By MARCY GORDON, Associated Press
WASHINGTON (AP) — A former executive at the collapsed brokerage MF Global testified Thursday that he warned then-CEO Jon Corzine a year before the company went under about the risks of making large bets on European government debt.
Michael Roseman, who was chief risk officer for the company, told a House oversight subcommittee that he raised the concern in October 2010, as the company's bets on European debt approached $4 billion.
Roseman said Corzine, a former governor of New Jersey, "allowed me to express my opinion in the board meetings. ... Within the room, there were certainly differences of opinion."
At another point in the hearing, Roseman said his analysis of the risks that the company was taking was "challenged as being implausible." He did not specify who challenged it.
Roseman said he was told in January 2011 that he was being replaced, and he suggested to the subcommittee that his views on MF Global's risk-taking played a role in the decision. Some of the lawmakers agreed.
"It almost looks like they took Mr. Roseman out and they replaced Mr. Roseman with a yes-man," said Rep. Stephen Fincher, R-Tenn.
MF Global collapsed in October, the eighth-largest bankruptcy in U.S. history. About $1.2 billion disappeared from customer accounts. After the collapse, Corzine told Congress he did not know where the money went.
Corzine also told the panel in December that differences of opinion on risk were allowed to be aired in boardroom discussions.
Roseman's successor in the risk job, Michael Stockman, told the subcommittee that he was not involved in putting together a plan for how the firm would handle financial distress and a downgrade by a credit rating agency.
He objected to being characterized as a yes-man. He said he and his team of risk analysts gave complete information to senior management and board members, who made "informed and sophisticated business judgments."
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.
If MF Global hadn't made the big risky bets, Roseman told the lawmakers, "In my opinion they would still be here."
The collapse grabbed headlines in part because it was headed by Corzine, who was once CEO of Wall Street powerhouse Goldman Sachs. He took charge of MF Global in early 2010 and wanted to transform it into a full-scale investment bank, similar to Goldman.
"The eminence of Jon Corzine may have lulled the board of directors, regulators and market participants into a false sense of security — despite the writing on the wall," said Randy Neugebauer, R-Texas, chairman of the oversight panel.
Lawmakers also criticized credit rating agencies Moody's Investors Service and Standard & Poor's for failing to take account of MF Global's exposure to European debt in their ratings of the firm's creditworthiness.
"I'm not so sure I can trust you guys anymore," Rep. Michael Capuano of Massachusetts, the panel's senior Democrat, told executives of the two agencies who appeared at the hearing.
They stood by their agencies' methods for arriving at ratings. But Richard Cantor, Moody's chief credit officer, said that if the agency had known more earlier about MF Global's finances, it may have acted differently on ratings.
Most of the $1.2 billion reported missing has been traced to customer accounts and banks, people briefed on the matter told The Associated Press on Wednesday. They spoke on condition of anonymity because they were not authorized to discuss the investigations.
Brokerages are supposed to keep customer money separate from company money. That way, customers are protected if the brokerage fails.
Much of the missing 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.
AP Business Writer Christopher Leonard in St. Louis contributed to this report.
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