Global, the commodities brokerage firm led by Jon Corzine, filed for bankruptcy. On Thursday a House subcommittee investigating that firm's failure delivered its autopsy report. It faults Corzine, a former U.S. Senator and Governor of New Jersey, among others for the firm's failure.
The report from the Financial Services Subcommittee on Oversight and Investigations found that "Jon Corzine caused MF Global's bankruptcy and put customer funds at risk" by trying to turn the firm into a full-service investment bank before it was profitable from its existing commodities business. Corzine also exposed the firm's clients it to additional risks by investing heavily in European sovereign debt.
The report also faults the SEC and CFTC for failing to share critical information about MF Global with one another; the rating agencies for failing to identify the firm's biggest risk, namely its exposure to European sovereign debt; and the New York Fed for designating MF Global a primary dealer. As a primary dealer MF Global could buy government securities directly from the government and resell them to others.
David Kotok, co-founder and chief investment officer of Cumberland Advisors, an investment advisory firm managing $2.2 billion in assets, told The Daily Ticker that in the past the NY Fed was able to successfully and seamlessly manage bank failures. But not anymore.
"When Drexel Burnham went down, the NY Fed surveillance unit knew exactly the condition of the firm," Kotok notes. It was a seamless transition to market. Why was MF Global in this condition? Where was the responsibility for oversight?"
He says oversight now is "a regulatory mess" and he expects the situation will only get worse before it gets better.
The House subcommittee recommends that the SEC and CFTC streamline operations or merge into a single regulator and for the NY Fed to consider changing its selection process for primary dealers. The subcommittee also recommends a CFTC rule change forbidding firms to sometimes use customer funds as a source of capital for daily operations—the so-called "Alternative Method"—plus periodic monitoring of credit ratings by ratings firms.
In the meantime, Kotok suggests that the financial firms "find out what new structures will be, how to live within it and go forward."
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