They were very bad in Europe; leveraged 33:1 so there is no space of error when the firm is leveraged like that.
The three lessons that are can be shared from MF Global’s death:
- Accounting loopholes have to be closed and oversight improved.
- Non-bank financial firms should have a lead regulator.
- Rule-writers should consider “non-systemic” firms as well as “too big to fail” banks.
But there is a contrast view to it:
More regulation, more rules, Dodd Frank/EMIR/FATCA and to no purpose at all.
A banker wants to bet his firm on the direction of sovereign debt. If successful, we call him Soros and pat in him on the back. And if not, the firm is closed down. Regulations were pointless, because no rule book can reign in human ingenuity.
If you regulate all risk away, we might as well pay bankers the minimum wage. Just let it go, banks have been making bets, and losing their shirts, for so long as there have been debt and debtors. Trying to eliminate risk is just a fool’s game, just like trying to keep all the marbles in the EU.
Another deadly combination includes:
1-Actuarial Approach – You to work hard and do sound credit analysis.
2-Market Based Approach – CDS & Derivatives – Model based approach where lots of corners are cut.
When you institute the Market Based Approach which really is a house of cards approach, any lose in confidence is deadly. – Lehman/BSC/IKB/Irish/Islandic Banks.
Which one do you think most firms on Wall Street follow? Which one did MF Global Follow?