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

By Phil Mattingly and Silla Brush - Feb 3, 2012 3:30 AM GMT+0700

U.S. lawmakers questioned whether MF Global Holding Ltd. (MFGLQ)’s decision to replace Michael Roseman as chief risk officer a year ago was driven by his warnings over bets on European debt that helped push the firm to bankruptcy.

Roseman, who said that his concerns were dismissed as “implausible” by then-Chairman and Chief Executive Officer Jon S. Corzine, testified today along with his successor, Michael G. Stockman, at a House Financial Services Investigation subcommittee hearing in Washington.

“It appears Mr. Roseman was the chief risk officer until he stopped telling Mr. Corzine what he wanted to hear,” Representative Michael Capuano of Massachusetts, the panel’s top Democrat, said during a question-and-answer session.

In his first public testimony since MF Global filed for bankruptcy on Oct. 31, Roseman told lawmakers that the futures brokerage “would still be here” if it hadn’t made a $6.3 billion bet on European sovereign debt. The concerns he expressed about the firm’s exposure “certainly played a role” in his removal, he said.

Congress, the Commodity Futures Trading Commission, Securities and Exchange Commission and Justice Department are investigating events surrounding the collapse of MF Global, including the disappearance of $1.2 billion in customer funds.

Stockman, who replaced Roseman in January 2011, said he initially agreed with Corzine’s assessment of the risks, calling them “acceptable” when he joined the firm. That statement drew criticism from lawmakers, who suggested that Stockman was given the job because he would give the answer that Corzine wanted.

‘Yes Man’

“It almost looks like they took Mr. Roseman out and replaced him with a yes man,” said Representative Stephen Fincher, a Tennessee Republican.

Steven Goldberg, a spokesman for Corzine, declined to comment today about Roseman’s testimony.

Stockman told lawmakers that he changed his assessment after credit markets deteriorated later in 2011 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.

“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.

Corzine, a Democrat who served in the Senate and as New Jersey’s governor, testified three times in December before congressional panels looking into the brokerage’s bankruptcy. Today’s hearing focused on the role of risk officers and credit- rating firms in the run-up to the collapse.

Missing Client Funds

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

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

In January 2011, Roseman was told he would be replaced by Stockman. Roseman assisted in the transition until March.

MF Global began cutting European debt exposure in August, around the time regulators including the Financial Industry Regulatory Authority were pressuring the firm to raise capital.

Downgrade

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.

Representative Randy Neugebauer, the Texas Republican who led today’s hearing, said his panel will continue its investigation and will produce a report on the findings.

Investigators have located almost all of the $1.2 billion in client money that went missing as the firm unraveled, 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.

To contact the reporter 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