I guess you have noticed a few news items about the collapse of a financial firm called MF Global? Its CEO, Jon Corzine has just been grilled by congress about losing around 1.5 billion dollars of its customer’s money. When you stop and think about it, congress grilling anyone about losing its customer’s money is in itself ludicrous.
MF Global, which was a Futures Commission Merchant, (FCM) in commodity transactions, and arranged sales of commodity contracts is also tasked with overseeing customer’s funds in commodity trades. If a farmer in the Midwest wants to protect his profit he might buy corn futures, agreeing to sell his corn at a fixed price on a certain date. He would arrange this sale through an FCM, such as MF Global.
An Ethanol producer might buy the farmers corn contract, along with the contracts of many other farmers, in order to insure a source of supply for his ethanol plant. He also would arrange his trade through an FCM. The Chicago Mercantile Exchange will require that the ethanol producer put up some earnest money; their margin requirements, to insure he had sufficient funds for the transaction. The FCM would be notified that it needed to transfer the margin requirement to the Chicago Mercantile Exchange, which would then have custody of the customer’s money.
This FCM’s earnest money was supposed to be kept in an escrow account, a segregated bank account with J.P. Morgan, containing only customer money. Under the federal regulations the FCM is permitted to collect interest on the customer’s money, but is not permitted to do anything else with those funds.
Did MF Global engage in complex bond trades in the sovereign bonds of troubled European countries, and use the customers’ money in its possession to meet its own margin requirements?
A federal agency, the Commodity Futures Trading Commission has responsibility of overseeing these escrow accounts and they failed to properly supervise this account. So the federal government is also responsible for the loss of the customer funds. Do we have to bail out M.F. Global too?
Like other federal agencies the Commodities Futures Trading Commission has complex regulations and mountains of paper work, all designed to make doing business expensive and difficult. But this agencies primary job was to insure that customer funds are safe. The Commodity Futures Trading Commission failed to do that. Did you see congress grilling that outfit?
The other federal agencies operate the same way; they get so bogged down in bureaucratic tasks they overlook their real function. Take the environmental protection agency for instance. Tasked with protecting us from industrial pollution they have branched out and decided to control water and waterways, wet lands, farm smells, and global warming. Are they still doing their designated job, or is all their effort concentrated in being the USA global warming policeman?
If congress is going to create these agencies they need to maintain oversight of them. With around 600 congressmen they should be able to recruit some people to keep an eye on the agencies they create.