Poor supervision contributed to the downfall of futures brokerage MF Global, House Republicans said in a report released Thursday, underscoring how regulators struggle to get a grip on Wall Street despite the lessons of the financial crisis.
MF Global collapsed in October 2011 under the weight of aggressive bets on sovereign debts, thin capital and questionable disclosures to investors.
Customers were left reeling after it was revealed that more than $1 billion of their money could not be found.
A House of Representatives subcommittee squarely placed blame on MF Global's last chief executive officer, Jon Corzine - a former co-chairman of Goldman Sachs - for creating a culture of unfettered risk. Corzine has denied any wrongdoing.
It also heaped criticism on the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), as well as the New York Federal Reserve bank, for failing to recognize the growing threat that the firm had become.
The report also scolded the SEC and CFTC for poorly communicating with each other during MF Global's death spiral.
MF Global General Counsel Laurie Ferber told one SEC staff member that, against the explicit instructions from that agency, the CFTC had pressured the company to transfer money from a securities reserve account, the report said.
"Without telling us? That is unacceptable," SEC Chairman Mary Schapiro said in an email, according to the report.
Congress should explore whether it was better for the SEC and the CFTC to "streamline their operations or merge into a single financial regulatory agency that would have oversight of capital markets as a whole," the report said.
That idea may have little traction in Congress. Republican Senator Pat Roberts, who is ranking member of the Committee on Agriculture, which oversees the CFTC, blasted the idea soon after the report was issued, and said he didn't see how merging the two would have made "any difference" in preventing MF Global's collapse.
A lack of cooperation between regulators aggravated the global financial crisis, which reached its height in 2008 with the collapse of U.S. investment bank Lehman Brothers and triggered the Dodd-Frank Wall Street overhaul.
A spokesman for Corzine didn't immediately respond to a request for comment on Thursday. Late on Wednesday the spokesman said Corzine strongly disagreed with the assertions in the report. An SEC spokesman said the agency was reviewing the report and will consider carefully the recommendations within its jurisdiction. A CFTC spokesman declined comment.
MF Global went under when markets started worrying about its heavy exposure to European sovereign debt and a spate of credit rating downgrades, triggering investors and trading counterparties to pull out funds.
Corzine's strategy was to turn the company into a full-fledged investment bank that would take on far riskier proprietary positions than would be normal for a brokerage, whose business is largely driven by clients.
Much of the question of what caused MF Global's demise centers on whether it used client funds to prop up its own financial situation in its last few frantic trading days.
Michael Capuano, the top Democrat on the subcommittee, said that while he agreed with some of the report's observations, he was not co-sponsoring it because he was given insufficient time to review it.
Corzine and other executives face civil claims from a bankruptcy trustee, customers and shareholders, who have accused them of mismanaging the firm and catalyzing its demise.
U.S. authorities probing MF Global's collapse have not yet filed any formal charges.
A June report from the trustee liquidating the company's broker-dealer unit found that Corzine failed to address the firm's growing liquidity needs as he tried to build the group into a global investment powerhouse.
The Thursday subcommittee also blamed the New York Fed for giving MF Global a prestigious primary dealership, even though the firm had a track record of "prior risk management failures (and) chronic net losses."
And credit rating agencies Moody's and Standard & Poor's, a unit of McGraw-Hill Cos Inc, failed to see that Corzine's strategy would increase the company's risk profile as it took more risk on its books, the report said. (Additional reporting by Emily Stephenson; Editing by John Wallace, Lisa Von Ahn, Karey Wutkowski and Andrew Hay)