Gensler: MF Global Highlights Capital Shortfall Risks
Gary Gensler said that in the case of MF "the events are just but another reminder of the importance of having strong regulations to have enough capital in place early and to be ever alert for when short-term funding is starting to dry up."
At the Securities Industry and Financial Markets Association annual conference in New York on Monday, TheStreet asked Gensler whether MF Global's failure to sell itself at the last second to Interactive Brokers (IBKR) signals that stressed financial institutions can't find buyers, even if they aren't too big to fail -- to which he added, "when there starts to be a run on the bank, it's enormously challenging to find capital."
In MF Global's failure, it seems that both the requisite regulatory framework and capital were not in place to foster a sale that would avert a messy and loss-creating bankruptcy. While the firm was not "too big to fail" , it's unclear whether it was healthy enough for a sale.In seperate questions at a press conference, Gensler said he didn't give MF Global preferential treatment prior to its collapse last Monday and confirmed that he's recused himself from an ongoing investigation into the trading firm's collapse, which was the eighth largest bankruptcy in U.S. history. When asked whether his relationship with MF Global's former chief executive Jon S. Corzine was behind a decision to delay rulemaking about how brokers could manage client funds, Gensler said "that's just not the case." Gensler, who worked with Corzine when the former MF Global CEO co-headed Goldman Sachs (GS), said he chose to recuse himself from the CFTC's investigation into MF's demise because he "didn't want to be a distraction." The decision to recuse himself was made prior to Corzine's resignation, after which Gensler added, "the senator and I had a nice conversation." After MF Global Holdings and its Global Finance units filed for Chapter 11 bankruptcy last Monday, listing more than $39 billion in liabilities and $41 billion in assets, reports of up to $700 million in missing client funds surfaced last week and the firm also came under increasing scrutiny for risking $6.3 billion of capital to bet on European sovereign debt. Corzine resigned as chief executive of MF Global on Nov. 4 and reports also say he's hired a criminal defense attorney. MF Global's bankruptcy trustee along with the CFTC, Securities and Exchange Commission and Chicago Mercantile Exchange (CME) are investigating missing customer funds that should have been held in segregated accounts from MF's trading account, while Bloomberg reports that the Federal Bureau of Investigation has started a probe, citing a person familiar with the matter. Late Friday, Bloomberg also reported that up to $658.8 million in missing client funds had been located at its clearing firm JPMorganChase (JPM). In the firm's bankruptcy petition, MF Global's lawyer Kenneth Ziman said that "to the best knowledge of management, there is no shortfall," according to reports of the proceedings by Bloomberg. That Tuesday, in a call with analysts, CME Group group Chief Executive Steven Donahue said, "CME has determined that MF Global is not in compliance with CFTC and CME customer segregation requirements." TheStreet reviewed MF Global's finances and that its leverage and business model put the firm in crisis prior to Corzine's arrival as chief executive in March 2010. -- Written by Antoine Gara in New York
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