Monday, December 05, 2011

This new bullshit called the "MF Global rule"

Like Sarbanes-Oxley, the new "MF Global rule" is an overreaction, utter nonsense, and another power-grab by the feds.

"The new rule will limit how the brokerage industry can invest customer money, largely barring firms from using client funds to buy foreign sovereign debt. It also prevents a complex transaction that allowed MF Global, in essence, to borrow money from its own customers."

The problem with MF Global wasn't that it invested in sovereign debt, but that it stole money from its clients (it's theft when you take something without the owner's permission) to cover its proprietary desk's losses from sovereign debt investments. It was already a crime to take clients' money for the firm's own trading. But take some regulators who have an agenda of usurping more control, and other regulators who want to ban the effect because they don't understand the cause...

The problem with Enron and WorldCom wasn't a lack of regulatory oversight, but a lack of prosecution. Fraud was already a crime, and Sarbanes-Oxley has done nothing to prevent additional fraud. In fact, as Stephen Bainbridge has pointed out, SarbOx hinders U.S. capital markets, especially IPOs, and encourages public companies to go private so they can escape the costly regulation. Larry Ribstein notes a study "that SOX makes it cost less for a public firm to acquire a private target than for a private target to do an IPO because the public firm can apply its existing SOX infrastructure to the newly acquired firm." And his conclusion is more than compelling: "rules designed to make the markets safe for ordinary investors have ended by excluding them." Such is the inescapable effect of government regulation. Government control.

At best, the "MF Global rule" does nothing to protect investors. At worst, it's opening the door. Look what's next: "Bart Chilton, a Democratic member of the commodities commission, is pushing for Congress to create an insurance fund for futures industry customers."

This will no doubt work just as well as the FDIC fund, which is now all but completely tapped after all these bank failures (thanks to new FDIC mark-to-market requirements that forced otherwise solvent banks to close). If this insurance fund is created, we can expect the CFTC to create rules that effectively force some brokerages to close.

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