WASHINGTON Regulators still sore from the beating they took over the financial crisis are scrambling to ensure they avoid the blame for the collapse of the Jon Corzine-run futures brokerage MF Global.
MF Global, which collapsed on Monday after bets on debt from troubled euro zone nations scared away clients and investors, had a half dozen regulators with no one clear watchdog minding the shop.
Worse yet, last year's Dodd-Frank financial oversight law, which is not yet in full effect, would have done little to change the outcome.
"We had multiple regulators looking at it, and then none of them picked anything up," said Jerry Markham, a law professor at Florida International University.
There were similar comments throughout the financial crisis when there were numerous regulators overseeing banks and other financial firms, including Lehman Brothers and AIG, but rarely one who said it was accountable for missing a problem.
MF Global's disclosure that it had bet more than five times its book value on the recovery of European sovereign debt sparked ratings downgrades and margin calls that quickly turned into a liquidity crisis for the futures brokerage.
Its attempts to find a last-minute buyer this past weekend fell apart after the discovery that hundreds of millions of dollars in customer money was missing.
The quick unraveling of a major financial firm has critics wondering why MF Global's risky bets were not exposed earlier, and why regulators were unable to safeguard client funds.
"When the government misses cases, you have to ask, 'Were they asleep at the switch, or were they doing something else?'" says Jeff Ifrah, a white-collar defense lawyer in Washington.
Federal Reserve Chairman Ben Bernanke came out first in trying to deflect blame.
Bernanke faced questions at a news conference on Wednesday about the Fed's role, in light of the New York Fed finding MF Global in good enough standing to be named in February a primary dealer of U.S. treasuries. The Fed conducts its monetary policy through the primary dealers.
Bernanke was adamant that this was a one-time review, and that ongoing policing was left to the Securities and Exchange Commission and the Commodity Futures Trading Commission.
"Making them a primary dealer did not in any way constitute a seal of approval," he said. "We were not, we are not, the overseers, the regulators of that company."
The SEC and CFTC followed with their own defenses on Thursday.
SEC Chairman Mary Schapiro told a financial fraud conference that the agency jumped in as soon as cracks in the firm appeared last week and grew over the weekend.
"We were literally on conference calls through the night and all day long over the weekend, so there's no shortage of regulatory attention to the issues that have led to MF Global's bankruptcy," Schapiro said.
CFTC Chairman Gary Gensler said his agency is also on the case, and not just to find the roughly $600 million in missing customer funds.
He pointed to a $10 million fine MF Global had to pay as part of a 2009 CFTC case for risk-management failures in a rogue-trading scandal at the firm.
"We've been very much on the beat," Gensler told reporters after testifying to the Senate's Permanent Subcommittee on Investigations on Thursday.
NO CLEAR PATH FORWARD
Former officials have also come to the defense of the regulators.
George Brunelle, a securities lawyer and former chief counsel for the New York Stock Exchange's market surveillance division, said requiring earlier enhanced disclosures from MF Global about its risky bets would not likely have stopped the company's disastrous spiral into bankruptcy.
Regulators started getting concerned about MF Global's European sovereign debt exposure and its capital treatment as early as June, according to a source familiar with the matter.
The Financial Industry Regulatory Authority and SEC had lengthy discussions with the firm, and did not force MF Global to disclose a capital change until September 1.
"Having them make disclosures early on may have made it worse. If you send out to the world that a primary dealer is in trouble, it can affect a lot of markets," said Brunelle, who represents brokerages.
Defenders also said it would have been tough for the CFTC or the CME Group, one of the exchanges overseeing MF Global, to detect if the firm raided customers funds once it starting crumbling.
Neither MF Global nor its CEO Corzine, who once ran Goldman Sachs before becoming a U.S. Senator and then Governor of New Jersey, have been accused of any wrongdoing.
"The notion that they're going to be able to catch somebody if they are dipping into (segregated) funds in real-time, I just think that just shows a lack of understanding for how the system works," said Dan Waldman, a former CFTC general counsel and now a partner with law firm Arnold & Porter.
Dodd-Frank, if it was fully in effect, would likely have done little to alter the course of events.
SEC's Schapiro said on Thursday that the Volcker rule that restricts banks' risky bets would not have applied to MF Global because it does not take government deposit insurance.
And Bernanke said under the current draft guidance, MF Global would not have been named "systemic" -- a designation that means its failure could cause major problems for the financial system, and comes with strict policing from the Fed.
Democratic Representative Collin Peterson, who has pushed for tough derivatives rules, said MF Global's collapse underscores the need for more reforms.
"The lesson is we didn't go far enough on Dodd-Frank," he said.