Fallout From MF Global May Get Political

The collapse of brokerage firm MF Global will definitely have political consequences in Congress, the Federal Reserve and among regulators, according to Dick Bove, vice president of equity research at Rochdale Securities.

United States Federal Reserve
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United States Federal Reserve

"A political issue of this thing being blown up in congress is definitely going to happen. What we saw was a 'rogue' trader operating without any oversight and we have seen what can happen when rogue traders do that," Bove told CNBC Tuesday.

He said that MF Global functioned as if this was 2007, not 2011.

"It placed bets and put the firm at risk in terms of the bets and the action it took in the marketplace. A firm in the financial arena should never put the firm at risk. Any firm that does that is a rogue firm," Bove said.

MF Global filed for bankruptcy Monday following the failure of last-ditch attempts to salvage the company and sell it to a rival brokerage firm.

MF Global did not immediately respond to a request for comment.

Jon Corzine, who headed up MF Global once ran Goldman Sachs , had hoped to emulate some of Goldman's success albeit on a smaller scale. Bad debts placed on the euro zone were being blamed as the cause of its downfall.

The New York Times reported on Tuesday that US regulators are looking into allegations that hundreds of millions of dollars of customers money went missing in recent daysto support the firm’s own trades as it faced collapse. The collapse of MF Global has been likened to the collapse of Lehman brothers in 2008, which precipitated the global financial crisis.

Bove said that the attempts to clean up the financial services sector through various forms of legislation, including Dodd-Frank and the Volcker Rule – intended to prevent firms from putting the system at risk, had been ignored by MF Global.

"It ignored all of those rules and it was not being regulated by the Federal Reserve because the Fed thought this firm was below the radar of firms it would look at. Now the Federal Reserve will come under considerable pressure for not regulating this firm and potentially many others that trade currencies, commodities and fixed income products," Bove said.

He said the collapse of MF Global was exactly what the Occupy Wall Street movement has been arguing about and what President Barack Obama has publically stated as needing to control “these guys.”

"Even if the financial issues can be contained the political issues are not. We can assume that there are other private firms who are doing what MF global did, there's no question about that but it's going to be difficult to uncover that," Bove added.

(Ed. Note: By statute the Fed only regulates banks. Broker-dealers like MF Global fall under the purview of other agencies unless they are found to be a systemic risk by the Financial Stability Oversight Council. The Fed chairman is a member of that council).