Quite simply, had market participants been able to see in real time the accumulation of the proprietary bet on European sovereign debt, they would have been in a position to exert discipline to stop it.
They would have exerted this discipline by a) moving their trading to another firm, b) raising the cost of and lowering the availability of funds to the firm and c) probably the discipline with the biggest impact, hammered the stock price.
MF Global's blowing up also confirms that the global financial regulators are a source of financial instability as they continue to protect their information monopoly. The regulators were in a position to see the trades and failed to convey the changing risk profile of MF Global to market participants.
According to a NY Times' Dealbook article, federal investigators have found that hundreds of millions of dollars of customer money is missing.
For readers who are unfamiliar with how Wall Street should work, customer funds are suppose to be kept separate from the firm's funds. That way, if something happens to the firm, nothing happens to the customers.
This article suggests that is not what happened at MF Global.
If in fact, MF Global used customer funds to cover its losses, it is even more reason that financial institutions should be required to disclose their assets, liabilities and off-balance sheet exposures at the end of each day.
That way, customers can protect themselves and move to other firms at the first sign of risk taking by the financial institution.
Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.
The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.
Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse.
The discovery that money could not be located might simply reflect sloppy internal controls at MF Global. It is still unclear where the money went. At first, as much as $950 million was believed to be missing, but as the firm sorted through its bankruptcy, that figure fell to less than $700 million by late Monday, the people briefed on the matter said. Additional funds are expected to trickle in over the coming days.
But the investigation, which is in its earliest stages, may uncover something more intentional and troubling.
In any case, the unaccounted-for cash could violate a fundamental tenet of Wall Street regulation: Customers’ funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts on a daily basis.