How MF Global Beat Red Tape

11/22/2011 10:17 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

A meeting with the Corzine pal running the CFTC coincided with delay of a rule that might have safeguarded the missing client funds, writes senior editor Igor Greenwald.

US businesses are choking on excessive regulation. Who hasn’t heard that excuse for our current predicament? Certainly the Hartford Financial Group (HIG) has.

And, lo and behold, a recent poll of small entrepreneurs commissioned by the struggling insurer seemed to confirm its suspicions. “According to the study,” bellowed Hartford, “small business owners identify economic constraints, such as government rules, regulations, and taxes, as the single biggest factor holding them back (37%).”

Actually, a closer inspection of Hartford’s data by The New York Times revealed that more like 9% of the respondents were preoccupied with regulation, and only 2% sweated tax policy, primarily. The other 26% lumped into a laissez-faire mob were more concerned with the shortage of paying customers and other “economic constraints.”

But let’s not linger over this instance of business marketing and political propaganda masquerading as social science. Let’s celebrate instead one of the many recent successes in liberating the private sector’s boundless energies from the dead hand of the state.

This tale of corporate heroism and perseverance starts at the end of the 20th century, when—two decades of hectic deregulation notwithstanding—US futures dealers were still oppressed by the requirement that briefly borrowed client funds be invested only in safe, dull US federal, state, or municipal obligations.

Over the next decade, this oversight was corrected in a series of rule changes championed by the securities industry, so that, by 2008, customers’ money could be wagered on almost anything short of the seventh race at Aqueduct, notably including corporate bonds as well as the debt of foreign nations.

Then the Frank-Dodd financial reform came along, seemingly out of nowhere, and threatened to ruin a good thing for everyone. The Commodity Futures and Trading Commission (CFTC) proposed crossing foreign bonds as well as corporate ones lacking government guarantees off the list of things the brokers could rent with their clients’ funds.

The industry saw the liberties it had lobbied so hard to secure under threat and objected strenuously. Our capital isn’t free, argued one insider; restricting how we can invest client funds will cost us money, force us to raise fees, and crimp competition for everyone.

Her name was Laurie Ferber, and she was MF Global’s (MFGLQ) general counsel, working for fellow Goldman Sachs (GS) alum Jon Corzine while lobbying yet another Goldman graduate, CFTC Chairman Gary Gensler.

In her 2010 letter to the CFTC, Ferber made the interesting argument that additional restrictions were not needed because the bad things they were trying to prevent hadn’t happened yet. For example, “no foreign country that actually defaulted on its debt resulted in any [futures broker] being unable to return its funds to customers upon request."

Lesser business minds might have relied to the power of this argument to have the desired effect. But Ferber was getting rich for a reason, so she and Corzine visited Gensler at the CFTC the very day the commission changed some of its rules to comply with Frank-Dodd. (Bob English of has the details.)

And guess what: the rule changes Ferber had protested seven months earlier were not part of the deal, left by the CFTC for a later date. A date, as it turned out, that would come after MF Global’s bankruptcy as a result of ill-advised speculation on European sovereign debt, a bankruptcy that has left $3 billion in client funds in limbo and as much as $1.2 billion apparently missing.

Gensler is a Democratic appointee and longtime advisor to Bill and Hillary Clinton. He’s recused himself from the investigation into the biggest fiasco on the CFTC’s turf in the agency’s history to avoid his ties to Corzine being a “distraction.”

But three months earlier, he displayed no such qualms in meeting Corzine to discuss rules the commission was acting on that very day. Who says Democrats don’t cater to business interests?

Some might argue that Gensler should resign because he’s lost all credibility as a regulator; they clearly are not familiar with the Greenspan doctrine that industry knows best what regulations it requires.

If Gensler hadn’t heard Corzine out, who knows what might have happened to MF Global’s ambitious expansion plans. Corzine might have complained to pollsters that regulatory uncertainty was holding him back. And we couldn’t have that in our hour of need.

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