This morning, CFTC Commissioner Bart Chilton was on CNBC and spoke about the MF Global disaster. The one point I want to concentrate on is segregated funds. Corzine and MF Global committed fraud, and had a severe breach of ethics when they used customer funds to plug holes in their business. No other firms had ever done this, and it shocked the street when they did.
When someone is determined to commit fraud for whatever reason, no law, rule, regulation or penalty will stop them. In Corzine’s case he had enough hubris and money that he figured he could commit the fraud, get out of the situation and no one would be wiser. The bonds he bought blew up in his face. At that point, the trade became about ego not running a company and so he added up the costs/benefits of continuing the fraud and figured with his money and connections he wouldn’t get in too much trouble even if found out.
Now, the question becomes what to do about it. As my friend Jack B predicted, the predictable government reaction would be to ban it. Ban firms from investing segregated customer funds in low risk assets. We wouldn’t be in this situation if MF Global had invested in US Treasury bills, long taught in finance courses worldwide as an almost risk free asset. In virtually all finance equations, the risk free rate is implied to be the rate of some US Treasury.
When one looks at the market, or economic, impact of MF Global’s breach of ethics, what do we see? Who was hurt by the fraud the most? It wasn’t the banks($GS, $INTL, $MS, $C, $BAC). It was an exchange like $CME. The banks that got whacked were sold for reasons other than MF Global defrauding customers.