“That was not a case of derivatives escaping scrutiny,” said Frank, who crafted the law that now bares his name. “The derivatives themselves were covered by the bill. Under the bill, they had to get post margins for these [trades].” It’s true that regulations forced MF Global to comply with capital requirements that limited leverage on the risky bets they made on sovereign debt in troubled European countries. When MF Global failed to post enough capital to back up those futures contracts, regulators insisted that they do so. But at that point, MF Global was already in a downward spiral and reportedly resorted to using at least some of the customer funds to prop up the firm’s daily activities, though it’s still unclear whether the money was directly used to back up its bad European bets. Even now, about $600 million in customer funds are still missing, and there’s still speculation as to where it went. “They stole the customers’ money to put up the margin money,” Frank alleges. Federal authorities are still investigating the case.
The failure of MF Global didn’t result in a systemic collapse, and the firm’s demise was partly the outcome of bets on Europe that were simply unwise. But federal officials themselves have acknowledged that weak regulations could also be partly responsible for the MF Global mess, particularly with regard to the missing money. Earlier this month, the Commodity Futures Trading Commission ordered a review of the private, industry-funded regulators who are responsible for overseeing futures brokerages, to determine whether they and other watchdogs missed early warning signs.
In fact, the CFTC has already passed a new regulation that some have dubbed the “MF Global rule,” which puts stricter limits on what these firms can do with customer funds. But Frank is right that MF Global’s most egregious mistake wasn’t to make derivative bets in the first place, but to use funds in ways that went beyond the activities at the heart of the 2008 crisis. “It’s like putting up a sign--‘Please, no stealing,’” the Massachusetts congressman said of the MF Global rule.