MF Global Lowered European Risk in August, Stockman Says

MF Global Holdings Ltd (MFGLQ)., the broker that filed for bankruptcy last year and saw as much as $1.2 billion in client funds go missing, began limiting its positions in European debt three months before collapsing, according to Michael G. Stockman, the company’s former chief risk officer.

Stockman said in testimony prepared for a U.S. House hearing on Feb. 2 that he warned the broker’s board of risks to the company’s bets on European sovereign debt. He told the company’s senior management in July and the board in August of higher default and liquidity risks to the trades.

“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 in European sovereign debt,” Stockman said in the testimony.

The hearing also will include the testimony of Michael Roseman, the firm’s former chief risk officer. It will be the first time Stockman and Roseman have testified to Congress in connection with the bankruptcy.

Stockman said he doesn’t know what happened to the missing $1.2 billion. The Commodity Futures Trading Commission, Securities and Exchange Commission, Justice Department and bankruptcy trustee overseeing the liquidation of the firm are investigating the Oct. 31 collapse of the New York-based broker.

Risk Management

U.S. lawmakers who have been probing the bankruptcy are turning their attention to the risk-management practices of the firm, which was led by former New Jersey governor and Goldman Sachs Group Inc. (GS) co-chairman Jon S. Corzine, as well as the role credit-rating firms played in the lead-up to the bankruptcy. Corzine, who resigned last year, testified to Congress three times in December.

Representative Randy Neugebauer, a Texas Republican and chairman of the Financial Services investigations subcommittee holding the hearing, said in a statement yesterday that the hearing would provide “visibility into the risk-management practices at MF Global in the lead-up to its bankruptcy.”

Stockman, who said he was offered the position of chief risk officer in January 2011, used his testimony to defend the $6.3 billion bet on European sovereign debt, noting that “none of the European sovereign debt securities” in the transaction have defaulted or been restructured and all of the securities in the portfolio “that reached maturity have been paid in full.”

Roseman, who also served as MF Global’s chief risk officer, preceded Stockman in the job.

To contact the reporters 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

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