Down Goes Corzine – But Where’s the $600 Mil?

Early in the morning of October 31st, MF Global filed for Chapter 11 bankruptcy, earning the dubious distinction of the 8th largest corporate bankruptcy in the history of American business.  Headed by Jon Corzine, the banker-politico with a diverse resume ranging from CEO of Goldman Sachs to Governor and US Senator (D-NJ), the brokerage firm was crushed by its large proprietary bets on risky European government bonds that have become the financial toxin-de-jour.  Fortunately, systemic blowback was minimal – there was no panicked “Lehman Moment” accompanied by photos of traders burying their heads in their hands.  This was a standard financial bankruptcy – a firm borrowed too much, took ill-timed risks, and did not hold enough capital against possible losses.  Unable to find a buyer, bankruptcy was the only choice.  There were no bailouts and no messy shotgun-marriage mergers.  No bankruptcy, however, is complete without its fair share of scandal and intrigue.

Throughout the frantic and contentious bankruptcy process, lawyers and regulators have been unable to account for some $600 million of client funds.  This is bad.  Clients hold accounts with brokerages so that the brokers may buy and sell securities on the clients’ behalf.  These funds are never to be used to fund firm operations, especially risky proprietary bets.  Early reporting suggests that MF may have used client money to fund its bets on European debt, bending technical SEC and CFTC rules that allowed them to skirt the limits of acceptability. Ironically, MF and a consortium of other futures brokers had aggressively lobbied to preserve these rules just months before when the government was seeking to review and tighten regulation of client funds. 


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If this turns out to be the case, it casts quite the shadow over the government’s increasing attempts to regulate the financial sector. A regulatory system pockmarked with exceptions and loopholes is no way to preserve an efficient market place.  Unless regulators plan to refuse financial institutions lobbying privileges over their own industry, history shows a tendency for those who yell the loudest to get their way, leading to a less efficient system than the original one the government sought to “fix.”  When regulators lay down for those who can make the most noise, it makes one wonder why they are even there in the first place.  Going forward, this failure shows no signs of abating.  The Obama administration’s cherished Volcker rule has ballooned from a 10-page law to a 298-page tome of federal rulemaking with exception after exception.  If these misguided attempts at reforms aren’t making matters worse for the American economy, they certainly aren’t making them any better.

Benjamin E. Chuchla