House report on failure of MF Global calls for merger of SEC, CFTC

House Republicans are blaming regulators, credit raters and former executive Jon Corzine for the high-profile collapse of the investment firm MF Global.

In a new report, Republicans recommend that financial executives be made more liable for a firm's collapse, and call for a merger of two major financial regulators.

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Republicans say the operations of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) need to be streamlined, if not combined outright. The report is the end product of a year-long investigation by the investigatory subcommittee of the House Financial Services Committee.

The report says the two regulators did not discuss their monitoring of MF Global with each other, leaving both with an incomplete understanding of the risks that the firm faced.

At least one high-profile Democrat has expressed an interest in merging the SEC and CFTC: Rep. Barney Frank (D-Mass.), the ranking member of the committee, who is retiring this year.

But GOP members are not promising legislation overhauling the regulatory landscape is on the way. Rep. Randy Neugebauer (R-Texas), who chaired the investigatory panel behind the report, said the document is intended to jump-start a discussion of that and other issues.

The meltdown of the futures merchant MF Global in 2011 left roughly $1.6 billion in customer funds missing and destroyed the reputation of Corzine, a former New Jersey senator and governor.

Snippets of the report released Wednesday heaped blame on Corzine for the collapse, accusing him of creating an "authoritarian atmosphere" in which his decisions to invest heavily in risky European debt could not be questioned.

Neugebauer said the former Democratic lawmaker was the "primary culprit for the demise of MF Global."

"What we saw was mismanagement of the highest order," he added. However, he stopped short of accusing Corzine of breaking any laws or regulations, saying that decision is best left to the appropriate regulators.

Republicans suggested Corzine had to have played a role in the frantic final days of the firm, when more than $1 billion in customer funds were improperly tapped to help with the company's cash flow.

"Ethically and morally, what went on here was wrong," said Committee Chairman Spencer Bachus (R-Ala.), adding that there was "circumstantial evidence" that Corzine was culpable.

The report found that MF Global did not fully disclose the extent of their risky investments to investors and regulators, which lawmakers said should prompt an investigation by the SEC into whether MF Global violated securities laws or rules in its financial disclosures.

Through a spokesman, Corzine disagreed strongly with the portions of the report released Wednesday. He noted that 80 percent of missing customer funds have been returned thus far and said he feels "great sadness" about what occurred.

"When Mr. Corzine joined MF Global he was tasked with quickly turning around a failing business, shoring up internal processes and controls, and, most importantly, immediately returning MF Global to profitability," his spokesman said in a statement. "He set a new strategy for the firm after extensive discussions with the Board, the senior management team and well respected outside consultants. At all times Mr. Corzine acted in good faith and did what he believed was necessary to turn around MF Global."

But Thursday's full release also cast scrutiny on regulators and credit raters who missed the warning signs. The report states that Moody's Investors Service and Standard & Poor's did not understand the extent of MF Global's risks and failed to conduct adequate due diligence before assigning ratings.

Bachus singled out CFTC head Gary Gensler for criticism, saying he was "shocked" when Gensler recused himself from all investigations tied to MF Global, citing the time he spent working with Corzine at Goldman Sachs.

Republicans also used the report to open up a fresh line of attack on the Dodd-Frank financial reform law. While the law is still being implemented by regulators, committee Republicans said the bankruptcy showed the law came up short, as regulators failed to coordinate their efforts. They also suggested that the busy work of implementing the law detracted from regulators' ability to oversee firms.

"Despite the promise of Dodd-Frank that regulators would work together, what the subcommittee’s investigation found is there was no meaningful coordination among the regulators who were responsible for the supervision of MF Global,” said Bachus.

“This, once again, raises the question of whether regulators are so preoccupied writing hundreds of new rules that they’re missing the basics like safeguarding customer funds and protecting investors from financial frauds.”

The report is an official release from the Financial Services Committee, but the top Democrat on the investigatory panel, Rep. Michael Capuano (D-Mass.), refused to sign off on it, saying he did not have adequate time to review it and that some of the points merited "additional commentary."

—This report was originally posted at 10:00 a.m. and last updated at 1:44 p.m.