05 June 2012

MF Global Hid Risk To Avoid Capital Requirements While FINRA Regulators Looked On

One of the common elements in most of the great financial debacles seems, at heart, to involve accounting fraud that is tolerated and excused by all those entrusted with the safeguarding of the public interest and the innocent.

What characterizes the modern financial system, and its vast influence on the fabric of society, the political process, and the dialogues of public policy is the power of easy money, obtained through the mispricing of risk and brazen fraud, to corrupt the corruptible in every station of life, from the press corps to the politicians to the professors.

Truth, honor and goodness are collateral damage when everything has its price. Greed and selfishness abound, and the 'best lack all conviction, while the worst are filled with passionate intensity.'

NY Times
MF Global Dodged Capital Requirements, Report Says

Under pressure from regulators last summer to increase its capital cushion, MF Global moved some of its risky European debt holdings to an unregulated entity in an effort to avoid having to raise extra money, according to a new report. The revelation raises new questions about MF Global’s actions in its last months — in particular, how it responded to regulators. The brokerage firm had previously disclosed that it had met the capital requirements, but never mentioned that it had transferred some bonds rather than raising additional money.

The shift was detailed in a report by Louis J. Freeh, the trustee overseeing the bankruptcy of MF Global. The report is separate from the one issued Monday by James W. Giddens, the court-appointed trustee charged with recovering money for MF Global’s customers.

“This strategy allowed the MF Global Group to transfer the economic benefits and risks,” thus reducing the “regulatory capital requirements,” the report by Mr. Freeh said.

Shifting the bonds to an unregulated entity to avoid capital requirements is unusual at financial firms, corporate accounting specialists say. Regulators expressed concerns about the maneuver, although ultimately they did not block it. The Financial Industry Regulatory Authority (FINRA), Wall Street’s self-regulator, said it lacked jurisdiction to pursue the matter further.

It’s a shell game, and the problem is the regulators buy off on this stuff, and then when it implodes, they always look so stupid,” said Lynn E. Turner, the former chief accountant at the Securities and Exchange Commission. “Common sense says why would you accept these types of shenanigans..."

Read the rest here.