Regulators pushed MF Global on risky bets months ago

Wed Nov 2, 2011 4:05pm EDT
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By Sarah N. Lynch and Christopher Doering

(Reuters) - U.S. regulators started raising concerns about MF Global's European sovereign debt exposure as early as June, according to a source familiar with the matter, four months before the company's collapse into bankruptcy.

The revelation comes as MF Global tries to account for hundreds of millions of dollars in client accounts that are still missing, according to a federal official. While the size is down from an initial $900 million that was missing, the source told Reuters that regulators are not sure where the money went, and why they can't find it.

The meltdown of Jon Corzine's firm after high-risk bets on European debt should spark reforms to separate retail from investment banking operations, according "Bond King" Bill Gross, who says it marks another example of how Wall Street has "lost its way."

Not long ago, Wall Street was witnessing the comeback of Corzine, the ex-Goldman Sachs chief and former New Jersey governor, when he took the helm of MF Global. But the recent revelation of $6.3 billion of European bond positions caused the ratings agencies to cut to MF Global's debt to junk status, speeding its descent into bankruptcy.

The implications for the broader market so far, however, are limited, according to U.S. Federal Reserve Chairman Ben Bernanke.

"It appears to be an idiosyncratic case," Bernanke told reporters. "We are monitoring the possible impacts on funding markets and elsewhere, and so far we have not seen any significant impact on financial stability."

Though the firm's failure played out in a matter of days, regulators started turning the screws on MF Global months ago.

Around June, the Financial Industry Regulatory Authority (FINRA), one of many regulators that policed the firm, became concerned that MF Global had a substantial position in European sovereign debt and was not appropriately holding capital against it, the source told Reuters.   Continued...

<p>Customers of MF Global swarm around an unidentified employee holding a stack of withdrawal request forms in Singapore, in the lobby of its office, November 1, 2011. REUTERS/The Straits Times/Lau Fook Kong</p>