The MF Global story gets worse and worse; the firm had been dipping into client funds for weeks and the customer shortfall may be as high as $1.2 billion. Therefore I was thrilled to hear that the Board resigned last week, and that Jon Corzine will be forced to testify in front of Congress. Meanwhile regulators moved quickly for a change. Bloomberg reported:
U.S. derivatives regulators voted today to restrict how brokers can invest customer funds, acting on a delayed rule after as much as $1.2 billion went missing before MF Global Holdings Ltd. sought bankruptcy protection. The Commodity Futures Trading Commission voted 5-0 at a Washington meeting to limit how brokers invest clients’ margin in money market funds, and ban investments in foreign sovereign debt and in-house transactions such as repurchase agreements.
This is a good start, but it doesn't address the client money segregation bit of the problem. In today's FT, two professors had some suggestions though. Darrell Duffie, Professor of Finance at Stanford University’s Graduate School of Business, and Joe Grundfest, Professor of Law and Business at Stanford Law School and a former Commissioner of the SEC, penned a comment suggesting that the rules be more stringent.
They offered two possibilities: 1.) Segregate customer funds with an independent custodian, and 2.) Form an information-technology firewall at the broker, creating a “virtual custodian”. Both of these are valuable and realizable solutions. So why did the comments to the article say things like this is "old news" and one wondered why such a big deal is being made of "tiny MF?"
I'll tell you why it is a big deal. A good friend of my husband's, his boss, and some colleagues of his are missing hundreds of thousands of dollars of their investments. MF Global has made good only a tiny percentage of their money thus far, and they are very concerned that they may not get any more back. And I know people who are MF Global employees, they are also receiving a good rogering by the firm; part of their compensation was tied up in MF Global shares which are now as good as worthless.
The fallout is large, it is personal and it tells a story of what happens when transparency is not mandated. And although investors are getting more savvy, as purported by the FT's Gillian Tett's column on November 24th, it should not be incumbent upon them to inspect every crevice and cranny of their broker's books before they turn over their money to be invested.