Bloomberg News

MF Global Cut European Exposure in August, Risk Officer Says

February 02, 2012

(Updates with request to raise capital in fifth paragraph.)

Feb. 1 (Bloomberg) -- MF Global Holdings Ltd., the broker that filed for bankruptcy last year and saw as much as $1.2 billion in client funds go missing, began limiting its European debt positions three months before collapsing, according to Michael G. Stockman, the company’s former chief risk officer.

Stockman plans to tell a U.S. House panel at a hearing tomorrow that he warned MF Global’s board about risks related to the company’s bets on European sovereign debt. He alerted senior management in July and the board in August of higher default and liquidity risks, according to his prepared remarks.

“To the best of my recollection, following my presentation at the August 2011 board meeting, the board and senior management made an informed business judgment to cease adding to the company’s long position,” he said.

The hearing also will include the testimony of Michael Roseman, who also served as the firm’s chief risk officer. It will be the first time Stockman and Roseman have testified to Congress in connection with the Oct. 31 bankruptcy.

The plan to cut MF Global’s European debt exposure came around the same time that regulators began to pressure the firm to raise capital. The Financial Industry Regulatory Authority in August told the company to add capital to its U.S. brokerage to back the trades.

By late October, Moody’s Investors Service downgraded MF Global to one level above junk status, citing its ongoing inability to meet earnings targets and concern that it wasn’t sufficiently managing risk.

Quarterly Loss

MF Global sought bankruptcy protection less than a week after reporting a quarterly loss of $191.6 million for the three months through Sept. 30.

Stockman said he doesn’t know what happened to the missing $1.2 billion. The Commodity Futures Trading Commission, Securities and Exchange Commission, Justice Department and bankruptcy trustee overseeing the liquidation of the firm are investigating the Oct. 31 collapse of the New York-based broker.

U.S. lawmakers who have been probing the bankruptcy are turning their attention to the risk-management practices of the firm, which was led by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon S. Corzine, as well as the role credit-rating firms played in the lead-up to the bankruptcy. Corzine, who resigned last year, testified to Congress three times in December.

Provide ‘Visibility’

Representative Randy Neugebauer, a Texas Republican and chairman of the Financial Services investigations subcommittee holding the hearing, said in a statement Jan. 30 that the hearing would provide “visibility into the risk-management practices at MF Global in the lead-up to its bankruptcy.”

To execute his European debt trade, Corzine used repurchase agreements, a type of transaction that allows investors to finance most or all of the purchase, depending on the securities involved, the length of the deal and the credit quality of the borrower. In earnings calls, the CEO said the firm was seeking to profit from the difference between the yield it received on the European bonds and the interest rates it paid under the repurchase agreements.

Stockman, who said he was offered the position of chief risk officer in January 2011, used his testimony to defend the $6.3 billion bet on European debt, noting that “none of the European sovereign debt securities” in the transaction have defaulted or been restructured and all of the securities in the portfolio “that reached maturity have been paid in full.”

Roseman preceded Stockman as chief risk officer.

--Editors: Maura Reynolds, Gregory Mott

To contact the reporters on this story: Silla Brush in Washington at sbrush@bloomberg.net; Phil Mattingly in Washington at pmattingly@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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