If you don’t think Wall Street is chomping at the bit to get back to the good old days, take a look at MF Global. This financial services company was taken over by John Corzine, the former governor of New Jersey, a 24 year veteran of Wall Street, and the CEO of Goldman Sachs for 5 years.
The company was involved in a wide range of services and doing well for itself. Then Corzine came in with support from its leaders and promptly leveraged it to the max. Including a $6.3 billion dollar wager on European debt.
That obviously went south but that’s not what is interesting here. Rather, it’s that MF Global made the bet with its own money. A process called proprietary trading that is highly controversial.
Mostly because banks are not supposed to use their financial wizardry for themselves, but for us the customers. When they do start making their own bets it puts our money at risk. If one of those bets goes sour and the entire bank goes down, so do we.
It also makes the FDIC step in and we are back to square one with Wall Street making bets and Main Street cleaning it up.
Obama’s financial reform, called the Dodd Frank Act, largely ignored proprietary trading. Only at the last-minute did Paul Volker fight for some legislation on this, which is why the result is called the Volker Rule.
For the past year, U.S. Regulators and the major banks have been negotiating on the terms of this important rule. A spicy topic because proprietary trading accounts for up to 25% of all bank profits.
The rules are expected to go into effect next year (2012). Which is why I think Corzine went so fast, he was only CEO for 19 months, and went so huge. He wanted to get into the game before the rule set in.
I think he figured that if his bet worked then he would have turned MF Global into a Wall Street powerhouse to compete with Goldman, Citi, JP Morgan, etc.
Of course, he failed and now regulators have a fresh example to guide them in drafting the rules. This collapse rattled many of them and the rules will certainly be tightened.
The whole situation is like a throwback to the pre-recession days. It shows that firms will still take massive risks with other people’s money (and their own). We just have to hope that, going forward, those who do will be small enough to not take down our whole system.