MF Global Told S&P ‘Never Been Stronger’ as Failure Loomed

MF Global
MF Global Holdings Ltd.'s top executives, Jon S. Corzine, left, Bradley Abelow, center, and Henri Steenkamp, at a Senate Agriculture Committee hearing in Washington on Dec. 13, 2011. Photographer: Andrew Harrer/Bloomberg

A week before MF Global Holdings Ltd. collapsed, its chief financial officer told Standard & Poor’s in an e-mail that the futures broker had “never been stronger.”

S&P provided the House Financial Services Subcommittee on Oversight and Investigations with an excerpt of the e-mail from MF Global CFO Henri Steenkamp. S&P also informed the panel that Jon Corzine, then MF Global’s chief executive officer, met with its analysts on Oct. 20 to reassure them that his $6.3 billion bet on European sovereign debt was no threat to the firm, according to a Jan. 17 letter obtained by Bloomberg News.

U.S. lawmakers will turn their attention to the role of the ratings companies in the failure of MF Global at a Feb. 2 hearing after summoning Corzine, the former governor of New Jersey and Goldman Sachs Group Inc. co-chairman, to two hearings in December. S&P ranked MF Global as investment grade until its failure, while Moody’s downgraded it to junk status four days earlier.

“MF Global is in its strongest position ever,” Steenkamp told S&P on Oct. 24, according to the letter to Representative Randy Neugebauer, a Texas Republican, from Craig Parmelee, a managing director at S&P in New York.

No ‘Police’ Role

MF Global filed for the eighth-biggest bankruptcy in U.S. history on Oct. 31 after receiving margin calls and other demands for money amid escalating concern that the brokerage wouldn’t have enough capital to cover its European bets. S&P said in the letter that it relied on MF Global’s public filings for information on the positions.

“S&P does not purport to audit the issuers it rates and does not undertake to police issuers for fraudulent activity or misconduct,” Parmelee wrote.

Moody’s analysts believed that MF Global was increasing its trading activity “for the primary purpose of facilitating customer transactions,” Steven Ross, a partner at Akin Gump Strauss Hauer & Feld LLP who represents the firm, wrote to Neugebauer in a separate letter dated Jan. 17. The brokerage’s presentations before Oct. 21 “did not describe or reflect” the European positions, Ross wrote.

Diana DeSocio, a spokeswoman for MF Global, declined to comment.

Chief Risk Officers

Michael Roseman, former chief risk officer at MF Global, and his replacement Michael Stockman are also scheduled to testify at the hearing, along with James Gellert, chief executive officer of Rapid Ratings, a smaller competitor, according to the committee’s website.

“This hearing will give us visibility into the risk management practices at MF Global in the lead-up to its bankruptcy as well as give us an opportunity to analyze how the financial markets and credit-rating agencies understood and interpreted MF Global’s risk appetite,” Neugebauer said today in a statement.

Executives from S&P and Moody’s were called before Congress in July after they threatened to strip the U.S. of its AAA rating. S&P downgraded the country to AA+ the following month. In April, a Senate panel released a report blaming the ratings companies for helping cause the worst financial crisis since the Great Depression by providing inflated grades to mortgage-backed securities at the request of Wall Street banks.

“These guys have been through the wringer and they’ll go through the wringer again,” Ed Atorino, who tracks the companies for Benchmark Co. in New York, said in a telephone interview earlier this month.

‘Nothing Stood Out’

Regulators are considering how to implement portions of the Dodd-Frank financial regulation overhaul that instruct them to remove credit ratings from rules. Lawmakers may push for a stricter interpretation of the law after the MF Global hearing, Atorino said.

MF Global, which had been building its European positions since June 2010, first disclosed them in regulatory filings last May, according to a memo by the subcommittee’s staff dated Jan.

27. Ross, the lawyer for Moody’s, said in the letter that “nothing stood out” in those filings for its analysts. Parmelee didn’t say how S&P’s analysts reacted to the disclosure in his letter.

S&P warned investors on Oct. 26 that it might downgrade MF Global from BBB-, the lowest investment grade, citing the “poor quarterly results” that the brokerage reported a day earlier. Moody’s, which cut MF Global to an equivalent Baa3 on Oct. 24, lowered its rating to Ba2, the second-highest junk rating, on Oct. 27.

Italy Bonds Surge

“The abruptness of the downgrades and the suddenness of MF Global’s collapse raise questions about why the credit rating agencies did not consider MF Global’s exposure to European sovereign debt until late October,” the subcommittee staff wrote in the memo.

MF Global’s bets may have paid off had the firm’s customers and counterparties allowed it to continue to hold their money. No European countries have defaulted and Italian bonds surged this month after the European Central Bank began offering the region’s lenders record amounts of emergency funding.

MF Global gave Moody’s a presentation on May 18 that said that its “value at risk,” a measure of potential losses on its trading, was unchanged from a year earlier, Ross wrote. It didn’t “refer in any way” to the sovereign debt, he said.

Roseman, the chief risk officer who was replaced in early 2011, told the subcommittee he was “very concerned” about Corzine’s bets by September 2010 as they approached $4 billion, according to the memo. He met with Corzine and MF Global’s board of directors, which approved position limits of about $4.5 billion. At the end of January, Roseman was told he would be replaced by Stockman.

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