The push for increased oversight of the financial investment and advice industry may have gotten an unexpected boost.
Thanks to the unfolding meltdown at MF Global Holdings Ltd., which filed for Chapter 11 bankruptcy protection last Monday, it appears that 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 LLC, a $7.2 billion advisory firm.
Indeed, several parts of Dodd-Frank that are crucial to the financial advice industry — a self-regulatory organization for investment advisers, a single fiduciary standard, to name two — have yet to be carried out and face opposition on Capitol Hill.
It is possible that 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 financial 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 Jon Corzine was leverage.
Mr. Corzine, the former co-chairman of The
Goldman Sachs Group Inc. who went on to serve New Jersey as a U.S. senator and governor, resigned from the company Friday,
Although 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 financial support, executives 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 Chapter 11 filing, the company reported $41 billion in assets and $39.7 billion in liabilities. The value of those assets may be subjective, however, as they were 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.
The irony in this story: A high-profile former Democratic politician who returned to regulation-averse Wall Street is providing his party with some ammunition 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 “gets implemented.”
On that day in June 2010 — less than three months after taking over as head of MF Global — he said, “Risk creates opportunity, and 75 days ago, I saw a great opportunity to intermediate risk and create opportunity.”
Email Jeff Benjamin at [email protected]
