MF Global fallout

November 2nd, 2011

WilliamsMarkThe following opinion piece was written by Mark Williams, an expert on risk management who teaches finance at BU’s School of Management. Williams is a former Federal Reserve examiner and the author of Uncontrolled Risk: The Lessons of Lehman Brothers.

 

 

MF Global is a reminder that Occupy Wall Street has a valid point – excessive risk-taking on Wall Street is alive and well and effective regulatory oversight remains nonexistent. In a post Dodd-Frank world, this is a frightening thought.

In 2011, three years after the worst financial debacle since the Great Depression, Wall Street continues to operate business as usual. Having been pushed into a global recession, the world has changed but Wall Street remains frozen in time. Large risk taking, excessive leverage and the pursuit of larger bonuses remain in fashion.

MF Global was an Enron, a Lehman Brothers, and a Refco all rolled into one. They apparently engaged in unethical behavior, took risky bets using excessive leverage and when the market woke up to this fact, a run on the bank closed the company in a matter of days.

Regulators – including the SEC, CFTC, and FINRA – missed the risky business practices and weak controls allowed to exist at MF Global. The rating agencies had the firm rated investment grade almost until its bankruptcy. If only the regulators and rating agencies had identified these risky behaviors earlier. Without early warning, customers were the ones most harmed.

News that customer monies are missing is just another sign that finance and ethics remain mutually exclusive on Wall Street. The very traits that are required to build a strong business – trust and honesty – seem to remain in short supply.

The Occupy Wall Street movement claims that Wall Street is a rich man’s game rigged against Main Street and operating to benefit the 1 percent. MF Global proves this point. The collapse of MF Global, the quintessential Wall Street insider shop, was simply a gambling casino for the Wall Street elite.

Occupy Wall Street has been given a gift – MF Global on a silver platter. This Wall Street movement should drop all other placards and simply declare ‘Remember MF Global.’

MF Global is proof positive that meaningful reform in how regulators oversee our financial firms is needed. To restore investor trust, regulators need to start doing their job and policing for those that put excessive risk-taking and personal gain at the cost of the overall market.

MF Global will undoubtedly lay off many of its more than 2,700 workers, adding to the ranks of the Occupy Wall Street movement. Will Wall Street wake up to the fact that the 99 percent fund them or will more need to collapse before regulatory oversight reform is truly implemented?

 

Contact Williams at 617-358-2789; williams@bu.edu


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