Congressman Capuano's Report Says That Corzine Is Not Only One to Blame for MF Global's Collapse (with Lofchie Comment and YouTube Videos)

In an addendum to the Financial Services Subcommittee Report on MF Global's Bankruptcy, Congressman Michael Capuano argues that, while the version of the MF Global study produced by the Republican members of Congress properly imposed blame on CEO Jon Corzine for MF Global's failure, it imposed too great a portion of the blame on him as well as on some others. The report produced by the Democrats doesn't defend Corzine; it only spreads the blame more. The report did defend the ratings agencies, saying that they had done a "better job" rating MF Global than with financial agencies pre-crisis, as the rating agencies had treated MF Global debt as "essentially junk."

In addition to blaming Corzine, Capuano blames the CFTC for allowing MF Global to use a method of segregation referred to as the Alternative Method (i.e., a way to account for funds required to be set aside), that allowed the firm to take risks with customer funds. (As Capuano notes, use of the Alternative Method is not permitted any longer.) Capuano also seems to blame the CME for failing to adequately monitor "an entity in such dire financial straits."&

Representative Capuano also seems to blame the NY Fed for failing to conduct adequate diligence of MF Global in its bid to become a primary dealer (although he does not suggest any connection between the NY Fed. and MF Global's failure). Also, immediately after blaming the NY Fed. for being lax as to MF Global, he says that, when the NY Fed had tougher standards, the result was a decline in number of primary dealers, arguably forcing an increase in the cost of government debt (which would seem to lead to the conclusion that the NY Fed can't as a practical matter, be overly tough in its approval standards).

The report recommends merging the SEC and CFTC, but, so long as they are not merged, the report recommends that both Commissions be fully funded.

Lofchie Comment: Given the great mutual affection expressed by the Democrats and the Republicans in their separate reports, it is somewhat funny that a principal finding of each report is that the SEC and the CFTC do not get along. Perhaps this song will help. The obvious point made by all of the reports is that the segregation rule used by MF Global -- the so-called Alternative Method -- was a bad system. Whatever damage was done by that rule, the rule is no longer in place, so there is not much more to say about it.One point in Representative Capuano's speech that I did find interesting (without knowing if it had any validity) is that he blames the CME for being lax in its supervision of MF Global. When CFTC Chairman Gensler testified before Congress as to MF Global, he also pointed to the CME as the entity's primary regulator. For me, this raises an interesting questions, not with respect to MF Global, but rather as to the future of regulation: What should be the role and responsibility of self-regulatory organizations? Should an exchange be the primary regulator of its members? Should the authority of FINRA be expanded as to investment advisers? Questions as to the proper role, responsibility and funding of self-regulatory organizations are extremely important as to the future direction of our financial regulatory system (or, perhaps the Democrats and the Republicans, the SEC and the CFTC, the Patriots and Jets might consider the questions posed herein).

View Report in full here (links externally to PDF).Related News Item: Financial Services Subcommittee Report on the MF Bankruptcy (with Lofchie Comment).