“The failure illustrates how much financial markets are about trust and confidence. Once you lose those, you are done.”
-Frank Partnoy, professor of law and finance at the University of San Diego
Very interesting piece in the WSJ on the takeaways from the MF Global implosion. Their self-destruction appears to be the result of a very bad bet on Europe — MFG appears to have been levered 33 to 1, and it takes very little error when you are running that sort of leverage to commit Seppuku.
The entire piece is well worth reading, but here are the key takeaways from a systemic perspective:
1. Accounting loopholes have to be closed and oversight improved.
2. Nonbank financial firms should have a lead regulator.
3. Rule-writers should consider “nonsystemic” firms as well as “too big to fail” banks.
Think back to the deregulation of the accounting industry in the 1990s, in particular, the Securities Litigation Reform Act of 1995. Consider Greenspan’s nonfeasance when it came to nonbank financial firms — he called them innovators and declined to supervise them.
It goes back to a very fundamental belief: Can the finance sector be trusted to self-regulate? Or are profit driven bankers more likely to take on more risk in pursuit of profit, with the taxpayer as unwitting backstops. I argue that it is the latter, that deregulation of the past 30 years was tried — and failed spectacularly.
Rather than admit this, we get instead The Big Lie.
Three Lessons From the Collapse
WSJ, NOVEMBER 8, 2011