Financial reformers are point ing to the collapse of the $41 billion MF Global brokerage house as evidence of why we need Dodd-Frank's "Volcker Rule" to prohibit FDIC-insured banks and their affiliates from making proprietary bets on the markets. Fortunately, MF Global was not a bank or bank affiliate, and its failure has not cost taxpayers a dime. And I, for one, am very happy to see a major, well-connected market player eat its losses (while being equally dismayed by the apparent regulatory lapses that have let hundreds of millions in customer money go missing). But what if MF Global had been an FDIC bank? Would the Volcker Rule have protected the government purse? Well, it's not clear. MF Global took proprietary positions in European sovereign debt through what Wall Street calls "repo to maturity" transactions. Ittechnically sold the European bonds to other firms, agreeing to repurchase them at a premium when they matured in 2012. MF hoped to make money by pocketing the difference in the rate it paid its trading partners and the higher rate paid on the bonds themselves. As market prices on the bonds fell, MF Global's trading partners demanded more collateral. Given MF's extreme leverage-about 40 to 1-the collateral calls quickly brought it down.
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