House Minority Report on MF Global Also Recommends Merging SEC and CFTC

Rep. Michael Capuano (D-MA), Ranking Member of the House Subcommittee on Oversight and Investigations, released an Addendum to the Subcommittee’s majority staff report on the collapse of MF Global, which was released last month by Chairman Randy Neugebauer (R-TX). Ranking Member Capuano’s Addendum supports the recommendation of the majority to merge the SEC and CFTC. He recently joined Rep. Barney Frank in filing the Markets and Trading Reorganization Act to accomplish this merger as well as to provide the newly formed entity with an independent funding stream. The Democratic Addendum also agrees with the report’s conclusion that federal regulators lacked sufficient coordination with one another but notes that the self-regulatory agencies, which directly supervised and examined MF Global, share some of this accountability.

Ranking member Capuano also shares the majority report’s praise of the National Futures Association and the CFTC for moving to ban the Alternative Method, which he said was an accounting practice that contributed to the loss of MF Global customer funds. The Democratic Addendum encourages regulators to determine if adequate protection for customer funds is in place and to continue studying ways to further protect these funds. It also urges regulators to strengthen existing disclosure requirements so customers will better recognize and understand the risks they face.

The Capuano minority report does not fully share the assessment of the majority report that MF Global’s bankruptcy was caused by the executive decision to turn the firm into an investment bank. MF Global’s shift into becoming an investment bank was not problematic in and of itself, said the minority, as is evident by the existence of profitable investment banks. Rather, MF Global’s particular investments posed unsustainable and substantial liquidity risks. Preventing MF Global and other firms from failing should not be the focus, reasoned the minority report, rather the priority should be ensuring that investors have full transparency and access to all relevant financial firm data.

Ranking Member Capuano, who has been an outspoken critic of the credit rating agencies, agrees with the majority report’s findings that the rating agencies should have downgraded MF Global more quickly. He disagrees, however, with the conclusion that they failed in their overall efforts with respect to MF Global. The Democratic Addendum notes that in the case of MF Global, the credit rating agencies at least rated them as essentially junk from the beginning.

The Democratic Members also draw a distinction from the majority staff report in clarifying that MF Global’s failure was not just about one bad actor. While MF Global’s CEO Jon Corzine holds substantial responsibility, the Addendum points out that neither Mr. Corzine nor any other individual could have taken these actions if regulations had been tighter and enforcement of them had been more stringent. Better regulations and stricter enforcement would have made any such attempts more difficult and more readily apparent to regulators and investors.