Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

How Financial Reform Helped Destroy MF Global

MF Global
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Chalk up the destruction of MF Global to yet another unintended consequence of regulation.

The Dodd-Frank financial reform provision known as the Volcker Rule may have created the opportunity for MF Global's destruction.

As the New York Times reports:

Mr. Corzine arrived just as Washington was pressing the big banks to curb their lucrative yet risky businesses. Spotting an opening, he fashioned new trading desks, including one just for mortgage securities and a separate unit to trade using the firm’s own capital, a business known as proprietary trading.

This may have contributed even more than just the opportunity for MF Global to get into prop trading in a big way. By reducing the role of "smart money," the Volcker Rule may have made pricing more unreliable.

This in turn could explain why MF Global's view of the trades could differ so much from that of its counter-parties.

It's also a sign about how Wall Street's big men react to new regulations: they try to figure out how to make money from them.

(Hat tip: Tim Carney)

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