Mark Williams’ piece in the FT arguing that the New York Federal Reserve should not have permitted MF Global to be a primary dealer in US government bonds raises the question of how it happened.

Mr Williams explains why MF Global, headed until last week by Jon Corzine, former chairman and chief executive of Goldman Sachs, was a dubious candidate for this official seal of approval:

“From a risk perspective, its capital position was 30 times weaker than that of most primary dealers. It was also new to investment banking, a higher risk area than its core brokerage business. Under Mr Corzine it placed ever bigger bets, and more of its own capital, at risk. With less capital, trading losses could quickly erode its financial stability . . .

“By March 2010, soon after the New York Fed’s decision, a joke began to circulate: MF Global won fast-track approval because of two words: Jon Corzine. William Dudley, New York Fed president, and Mr Corzine had indeed worked together at Goldman Sachs, though approval came a month before the latter officially joined MF Global.

Rather like a ratings agency that downgrades a company after it collapses, the Fed terminated MF Global’s primary dealer status on October 31, having allowed it to retain the privilege until disaster struck.

Under the Fed’s own guidelines, that was highly questionable:

“In general, the New York Fed must determine that an applicant’s financial condition can comfortably support the obligations of a primary dealer. In making this judgment, the New York Fed will conduct a credit review of the applicant and will consider various measures of the applicant’s financial condition.”

One broker to whom I spoke last week suggested that MF Global’s status was less a matter of Mr Corzine’s connections, than the Fed’s determination to have as many primary dealers as possible to distribute US government debt. It could not longer afford to be picky.

Either way, the MF Global affair should prompt a reassessment.