The collapse of MF Global would never have happened had the
Volker rule been in place, according to Chicago-based
securities attorney Andrew Stoltmann.
The firm headed by CEO Jon Corzine, a former Goldman Sachs
chairman, filed for a Chapter 11 bankruptcy this week
after taking highly leveraged and un-hedged positions on
Forbes reported that the firm had bought $6.3bn of European
debt without hedging it, and that the firm was leveraged at
80 to 1 with $41bn in assets, against $39bn in debt. This
outstrips Lehman Brother’s fatal leverage levels
of 35 to 1 in 2008.
"There is no riskier asset class than European sovereign
debt at the moment. To think it was not even $1 was hedged is
absolutely incredible," Stoltmann told Global
The Chicago Mercentile Exchange later revealed Corzine
had also been using clients’ money to make trades
as financial troubles escalated at the firm. Now $700m of
clients’ money is unaccounted for.
Stoltmann says the situation illustrates the importance of
stronger regulations for banks and brokerage firms, including
the implementation of the Volker Rule.
Part of the US Dodd-Frank act and currently in draft form,
the Volker rule restricts ability of most banks and Wall Street
firms to use their own funds to buy and sell stocks, corporate
bonds and derivatives.
Stoltmann says had the Volker Rule been in place, such risky
positions would not have been possible.
"There is no question that if the Volker had been in place,
this meltdown at MF Global never would have happened. If this
had been two years from now there is no way MF Global could
have even engaged in this sort of trading and certainly
couldn’t have had a leveraged an 80 to 1 position,
and that’s why the Volker rules is so important,"
Fitch Rating’s said that its
October 27 2011 downgrade of the company's Issuer Default
Ratings (IDR) to 'BB+/B' from 'BBB/F2' was partly as a result
of the firm's increase in principal and the proprietary trading
activities that had elevated the firm's traditional risk
Fitch warned that the firm's persistently weak earnings and
leverage were "no longer consistent with an investment grade
financial institution", and that "sizeable concentrated
positions relative to the firm's capital base" had left MF
Global vulnerable to potential credit deterioration and
significant margin calls.
Rosanne Felicello, an attorney at Felicello Law, says
without proper analysis it is not yet possible to say exactly
whether MF Global’s proprietary trading would have
been within the rubric of the Volker rule as there are a number
of exemptions within and the definitions of proprietary trading
are still being worked out.
She says the bigger issue is that MF Global was using client
money that was meant to be kept separate.
"That is problem with or without the Volker rule and is a
violation of rules that area already in effect," she says.
Regardless, Stoltmann says it is "disconcerting" that even a
relatively small outfit can take these sorts of risks and he is
concerned that there may be larger players in the market with
comparable levels of exposure to European debt.