Thursday, November 17, 2011

the sad case of Jon Corzine and the difficulty in govt regulation of the market (in reality vs. wishful thinking)

Speaking of "The Big Short" and my review of it, here's some of the amazing story of Jon Corzine-- former Democratic Senator and Governor from New Jersey-- and the fall of his investment firm, MF Global.

In the WSJ, Michael Rapoport describes how Corzine lobbied against greater regs, worked to hide the risks he had taken. All quite instructive-- and all quite connected to the dilemmas described in Lewis' book...

For the past two years, MF Global Holdings Ltd. may have disguised its debt levels to investors by temporarily slashing the debt it was carrying before publicly reporting its finances each quarter...ratings agencies defend their actions...The activity, referred to in the financial industry as "window dressing," suggests that the troubled financial firm was shouldering more risk and using more borrowed funds to facilitate its trading than investors could easily detect from the firm's regulatory filings...the firm's aggressive approach to the issue speaks to its strong appetite for risk, even as European markets spiraled lower this summer. But that appetite was not always completely apparent to investors...In each of the past seven quarters, from late 2009 to mid-2011, MF Global's quarter-end borrowings were an average 16% lower than the quarterly average...Window dressing isn't illegal, but it can mask a financial institution's true levels of borrowing and risk-taking. That is an issue of particular concern with MF Global, where borrowings fueled large trades on European sovereign debt that helped lead to the firm's demise...

MF Global...lobbied against a Commodity Futures Trading Commission proposal that would have placed tighter restrictions on how futures-trading firms can invest cash sitting in customer trading accounts. MF Global Chief Executive Jon Corzine in July participated in a conference call with CFTC officials and strongly opposed the restrictions, saying they would hurt business.

This WSJ editorial notes the absence of (an effective) regulatory presence, even after the subprime fiasco. 

If reports of missing funds are true, it's a significant embarrassment for the firm's regulators at the Commodity Futures Trading Commission. CFTC Chairman Gary Gensler has been leading the Beltway chorus for years in reciting the (false) story that the absence of regulation allowed AIG and its credit-default swaps to wreak havoc in 2008. 

Never mind that the Treasury Department's Office of Thrift Supervision did regulate AIG, and that an OTS official testified before Congress that the agency signed off on the swaps because it didn't expect Armageddon in the housing market. Mr. Gensler nonetheless succeeded in gaining for himself and his agency broad new powers over the derivatives market as part of Dodd-Frank in 2010...

It is also no small irony that MF Global was among the cheerleaders for Mr. Gensler's plans for new clearing arrangements under Dodd-Frank. Maybe if the regulators hadn't been so busy writing new rules, they would have checked if MF Global was following the old ones.

It was always fanciful to believe that the regulators who failed to prevent the last financial meltdown would somehow prevent the next one. The surprise is that this mirage of regulatory competence has been exposed so quickly.

Some takes on Corzine have been very rough. (See: Jon Stewart with a funny segment with the usual colorful language.) Others, like this from the AP's Angela Delli Santi, have been quite (overly?) respectful. This WSJ editorial notes that at least he lost, mostly, his own money (vs. taxpayers'). 

Finally, this Holman Jenkins WSJ op-ed revisits the Corzine political legacy in light of recent events.


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