MF Global – Regulation Matters?
By Staff News & Analysis - November 03, 2011

Many Alarms Rang Before MF Global Crashed … A little before 2 a.m. on Monday, Jon S. Corzine was in MF Global's offices in Midtown Manhattan, scrambling to cut a deal to save his firm. Haggard from too little sleep, at times pacing the hallways, he at least had a handshake agreement with one suitor for the firm. Then the chief executive was interrupted to handle a brief conversation that would stop the deal talks cold: hundreds of millions of dollars in customer funds, he was told, could not be located. Three hours later, the board of MF Global, with no bidders or options left, voted to file for bankruptcy, the largest failure on Wall Street since Lehman Brothers in 2008. While the commodities and derivatives brokerage firm fell apart with ferocious speed, the collapse came after regulators raised warning flags for more than four months. They told MF Global it needed to raise more capital, and they asked about risky transactions involving European debt … Three years after the financial crisis, Wall Street executives are still fighting regulators' demands. It also shows that even when the watchdogs sound the alarm, it is not necessarily enough to save a firm. – New York Times

Dominant Social Theme: MF Global's crash shows that regulators are right and that more regulation is needed.

Free-Market Analysis: The collapse of John Corzine's MF Global is predictably being treated by august organs such as the New York Times as an argument for more regulation. One wonders how, after nearly a century of disasters in every part of industry, the argument can be made for STILL MORE regulation.

The US federal government spends something like US$3 trillion a year, is something like US$200 trillion in debt and sprawls across the domestic scene like some sort of beached whale. The shadow of its bloated corpse colors numerous nations with fear, violence and even bankruptcy.

Yet the New York Times is confident that this entity can capably supervise whole industries. Even those who are making and enforcing the regulations have no idea of what they're doing or the impact that their enforcement will have on the larger industry.

The 2008 economic crisis caught regulators "by surprise." The bankruptcy of millions of Americans caught the regulators by surprise. The Lehman bankruptcy gave rise to unintended consequences that the regulators did not anticipate. Bernie Madoff's scheme "embarrassed" regulators. And now we learn that regulators were "concerned" about the risk exposure of Jon Corzine's MF Global – but not concerned enough to do anything about it.

Regulations are good for two things. They raise the barrier of entry for smaller entrepreneurs and innovators, thus concentrating corruption with the networks of extant industrial leaders. And they lead to regulatory capture whereby the largest and most corrupt entities gain more and more power at the expense of everyone else. Here's more from the Times article:

Now, multiple regulators and the Federal Bureau of Investigation are examining the firm's collapse, trying to determine what went wrong and where the missing money, now suspected to be roughly $630 million, went. The CME Group, a major exchange where MF Global traded until this week, said on Wednesday that Mr. Corzine's firm had appeared to transfer client money sometime last week "in a manner that may have been designed to avoid detection," a serious violation of Wall Street regulations.

MF Global did not disclose the shortfall in client money to CME or to regulators until early Monday morning, shortly before the firm filed for bankruptcy. A person close to the company said it was not aware of any audit by the CME Group. Neither Mr. Corzine nor MF Global have been accused of any wrongdoing.

Just before 1:45 a.m., Mr. Corzine received the information telling him that customer funds were missing. That alarmed Interactive Brokers, and the firm walked away from the bargaining table. An MF Global executive then notified the regulators, who were still camped in the firm's Manhattan offices. Commodity Futures Trading Commission officials called Mr. Gensler, waking him around 2:30 a.m. to join a conference call with MF Global and other regulators.

MF Global executives could not stay on the phone for long — they needed to convene the board and prepare for a bankruptcy filing. But the phone line remained open for several hours, as regulators discussed how to handle the first major financial failure of the postcrisis era.

We're sure regulators will continue to "discuss" the current failure and more to come. They will discuss, Congress will pass more regulations. People will go to jail as Occupy Wall Street's neo-French Revolution revs up. None of it will make a difference.

After Thoughts

Regulation is a fundamental dominant social theme of the elites and they will flog it until people wake up and realize that every law and regulation is merely a price fix. Price-fixing merely distorts the underlying economy and transfers wealth from creators to those who had nothing to do with it and don't know how to use productively. Regulation "cures" little and "fixes" less. That's economic reality, no matter what lawyers and politicians want people to believe.

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