The collapse of MF Global last week proves the Federal Reserve Bank of New York needs a lesson in how to pick its friends. The New York Fed selects an elite group of primary dealers to carry out monetary policy, distributing US debt as part of its federal open market committee operations. Those who pass the test gain a unique and profitable status. In February 2010, MF Globalreceived approval. A dealer with about $1bn in capital, and previously weak operational controls, joined the Wall Street elite.

Now one of about 20 primary dealers, including powerhouses Goldman Sachs, Barclays Capitaland Deutsche Bank, MF Global was a Cinderella story. Challenged to stay afloat after a 2008 trading scandal, it appointed Wall Street insider Jon Corzine chief executive in March 2010, and appeared positioned to become a mini Goldman Sachs.

The firm’s bankruptcy raises an important question. Had its financial soundness changed dramatically in nine months since it received New York Fed approval or were the standards flawed?