MF Global is the latest dastardly culprit of Wall Street's arrogance and excess. Less than three years after a systemic collapse of the U.S. financial system that led to taxpayer bailouts and plummeting share prices, Wall Street stalwart John Corzine drove the company off the cliff. Under Corzine's direction (we daren't say leadership), the company leveraged its balance sheet 44:1 like the old days of 2007 that felled an entire economy. Corzine is former CEO of Goldman Sachs, former U.S. Senator, and former New Jersey Governor. He knew the game from the inside. He knew the risks better than all but a very few in the entire world and still pushed his company into an abyss from which it will not return.
Corzine leveraged other people's money to provide a derivative known as a "swap." The swaps market is an unregulated market that really doesn't have oversight and certainly doesn't have capital requirements. Once again, the arrogant banker swung for the fences -- not only with his firm's money but with clients' money -- and lost. MF Global filed for bankruptcy on October 31, 2011. Hundreds of millions of dollars were found to be missing from customer accounts. Egregious does not begin to describe the depth of this crime.
I use the word "crime" advisedly. I believe that Corzine and MF Global did, indeed, commit a crime by clearly violating the firm's fiduciary responsibilities. According to Wikipedia, "A fiduciary duty is the highest standard of care at either equity or law. A fiduciary is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents."
As it happens, there are really only two ways that fiduciary responsibility can be maintained. The first is to operate honestly in the first place -- to exercise the necessary consistent restraints and controls to ensure that the client is served dutifully and honestly. But if that doesn't happen -- as in the case of MF Global -- the other way to encourage fiduciary responsibility is with consequences. And what were the consequences for MF Global? Remains to be seen. But right now, nothing. Just employment for a host of accountants and attorneys working day and night to track down the missing $600+ million that vanished from client accounts.
No wonder those who witnessed the frauds and bailouts and absence of consequences in 2008 and 2009 are having déjà vu all over again.
What should we expect of firms like MF Global and Merrill Lynch and Morgan Stanley? It's really not that complicated. The ethical standards are pretty clear. These firms are "Broker Dealers." They are regulated by the Financial Industry Regulatory Authority, or FINRA. Representatives of these types of firms are not held to a "fiduciary" standard but rather a "suitability" standard. This means that brokers are not required to act in their clients' best interests but must ensure that an investment is appropriate for a certain client. The Dodd Frank Act attempted to impose the fiduciary standard on broker dealers, but industry lobbyists defeated the measure. In an era of eroding trust, why wouldn't Congress demand that financial advisors agree that clients' interests come first?
How many more MF Globals will we have to endure before we demand better? Trust is at stake, and runaway arrogance is a devastating threat. The Tea Party and Occupy Wall Street crowd share the same complaint: the leaders of government and the financial services industry need to be accountable for their arrogant excesses and quit passing the bill to taxpayers. Why should every American bear the consequences of an arrogant group of jerks while the arrogant group of jerks profit and benefit?