U.S. News

MF Global Risk Chief Urged Caution on Trades

By Shahien Nasiripour, Financial Times

MF Global’s chief risk officer urged senior executives and the company’s board to pare back its $6.3 billion proprietary bet on the debt of troubled European nations roughly three months before the futures broker declared bankruptcy, according to his prepared congressional testimony.

MF Global
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Michael Stockman, the failed brokerage’s risk officer for much of 2011, planned to tell the US Congress on Thursday that beginning in July, he told executives it would be “prudent for the company to mitigate the increased risks” associated with the brokerage’s position, according to his prepared statement, which was obtained by the Financial Times.

Mr. Stockman said in his statement that he “initiated several discussions with senior management to express this view” and urged the company’s leaders to “consider entering into hedging transactions to reduce the company’s exposure”. His statement did not identify the managers. The company was headed at the time by Jon Corzine, the former New Jersey governor and senator.

MF Global’s former chief risk officer “highlighted the increased default and liquidity risks” associated with its $6.3 billion “repurchase-to-maturity” trades in written and oral presentations to the futures broker’s board of directors at its August meeting, Mr. Stockman said in his remarks.

Following that meeting, senior executives and the board eventually decided to stop adding to their long position in European sovereign bondsand to allow their existing positions to roll off as the securities reached maturity, Mr. Stockman planned to say.

For MF Global, though, that decision probably was too late. In August, regulators forced the company to hold more capital to support those positions. In October, MF Global had its credit downgraded, reported poor earnings and saw counterparties and customers flee to the point that it was forced to seek bankruptcy protection on October 31.

But for much of last year, the risk profile of those trades was “acceptable in light of then-prevailing market conditions”, Mr. Stockman planned to tell Congress.

The futures broker’s European sovereign debt trading strategy was “firmly in place” when Mr. Stockman joined the company in January, he said in his prepared remarks. At the time, the board had approved a limit of $4.75 billion for such transactions.

Mr. Stockman did not raise objections until credit markets deteriorated over the summer, he planned to say.

Three months after the company’s failure, some $1.2 billion in customer funds that went missing during MF Global’s final days has yet to be recovered. Mr. Stockman plans to tell a House investigations subcommittee, led by Randy Neugebauer, a Texas Republican, that he has “no personal knowledge” of the lost money. He did not have responsibility for treasury functions, he planned to say.