Bernanke says Fed not responsible for policing MF Global

  • World
  • Thursday, 03 Nov 2011

NEW YORK (Reuters) - U.S. Federal Reserve Chairman Ben Bernanke said on Wednesday the central bank had tried to open the door to smaller firms like MF Global, but it was not the Fed's role to oversee those firms.

The seemingly embarrassing connection the Fed had to failed brokerage MF Global came up again on Wednesday during the news conference Fed Chairman Ben Bernanke held after the Federal Open Market Committee, and Bernanke dismissed it.

He pointed out that the Fed was not MF Global's regulator, and he did not suggest that the Fed ought to take on that responsibility.

MF Global was one of 22 primary dealers, the banks and securities firms authorized to deal directly with the Fed and the Treasury Department to help carry out monetary policy and distribute U.S. debt. The firm declared bankruptcy on Monday after losing money on bad bets on European debt.

Becoming a primary dealer involves what Wall Street views as a rigorous application process, and MF Global's failure raised questions about the soundness of the Federal Reserve Bank of New York's ability to evaluate the firms vying for "primary dealer" status.

Responding to a question, Bernanke said: "The New York Federal Reserve bank approved MF Global to be a primary dealer, I believe it was in February of this year.

"At that time, the company met the criteria that had been set forth, in terms of management, financial condition, capacity and so on, to qualify to be a primary dealer."

Former New York Fed officials told Reuters on Monday that the New York Fed was likely comfortable with some risk in its selection of primary dealers, because adding smaller, less-regulated firms helped expand the New York Fed's access to a complete view of the financial markets.

"We have set those standards in a way that would allow smaller firms like MF Global to participate in a primary dealer market," Bernanke said on Wednesday.

"But," he added, "we are not the regulators of MF Global. That's done by the SEC and CFTC. So we do not have ongoing insight into developments within the company.

He also cited a statement by the New York Fed that granting a firm "primary dealer" status did not mean the firm had received any sort of "stamp of approval" from the New York Fed. Financial market participants do, however, maintain that view.

"The company declined very, very quickly based on apparently a small number of large bets," Bernanke told the audience. "As far as I know, we were not aware of that but again to emphasize we were not, we are not, the overseers, the regulators of that company."

(Reporting by Emily Flitter and Karey Wutkowski; Editing by Andrew Hay)

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