Where is the client money after MF Global? – Part II
February 16, 2012
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As a followup on my post on the client funds after MF global on Tuesday, this new post from Zero Hedge today gives more detail. Somewhat tedious, but also very important, and of much relevant to the ongoing redesign of bankruptcy law and resolution regimes for financial institutions in general.
Until the Congress rectifies the current bankruptcy laws and allows trustees to claw back payments made to secured lenders and other counterparties, there is no reason for any rational personal to allow a broker dealer to hold securities in custody. All of this business will go to the big banks, who will be just as happy to see the smaller dealers thrown into the meat grinder.
The uber-privileged position of derivatives in the 2005 Bankruptcy law was supposed to secure the payment system and therefor financial stability. In fact the crisis and this MF Global bankruptcy has shown that customers and markets are worse off as a result, and pressure are building for change:
Now why, you may be wondering, did the lobbyists from the big banks push Congress to expand the safe harbor for secured parties in the bankruptcy code? As one former Bush II Treasury official told me last night: “The canard the banks used to get 546 amended was that overriding the trustee’s normal avoidance powers was said to be necessary to limit systemic risk and ensure access to credit. God forbid the banks be required to do some due diligence. As the bailouts showed, the systemic risk was in fact enhanced by the changes to the bankruptcy code and the illusion of superior claims to collateral, thus increasing leverage.”