Can federal watchdogs squeezed for funding prevent future MF Globals?

It’s not just Jon Corzine who is in the hot seat this morning at the House Agriculture Committee hearing on MF Global’s bankruptcy. First to testify was Jill Sommers of the Commodity Futures Trading Commission, the federal watchdog responsible for overseeing the industry. Rep. Frank Lucas, the GOP chair of the committee, grilled Sommers about whether the CFTC had failed to foresee the firm’s bankruptcy—and prevent up to $1.2 billion in customer funds from going missing.

Jill Sommers, commissioner of the U.S. Commodity Futures Trading Commission (CFTC), left, and James Kobak, lead council for the trustee for the liquidation of MF Global Holdings Inc. (SOURCE: BLOOMBERG ) “There were warning signs at MF Global in the weeks if not months in the weeks beforehand,” said Lucas. “Was the CFTC aware of these warning signs?”

In fact, the CFTC isn’t responsible for auditing brokerage firms like MF Global. That responsibility falls to private, industry-funded regulators like the Chicago Mercantile Exchange, which sent the federal agency a report that first raised flags in August about MF Global, explained Sommers. But even if federal watchdogs like the CFTC didn’t fall asleep behind the wheel, they are now under major pressure to step up their role.

At the hearing, House members pressed the CFTC to promise to adopt better protocols in the future, and Sommers promised that the agency would tackle the job. “The Commission has a great deal of work ahead to get customers funds back where they need to be, to determine what went wrong with segregated funds at MF Global...and to determine what needs to be done to prevent a similar circumstance in the future,” she said at the hearing.

At the same time, however, both Democrats and Republicans have agreed separately to support budget cuts to the CFTC even as the agency has taken on additional responsibilities. CFTC chair Gary Gensler has previously blamed budget cuts for hindering the agency’s ability to implement Dodd-Frank, but both parties have agreed to slash funds for the CFTC in 2012, giving them 20 percent less than what Senate Dems had originally proposed.

In response, some Democrats are trying to restore funding to the agency through a separate bill that Reps. Rosa DeLauro (D-Conn.), Peter Welch (D-Vt.) and Leonard Boswell (D-Iowa) are introducing today, as Morning Money’s Ben White reports. At the hearing, Boswell told Sommers that he didn’t blame CFTC for what happened, but added that “I am concerned you have the resources to do the job you’re expected to do.” Sommers replied that it was “premature” for the agency to estimate how much more money it would need, but emphasized that it would be impossible for the agency to “implement and enforce Dodd-Frank without additional funding.”

But some other Democrats and Republican members made it clear that they believed the CFTC’s leadership itself was the problem, not the funding levels. At the hearing, Rep. Timothy Johnson (R-Ill.) took a shot at the “inordinate delays that the CFTC has had on regulations and rules”— and blasted Gensler, in absentia, for recusing himself from the investigation and “the most important hearing for this committee in years.” Gensler has recused himself from the MF Global investigation—and the hearing today—citing his past working relationship with Corzine when both were at Goldman Sachs. But after MF Global’s failure, reports surfaced that Corzine had lobbied Gensler to prevent stricter CFTC regulations in recent months.

Johnson pressed Sommers to explain why Gensler was absent. “Is it because he’s part of the same Goldman Sachs fraternity in which ministers of finance are invested, in which Corzine is invested?” he asked. Sommers simply said she had no inside knowledge of Gensler’s whereabouts.

Rep. David Scott (D-Ga.) also blasted Gensler’s absence from the hearing room Thursday: “It’s an example of why the American people are rapidly losing faith in Washington.”