Why Did the NY Fed Allow Obviously Troubled MF Global Primary Dealer Status?
Surely it couldn't have been because Jon Corzine is such a charming bastard.
Now bankrupt MF Global lobbied the New York Federal Reserve heavily to become a primary dealer, eventually succeeding after a delay sparked by a regulator flagging internal control problems.
Thomas Baxter, the New York Fed's general counsel, revealed the regulator's behind-the-scenes dealings with the futures brokerage, including a personal meeting with former MF Global chief Jon Corzine, in testimony prepared for a congressional hearing on Thursday.
The Fed delayed approving MF Global's application for primary dealer status after the Commodity Futures Trading Commission warned the Fed in April 2009 it had uncovered major compliance issues.
After a review process that included looking at audited financial reports, tax returns and an on-site visit, the New York Fed finally concluded in a January 2011 memo that MF Global "demonstrated a clear ability" to meet the Fed's standards.
That last paragraph is actually pretty funny. Just months before its collapse, MF Global "demonstrated a clear ability" to meet the Fed's standards, which tells me either the Fed has no standards or the standards they have aren't at all relevant to financial security. I mean think about it, Bank of America is a Fed primary dealer. And we know how well they are doing these days.
Of course, primary dealer status isn't an audit opinion, and it was never the Fed's job to judge whether or not MF Global was solvent. Still, you'd think they would have maybe seen something when they were checking out those audited financials and tax returns. Oh well, no one's perfect.
Find Baxter's prepared remarks for your reading pleasure here.