WASHINGTON – The former chief risk officer of MF Global says he warned then-CEO Jon Corzine in late 2010 of the risks in large bets on European government debt. Those bets sank the brokerage firm last fall.
Michael Roseman, who left MF Global in January 2011, testified Thursday at a hearing of a House oversight subcommittee. Lawmakers are looking at why MF Global failed and became the eighth-largest U.S. bankruptcy.
About $1.2 billion disappeared from customer accounts.
Roseman said that in October 2010, the firm's bets on European debt approached $3.5 billion to $4 billion, and he expressed concern to Corzine and others. In January 2011, Roseman said, he was told that he was being replaced in his job.
"My views on risk certainly played a factor in the decision" to replace him, Roseman testified.
Lawmakers saw Roseman's candor as possibly costing him his job.
"It almost looks like they took Mr. Roseman out and they replace Mr. Roseman with a 'yes man'," said Rep. Stephen Fincher, R-Tenn.
Roseman's successor in the job, Michael Stockman, told the panel he wasn't involved in putting together a "break-the-glass" contingency plan for how the firm would handle financial distress and a downgrade by a credit rating agency.
Stockman objected to being characterized as a "yes man." He and his team of risk analysts gave complete information to senior management of the firm and board members, who made "informed and sophisticated business judgments," Stockman said.
Corzine, when he testified before the panel in December, said differences of opinion on risk were allowed to be aired in boardroom discussions.
MF Global's collapse threw commodity markets into disarray and left hundreds of customers confused and angry because their money was missing. Much of the money belonged to farmers, ranchers and other business owners who used MF Global to reduce their risks from the fluctuating prices of commodities such as corn and wheat.
Financial exchange operator CME Group Inc. said Thursday it will create a $100 million fund to insure the accounts of farmers and ranchers who used the exchange to hedge against risks in their business. The company said it is starting the fund to rebuild investors' confidence after the MF Global collapse.
CME Group also reported that the firm's failure cost it $30 million in the fourth quarter. MF Global was a major presence on CME exchanges, and CME Group was responsible for auditing some of its customer accounts.
Regulators and Congress are investigating whether MF Global used money from customer accounts for its own purposes as its financial condition worsened. That would violate securities laws. The FBI and federal prosecutors also are investigating.
The collapse of MF Global grabbed headlines in large part because it was headed by Corzine, a former Democratic governor of New Jersey, U.S. senator and CEO of Wall Street powerhouse Goldman Sachs. Corzine took charge of MF Global in early 2010. He wanted to transform it into a full-scale investment bank, similar to Goldman.
MF Global failed after the bets on European debt spooked investors, credit rating agencies and the firm's shareholders. Corzine bet about $6.3 million on bonds issued by debt-saddled countries such as Italy and Spain. As the bonds lost value, MF Global was forced to set aside additional cash as collateral. The money was meant to protect the lender in case the bonds crashed or MF Global went bust.
On Oct. 24, Moody's Investors Service downgraded MF Global's credit rating, and placed it on review for a possible further downgrade, largely because of its deep exposure to European debt. The firm disclosed a record quarterly loss on Oct. 25.
But just a week before the firm's collapse, its chief financial officer had told rating agency Standard & Poor's that it had "never been stronger."
AP Business Writer Christopher Leonard in St. Louis contributed to this report.