Bloomberg News

MF Global Risk Chief Switch Stalled Euro Debt Cut by Six Months

February 09, 2012

Feb. 2 (Bloomberg) -- A switch from one risk oversight officer to another led to a half-year delay in efforts to reduce MF Global Holding Ltd.’s bets on European debt, contributing to the firm’s bankruptcy, according to statements by the two former executives.

Jon S. Corzine, the broker’s former chairman and chief executive officer, dismissed as “implausible” concerns about the bets on European sovereign debt raised by Michael Roseman, the company’s risk officer until January 2011.

Roseman and his successor, Michael G. Stockman, are set to testify today for the first time publicly since Congress, the Commodity Futures Trading Commission, Securities and Exchange Commission and Justice Department began probing the Oct. 31 failure of the New York-based broker.

Stockman said he at first agreed with Corzine’s assessment of the risks. He said he changed his mind when credit markets deteriorated and that he told MF Global’s senior management and board in July and August that the European debt bets posed liquidity and default risks, according to a statement he prepared for the hearing.

“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,” Stockman said in the prepared testimony.

Corzine, a Democrat and former New Jersey senator and governor, testified three times in front of congressional lawmakers in December. The House Financial Services Committee’s investigations panel is overseeing how MF Global evaluated its own risk and how credit-rating companies analyzed the broker.

Missing Client Funds

Investigators are probing what led the company to file the eighth largest bankruptcy in U.S. history, and how as much as $1.2 billion in client money went missing in the company’s final days.

Investigators have located almost all of the client money, which was supposed to be kept in segregated accounts meant for futures customers, a person briefed on the matter said yesterday. The probe has traced 90 percent of the money to other customer or bank accounts, according to the person, who spoke on condition of anonymity because the investigation is private.

Roseman said in prepared remarks that the company steadily increased its risk limits for bets on Italian, Spanish and other European sovereign debt during 2010. In October of that year, Roseman expressed concerns about the capital and liquidity risk of the trades.

‘Implausible’ Scenarios

“I discussed my concerns about the positions and the risk scenarios with Mr. Corzine and others,” Roseman said in the prepared testimony. “The risk scenarios I presented were challenged as being implausible.”

Still, the company approved higher risk limits after Roseman’s warnings. In January 2011, Roseman was told he would be replaced by Stockman. Roseman assisted in the transition until March.

The August 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. 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.

‘Never Been Stronger’

A week before MF Global collapsed, its chief financial officer told Standard & Poor’s in an e-mail that the broker had “never been stronger.”

S&P provided the House committee with an excerpt of the e- mail from MF Global CFO Henri Steenkamp. S&P also informed the panel that Corzine met with its analysts on Oct. 20 to reassure them that his $6.3 billion bet on European sovereign debt was no threat to the firm, according to a Jan. 17 letter.

Craig Parmelee, S&P’s managing director of corporate and government ratings, and Richard Cantor, chief credit officer at Moody’s Investors Service, are also scheduled to testify at the House hearing.

MF Global’s bankruptcy led Gary Gensler, CFTC chairman, to ask the agency’s staff to develop recommendations for new oversight of the futures industry’s self-regulatory organizations and of brokers. The review may include recommendations for changes that would require congressional action, according to a Jan. 26 letter from Jill E. Sommers, a Republican commissioner, to Senator Patrick Roberts, a Kansas Republican.

--Editors: Maura Reynolds, Anthony Gnoffo

To contact the reporter on this story: Silla Brush in Washington at; Phil Mattingly in Washington at

To contact the editor responsible for this story: Maura Reynolds at

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