MF Global Collapse Recalls 2008 Financial Crisis
The collapse of MF Global shows just how little progress Wall Street regulation efforts have made since the 2008 financial collapse.
MF Global filed for bankruptcy protection on Monday, after succumbing to risky bets on European debt. The manner in which the firm collapsed — due to excessive leverage and proprietary bets — immediately calls to mind the 2008 collapses of companies like Lehman Brothers. According to The Economist, MF Global revealed in its bankruptcy filing that it had “less than $1 billion in equity supporting more than 40 billion in assets, a staggering amount of leverage in an era when financial firms were meant to be ratcheting down risk.”
What’s worse, shortly before MF Global fell apart, its CEO, former New Jersey Democratic Governor Jon Corzine personally lobbied federal regulators to cease their efforts to control the exact kind of risky trading activity that led to his firm’s collapse.
As a former sovereign debt trader at Goldman Sachs, Mr. Corzine wagered that the European regulators would backstop any default. So even as dark clouds circled over Europe, he sensed an opportunity. Starting in late 2010, MF Global began to accumulate short-term sovereign debt of countries like Italy, Spain and Portugal.
MF Global financed these purchases through complex transactions known as repurchase agreements.
Leading the government’s effort to curtail these arcane practices was Gary Gensler, the chairman of C.F.T.C., who had worked for Mr. Corzine at Goldman Sachs. Mr. Gensler pushed for the proposed change in October 2010, and planned to bring it to a vote this summer.
MF Global has four outside lobbyists in Washington, tiny by Wall Street standards. But it was Mr. Corzine who marshaled the firm’s response to the proposal, lobbying most of the agency’s five commissioners directly. One commissioner said he visited with Mr. Corzine in MF Global’s headquarters, and acknowledged being impressed by the Wall Street titan, said a person with direct knowledge of the meeting who asked for anonymity because the meeting was private.
The C.F.T.C. polices the markets for futures trades. Staff members there often do not have a Wall Street pedigree.
Mr. Corzine’s background in finance made him highly credible, agency officials said.
Using his considerable influence as a former Goldman Sachs executive, U.S. senator, and governor of New Jersey, Corzine managed to convince regulators that they were trying to “fix something that is not broken.”
Well it certainly looks broken now.
MF Global’s collapse is just the most glaring in a long list of signs that Wall Street shouldn’t be allowed to regulate itself. Corzine and his fellow CEOs consistently argue against increased regulation, and they almost as consistently demonstrate that they learned nothing from the 2008 collapse. As a result of Corzine’s arrogance, MF Global investors are out $600 million, and the entire financial system has once again been made vulnerable.
The Dodd-Frank financial reform law passed last year was supposed to protect against collapses like this, but its rules remain almost 90 percent unwritten — in large part due to the concerted efforts of Wall Street lobbyists to slow-walk regulation. Clearly, the time has come for the government to stop trusting Wall Street bankers when they say that they don’t need oversight.
And until some serious steps are taken to reform the way Wall Street does business, failures like those at MF Global will continue to be all too common.