MF Global Exposes Risk Volcker Wants to Curb

Jon Corzine’s risk appetite just provided Paul Volcker with a demonstration of the dangers of Wall Street proprietary trading. Nineteen months after former New Jersey Governor Corzine took over as chairman and chief executive officer, MF Global Holdings Ltd. (MF)today filed for bankruptcy. The collapse was triggered by Corzine’s decision to boost risk-taking, including a $6.3 billion wager with the firm’s own money on European government debt. Volcker, a former Federal Reserve chairman who’s advising the Obama administration, pushed for legislation to curb wagering by banks or financial companies that have federal guarantees or are so embedded in financial markets that they’re deemed too big to fail. Regulators and the industry are wrestling over the fine print in the so-called Volcker rule, which takes effect in 2012. Now, three years afterLehman Brothers Holdings Inc. (LEHMQ) failed, MF Global’s implosion may buttress the argument for tighter trading limits. “In the wake of 2008, when we all should have learned a lesson, Jon Corzine told me himself that it was a relatively staid, not risk-oriented firm and he needed to ratchet up the risk,” William Cohan, author of “Money and Power: How Goldman Sachs Came to Rule the World,” said on Bloomberg Television. “Well he does that and it blows up in his face and for the first time he can’t unwind the trade. Honestly I’m still shocked and it should not have happened.” Corzine’s failure “is OK because MF Global is not such a large institution that it’s going to bring down the entire financial system with it,” Neil Barofsky, a former special inspector for the U.S. Treasury’s Troubled Asset Relief Program, said on Bloomberg Television’s “InsideTrack.” “If this is Goldman, if this is JPMorgan, if this is any of those institutions, we’re going to have to go in and bail them out and we’re going to bear the brunt of their bad bets, not the shareholders and possibly the debt holders.”

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