US Financial Regulators Rethink Dodd-Frank After MF Global Scandal

We reported at the beginning of the month on the sudden demise of MF Global Inc.  If you recall Jon Corzine, an ex "Democratic" governor and senator, and (coincidentally?) also an ex CEO of Goldman Sachs, presided over the seventh largest bankruptcy in U.S. history.  The Commodity Futures Trading Commission, one of the regulators charged with keeping an eye on shady dealings on Wall Street on behalf of U.S. taxpayers, has just released a long statement about the affair. Amongst other things CFTC Commisioner Scott D. O’Malia has this to say:

Segregation of customer funds is fundamental to our markets. The Commodity Exchange Act expressly prohibits intermediaries like MF Global from (i) commingling customer and proprietary funds (i.e., house funds) and (ii) using customer funds to support proprietary transactions. It appears that MF Global failed this fundamental responsibility.

To the the uninitiated it sounds a lot like the CFTC were failing in one of their fundamental responsibilities also, since what they "expressly prohibit" happened anyway. Addressing that point Mr. O’Malia has this to say:

While it’s tempting to compare the MF Global proceedings to the Lehman Brothers Inc. (“LBI”) bankruptcy, it is important to keep in mind that MF Global is unique because customer funds are missing from the segregated account. In the LBI bankruptcy, there was no shortfall in the segregated account, which meant that selling the segregated account, with its customer positions and funds, to Barclays was a straightforward process. In contrast, since the Securities Investor Protection Corporation (“SIPC”) placed MF Global into insolvency on October 31st, MF Global customers with positions have received an inadequate percentage of their total funds. Customers that thought it prudent to liquidate their positions prior to the insolvency (the “Cash-Only Customers”) have received none of the funds used to secure their trading at all. The inability of MF Global customers as a whole to access their funds has affected trading in futures markets, and has shaken public confidence in our customer protection regime.

With the public's confidence duly shaken, the CFTC propose:

To renew public confidence in segregation and to assure the public that MF Global is an isolated incident, the Commission should immediately take action.

To the uninitiated this sounds a lot like closing the stable door after the horse has already bolted. It seems:

The Commission should also take longer-term actions to increase public confidence. Without disclosure to its customers, MF Global dramatically changed the risk profile of its proprietary operations and its incentives relating to customer intermediation. That is unacceptable. The Commission should adopt improved transparency measures to give customers more comprehensive information on the risk profiles of the intermediaries with which they entrust their hard-earned money.

The Commission must use MF Global as its own teachable moment and reconsider its final and proposed rulemakings under the Dodd-Frank Act. First and foremost, we must reconsider the proposal that would limit investments of segregated customer funds. Somewhat prematurely, this proposal is being hailed as the solution to the MF Global problem. At this time, we have not identified the cause of the segregation shortfall, and any action that we take obviously cannot be the solution until we have greater clarification on what caused the problem.

The uninitiated wonder if The Commission have noticed that many people were unhappy about "the risk profile of [financial firms] proprietary operations" and the associated "transparency measures" long before MF Global disappeared down the drain. Possibly The Commission might ask itself if that's one reason why some of those uninitiated in the ways of The Masters of the Universe are currently occupying Wall Street and other streets around the Globe?

In conclusion Commissioner O’Malia states that:

Many have said that the failure of MF Global was not systemic and that we are lucky. I don’t view it in the same light. I am certain that the thousands of individuals who have lost money or can’t get access to their rightful property don’t share that sentiment either.

Your humble reporter hasn't personally lost any money courtesy of Jon Corzine and MF Global, but nonetheless he doesn't feel lucky either. All this makes him wonder once again "What if the globe wasn't governed by politicians and bankers?". Surely it couldn't be any worse, could it?