INsider: Why MF Global could thump advisers, too

The push for increased oversight of the financial investment and advice industry may just have gotten an unexpected boost. Thanks to the unfolding meltdown at MF Global Holdings Ltd. Ticker:(MF), which filed for Chapter 11 bankruptcy protection today, it appears the anti-regulation argument is about to lose some steam. “If nothing else, this will be a rallying call for those people who support Dodd-Frank,” said Scott Colyer, chief executive and chief investment officer at Advisors Asset Management, a $7.2 billion advisory firm. Indeed, several parts of Dodd-Frank that are crucial to the financial advice industry -- an SRO for investment advisers, a single fiduciary standard, to name two -- have yet to be carried out and face opposition on Capitol Hill. It's possible the latest Wall Street fiasco could embolden regulators to line up closer to reform advocates. That, in turn, could end up adding more restrictions on advisers. It should be noted that, as Mr. Colyer pointed out, MF Global's strategy of buying short-dated sovereign debt instruments was basically sound. But what ultimately brought down this holding company for the broker-dealer run by ex-Goldman Sachs Group Inc. Ticker:(GS) co-chairman and former New Jersey Governor John Corzine, was a huge amount of leverage. While the exact details of the meltdown are still being ironed out. It goes something like this: MF Global was so keen on its bet on sovereign foreign debt that is leveraged it up about 40 times, which was enough to get the attention of regulators. That, in turn, was enough to get the attention of ratings agencies, which then grabbed the attention of investors. Once you have loaded on that much leverage it doesn't take a big price change to lead to capital calls. Thus, after what was likely a sleepless weekend of trying to find some financial support, the execs at MF Global had no choice but to use bankruptcy protection to keep creditors at bay while trying to get the house back in order. According to the bankruptcy filing, the company reported $41 billion in assets and $39.7 billion in liabilities, which might not look so bad until you consider that the value of those assets is a moving target, and priced internally at MF Global. “It's amazing to me that we could find ourselves with a company availing itself of so much leverage so quickly after 2008,” Mr. Colyer said. Even though MF Global's is the largest bankruptcy filing of the year, it is likely to be less significant to the capital markets than it is to the financial services industry. There is certainly an ironic twist in this whole story that involves a high-profile former Democratic politician (Mr. Corzine) inadvertently providing his party with some ammo to keep fighting for regulatory reform. Seventeen months ago, while speaking in Chicago at a meeting of the Managed Funds Association, Mr. Corzine expressed concerns about how regulation “get's implemented.” On that day in June, less than three months after taking over as head of MF Global, Mr. Corzine said, “Risk creates opportunity, and 75 days ago I saw a great opportunity to intermediate risk and create opportunity.”