In the House of Representatives' report on MF Global (NASDAQOTH: MFGLQ ) , the desire for a splashy headline trumped substance. Not that we should be a bit surprised.
The initial "finding" in the Financial Services subcommittee report on the failed broker reads "MF Global Chairman and CEO Jon Corzine Caused MF Global's Bankruptcy and Put Customer Funds at Risk." It's a finding that's more likely to elicit yawns than anything else, since it reveals nothing that we didn't already know.
For essentially the entire year since MF Global went belly-up, it's been painfully clear that the bankruptcy of the company was driven by a bull-headed, oversized position in European sovereign debt spearheaded by Corzine. It's been similarly clear that Corzine was able to take this disastrous position by remaking MF Global as a collective of colleagues, pals, and yes-men. The Fool detailed all of this -- and more -- in our special report on MF Global's collapse in December of last year.
Not that leading with this "finding" is anything surprising. The subcommittee was a Republican-led one, and the fact that Jon Corzine -- a Democrat and a former New Jersey governor and U.S. senator -- was involved substantially complicated the case as politics muddied the waters all around. Of course, while the Corzine-related findings are yet another public shaming for the former Goldman Sachs (NYSE: GS ) chief, they offer little new hope for those hoping to see clear legal culpability from Corzine.
Also filed under "not helpful"
The finding that MF Global was "not forthright with regulators or the public" about its European bond exposure may also be more distracting than helpful. Sure, it might be found that MF Global had some missteps in the way it made disclosures about the sovereign debt in its portfolio. However, when the company filed its 10-K annual report in May of 2011, it was pretty obvious the extent to which the broker was exposed to risky European debt:
...the Company maintains the exposure to the risk of default of the issuer of ... European sovereign debt, consisting of Italy, Spain, Belgium, Portugal and Ireland. ... At March 31, 2011, securities sold under agreements to repurchase of $14,520,341, at contract value, were de-recognized, of which 52.6% were collateralized with European sovereign debt.
Quick math reveals that the European sovereign debt exposure was a whole heck of a lot at that point. Anyone with access to a computer had more than five months to digest that information prior to the company's failure. Somehow, I don't think the timing of the disclosure was the big issue here.
Getting to the good stuff
But before I throw the baby out with the bathwater, there were some recommendations from the subcommittee that, if not illuminating or particularly novel, are worth applauding.
Finding: The SEC and the CFTC Failed to Share Critical Information About MF Global with One Another, Leaving Each Regulator with an Incomplete Understanding of the Company's Financial Health
The lack of any coordination between the two agencies regulating MF Global would be comedic ... if the collapse of MF Global wasn't so disastrous for its customers. The subcommittee's report notes:
Following MF Global's collapse, the Subcommittee requested that the SEC and the CFTC produce all documents relating to each agency's regulatory oversight of MF Global during the twenty months leading up to its bankruptcy. These documents show no record of meaningful communication between the regulators regarding MF Global before the company's final week of business...
But what may best sum up the (lack of) cooperation between the agencies was an apparently sarcastic email comment from SEC Chairwoman Mary Schapiro during the MF Global unraveling: "Ahhhh, coordination in action!" Indeed, what could be more shocking?
The subcommittee goes on to note that the SEC and CFTC were originally designed to oversee markets that were, for the most part, clearly separate. Today, however, that's not as much the case as overlaps are common -- as in the case of MF Global.
The recommendation? "The SEC and the CFTC streamline their operations, or merge into a single financial regulatory agency that would have oversight of the entire capital markets." It's as simple as that. Well, simple to say, at least.
Finding: Moody's and S&P Failed to Identify the Biggest Risk to MF Global's Financial Health
In terms of groups that were way
behind the eight-ball on MF Global, ratings agencies Moody's
) and McGraw-Hill
's (NYSE: MHP
) Standard & Poor's are right at the head of the class. Or, as my colleague Alex Dumortier put it
in December of last year: "How did the two most influential agencies, Moody's and Standard & Poor's, perform? The answer: Not well."
Alex further highlighted:
As far as Moody's goes, we could find no evidence of any warning or even mention of MF Global's European sovereign debt positions at any time prior to the first downgrade on Oct. 24. By its own admission, Moody's understood the magnitude of the firm's European sovereign debt exposure only in the weeks leading up to the bankruptcy and only after discussions with company executives.
Nearly a year later, the House's subcommittee report came up with a very similar conclusion:
The [credit rating agencies] failed to conduct adequate due diligence. Documents demonstrate that neither Moody's nor S&P asked sufficiently probing questions or pursued fundamental information related to MF Global's European exposure until 11 days before the firm's bankruptcy.
So as far as the subcommittee's recommendation that there should be a de-emphasis of credit ratings and more competition within the ratings industry? You won't find any argument here.
Let's see change
Despite the long wait for this report, there's little in it that's particularly new or surprising. Certainly the continued public shaming of political punching bag Jon Corzine was to be expected. But this all also means that there's little new that will help the affected MF Global customers.
However, there are some reasonable recommendations in the report, and it raises the hope that meaningful change could take place that would head off a future repeat of this debacle.
This ain't Corzine's Goldman
Jon Corzine may have helped push for Goldman Sach's public offering, but it's been a long time since he was in charge. Is Lloyd Blankfein's Goldman of today a buy? To help you figure that out, we've released a new premium research report on the investment bank. Click here now for instant access!