Reporter Asks Bernanke: "Why Did You Approve MF Global As Primary Dealer? Did You Know It Was Leveraged 40-1?"
"Making MF Global a primary dealer did not constitute a seal of approval from the Fed, quite the contrary. Check our website disclaimer."
Just discovered this clip earlier today. That we're aware of, this is Bernanke's only public comment on MF Global, from the presser a few days after MF filed for bankruptcy. Great question from Peter Barnes on MF's ridiculous leverage, and the Fed's (lack of) oversight of primary dealers. Bernanke puts it on the SEC and CFTC.
Officially, The Bernank is right, the CFTC was asleep at the wheel, allowing customer funds to be stolen by MF Global on behalf of JPM, but the Fed shouldn't be excused so easily.
Feel free to email the guilty parties and let them know how you feel.
Bart Chilton firstname.lastname@example.org
Scott O'Malia email@example.com
Gary Gensler firstname.lastname@example.org
Links of interest:
Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
SG Americas Securities, LLC
UBS Securities LLC.
Testimony on MF Global Failure - Thomas C. Baxter, Fed General Counsel
B. The Termination of MF Global as a Primary Dealer
We exercised counterparty due diligence over MF Global from February 2011 until October of 2011, when its financial condition deteriorated abruptly and quickly. As noted, we were not the supervisor of MF Global; that role remained with the CFTC and the U.S. Securities and Exchange Commission (SEC). From October 24, 2011 until October 31, 2011, the New York Fed took a series of prompt and progressive actions with respect to MF Global that were designed to protect our position as counterparty and to safeguard the interests of the taxpayer.
On October 24, 2011, Moody's downgraded its credit rating for MF Global Holdings Ltd (the primary dealer's parent) from Baa2 to Baa3. On October 25, MF Global Holdings disclosed its largest quarterly earnings loss ever. Mr. Dzina reported the downgrade to the New York Fed's chief risk officer. Later, on October 25, the New York Fed's president requested an analysis of what a bankruptcy of MF Global might mean for U.S. markets. We actively communicated with MF Global to assess whether MF Global had the ability to perform on its commitments with the New York Fed. On October 26, 2011, I telephoned the regional administrator of the SEC in New York, and a member of the Commission's staff in Washington, DC, to ensure that the SEC was aware of the gravity of the situation. Members of my legal staff contacted the CFTC for the same reason. We learned that the SEC and the CFTC planned to go into MF Global on October 27, 2011, and we understand that they did.
A review of the New York Fed's counterparty exposure led us to take a series of actions. First, the New York Fed mitigated exposure by excluding MF Global from certain primary dealer operations. Second, as a result of our review of exposure to MF Global, we focused on a series of seven AMBS trades with MF Global, which were still outstanding as forward settling transactions. These trades subjected the New York Fed to exposure to MF Global if the firm became insolvent prior to the settlement date and the market price had moved in the New York Fed's favor. In such circumstances, the New York Fed would have to replace these trades by buying the securities at a higher rate. To protect against this exposure, the New York Fed asked MF Global to execute an Annex to the Master Securities Forward Transaction Agreement (the MSFTA), an agreement that MF Global and the New York Fed executed when MF Global became a primary dealer. The annex would require MF Global to post margin to the New York Fed. The margin, which was calculated daily and subject to daily call, would protect the New York Fed from credit risk exposure arising from the unsettled trades. Following the execution of the annex, MF Global posted the initial margin in the afternoon of October 28. Later in the day, the New York Fed made another margin call pursuant to the Annex that would be due on Monday, October 31, at 10 a.m. Third, by the close of markets on Friday, October 28, the future of MF Global was in doubt. Consequently, at approximately 6:00 p.m. on that day, the New York Fed informed MF Global that MF Global was suspended from conducting new business with the New York Fed as a primary dealer (but trades that had not yet settled were still open).
Over the course of the prior week and the weekend, the New York Fed participated in calls with various agencies that regulated or otherwise oversaw MF Global, including the SEC, the CFTC and the U.K. Financial Services Authority, to monitor the events with respect to MF Global's attempts to stabilize its liquidity situation and sell the firm or its assets.
As we all now know, late on October 30, 2011, the prospects for a sale of MF Global dissipated. Before the markets opened on Monday, October 31, the New York Fed publicly announced that it had suspended MF Global from conducting new business as a primary dealer (the decision that it had informed the firm about on Friday evening). Later that morning, MF Global failed to meet the New York Fed's margin call by the prescribed time of 10:00 a.m. As a result, the New York Fed declared an event of default under the MSFTA, and issued a notice of termination of outstanding unsettled AMBS trades. The New York Fed subsequently entered the market, executed replacement trades for the terminated trades with MF Global, and served MF Global with a notice of calculation of loss (based on the cost of those replacement trades and other costs). The New York Fed then exercised its contractual right under the MSFTA to set off the calculated loss against the margin provided to the New York Fed by MF Global.4 Through these actions, the New York Fed protected its position as counterparty and safeguarded the interest of the taxpayer. To be clear, the New York Fed sustained no loss from its relationship with MF Global.
MF Global collapse, one year on, still haunts futures industry
More Corzine and MF Global: