...The MF Global affair is doubly muddied up by alleged fraud and misuse of client funds. We cannot blame the NY Fed for an alleged fraud. But we can ask if the sanction for a primary dealer that fails the “transparency” and the “accuracy” tests should be limited to getting kicked out of the club. Maybe the $150 million minimum regulatory net capital requirement should be expanded, and maybe the shareholders and debt holders of a primary dealer should be told they are subordinated to claims that will include financial penalties for failure to comply with NY Fed rules. Maybe the NY Fed should take on an escrow safety-cushioning function in the same way a landlord holds a security deposit for a tenant. Maybe this whole system of New York Fed actions and primary dealer status needs reexamination. Maybe the system needs a chutzpah scan to remove the viruses.
Was the MF Global risk taking apparent? Many say no. But there are some very smart and skilled folks who say otherwise. One of them is Janet Tavakoli. Janet nailed it. For readers who are not familiar with Janet, see her website: www.tavakolistructuredfinance.com.
Here is an excerpt from a note that Janet wrote on November 3. We are fortunate enough to see her superb and timely work. We talked with Janet on Friday. She walked us through the evidence that was missed by many. Janet, you are awesome!
Janet wrote: “The fact that MF Global was exposed to default risk and liquidity risk because of these trades and that they were linked to European sovereign debt was disclosed in MF Global’s 10K for the year ending March 31, 2011, a required financial statement filed with the SEC. The CFTC and other regulators had the information right under their noses, but it appears they didn’t understand that they were looking at a leveraged credit-derivative transaction that could lead to margin calls that MF Global would be unable to meet....”Read the whole post (long) at Zero Hedge, David Kotok on MF Global, Chutzpah & the New York Fed -- Parts 1 & 2, posted by Chris Whalen