The fall of – and uncertain next steps concerning – MF Global Holdings Ltd. will likely have even more far-reaching consequences than analysts and commentators are currently anticipating.
So far media attention and public reaction have naturally been driven by the vagaries of the news cycle and by a few predictable preoccupations. First, of course, there are the daily breaking events, from the termination of 1,066 MF Global employees to the role of examiners from CME Group Inc. who reportedly knew of the $900 million client fund shortfall just before the regulators learned of it.
The public’s interest remains personality-driven as well because MF Global is still very much a story about Jon Corzine. One plaintiffs’ law firm has even promoted its case online as the “JonCorzine Lawsuit” and, in the process, successfully topped the Google news listings for MF Global. It’s worth noting that Corzine was a generally controversial politician long before this current debacle, arousing misgivings among many loyal New Jersey Democrats for campaign spending that was flagrant by any standards. His ambiguous public brand now shadows all perceptions of this latest financial services scandal.
At a more substantive level, there has already been intelligent commentary on what MF Global means in terms of the real role and efficacy of market regulation, and the purportedly uncoordinated roles of the various agencies. Early commentary also distinguishes this case from those involving larger institutions that cannot engage in proprietary trading as a result of Dodd-Frank. There is now speculation as to whether a post Dodd-Frank regulatory environment will include significantly greater purview over the practices of smaller firms, with closer attention to their leverage ratios (31-1 at MF Global) and more aggressive disclosure standards.
Strictly from a news perspective, MF Global has real legs because, importantly, the collapse occurred at a uniquely sensitive moment. First, there will be no government bailout, which means that people – some very sophisticated, powerful people – cannot rely on the taxpayer to recover their money. The JP Morgan flap is likely just a minor shot across the bow in terms of the highly public imbroglios ahead as the asset recovery saga goes forward. The story is all the more caliente as Corzine’s personal fortune is an alluring target for future lawsuits, especially if those who say his liability insurance won’t likely cover his exposure are correct.
News cycles aside, the enduring legacy of the MF Global collapse will play out on two larger fronts that speak to both public policy and investor perception.
First, MF Global revives old unresolved debates – not just on how effective the regulatory system is – but on the actual value of aggressive regulation as a response to financial crisis. Significantly, MF Global’s place in history is assured because it is the first post Dodd-Frank collapse. This dubious milestone begs the questions, what have we gained from the new law when behaviors still aren’t changed, when disclosure still appears insufficient, when risk-taking is still excessive, and when marketplace confidence is still abysmally low? Could effective enforcement have made any difference?
So we’re back to Square One in the great policy debate: “we must have new laws and tougher laws” versus “we must let the marketplace self-correct and be wary of the unintended consequences of legislating correctives that don’t even correct.” This fundamental ideological division will likely slip into next year’s election. (Corzine’s state, New Jersey, could be a prominent battlefield with Democratic senator Robert Menendez up for reelection.)
Second, MF Global is…well, global. Because its collapse is directly tied to the European economic crisis, MF Global is a direct reminder to already jittery investors that foreign entanglements expose all of us to unforeseeable, often instantaneous risk. There’s no longer a floor to that exposure for those who may not have a direct stake in MF Global but whose 401(k)s are loaded with assets that can go south in a single Athenian heartbeat.
For both financial services companies and for regulators, the takeaway in such a market can only be heightened disclosure based on communications policies that fully articulate risk as well as credibly provide safer alternatives. The regulators will have a voice in how such communications are made, but the funds and financial firms themselves must be equally committed to full transparency if only as a matter of their own survival.
These prescriptions are by no means new. The insistent demand – either via legislation or as a best business practice – for real accountability was a public discourse mantra well before the 2008 crisis. But it is a demand that must not abate, however old-hat it sounds, until the Jon Corzines of the world actually start complying.
Every economic crisis (in this case, Europe) will likely savage some brand-name financial firms and jolt world markets. In many ways, the debate on more versus less regulation in the aftermath of such panic is a healthy one. The best equilibrium of government action and inaction cannot be determined in a day or in a generation. Ongoing debate likewise assures that neither side will gain too much of an upper hand but maintain instead a salutary balance of power.
Yet the debate must be framed soberly. In an atmosphere of fear, where so many investors live in dread of imminent loss, shrill rhetoric on either side can only further diminish confidence whether we tilt toward or away from additional regulation.
Follow Richard Levick on Twitter @richardlevick.
Richard S. Levick, Esq., is the president and chief executive officer of Levick Strategic Communications, a crisis and public affairs communications firm. Mr. Levick is on the prestigious list of “The 100 Most Influential People in the Boardroom,” He is the co-author of The Communicators: Leadership in the Age of Crisis and Stop the Presses: The Crisis & Litigation PR Desk Reference, and writes for Bulletproofblog. Reach him at rlevick@levick.com.
