Brendan Smialowski/Bloomberg NewsMichael Roseman, former global chief risk officer at MF Global, testified before Congress.WASHINGTON — MF Global’s internal watchdogs defended their tumultuous tenures at the brokerage firm, telling Congress on Thursday that they sufficiently sounded the alarms about risky wagers on the European sovereign debt that toppled the firm.
Michael Roseman, MF Global’s chief risk officer until early 2011, and his successor, Michael Stockman, testified that they warned the firm’s top executives and directors about the danger of the European bets months before the firm’s downfall. Mr. Stockman took the reins of controlling risk after Mr. Roseman exited amid repeated clashes with the firm’s top executives.
“We did our job during this period,” a defiant Mr. Stockman told the oversight panel of the House Financial Services Committee. “In my view, the board and senior management were highly sophisticated; they knew and understood how the” European debt bets worked.
Lawmakers were dubious. While the positions were the brainchild of Jon S. Corzine, the firm’s chief executive and the former governor of New Jersey, lawmakers noted that it was up to the risk chiefs to control their boss’s risk-taking.
“You were not a lowly clerk,” Representative Bill Posey, Republican of Florida, told Mr. Stockman.
The often-testy exchanges unfolded before the House panel, which held the fourth Congressional hearing on MF Global’s downfall and offered the first opportunity for the firm’s risk officers to shed light on the European bond positions. The committee later on Thursday will also hear from rating agency executives, who are under fire for belatedly downgrading the firm in its final days.
Concerns about MF Global’s European debt positions first emerged in the fall of 2010. Mr. Corzine, who also was the former governor of New Jersey, had wagered that Europe would not let nations like Ireland and Spain default.
Mr. Roseman, who on Thursday said the firm would still exist if not for its sovereign debt positions, was skeptical.
He raised concerns in September 2010 when the bond buys jumped to $2 billion from $1.5 billion. In November, when the positions grew to nearly $5 billion, Mr. Roseman outlined the risks to the board, saying the bets hinged on the European countries not defaulting.
“The risk scenarios I presented were challenged as being implausible,” Mr. Roseman told lawmakers.
The board sided with Mr. Corzine. And about the same time, MF Global began a search to replace Mr. Roseman.
Mr. Corzine told Congress last year that he was looking for someone with deeper experience in the securities business, as the firm was transitioning into a full-service investment bank in the model of Goldman Sachs.
Mr. Roseman questioned why Mr. Corzine had concerns about his résumé. “I certainly had a strong background,” he said.
In January 2011, MF Global hired Mr. Stockman, who like Mr. Corzine, once worked at Goldman.
Mr. Roseman would not say whether MF Global replaced him to find someone more tolerant of the risky bets, but lawmakers were more blunt.
Mr. Posey said it appeared “Mr. Stockman was hired to tell Mr. Corzine what he wanted to hear.”
Another lawmaker called him a “yes man,” a notion that Mr. Stockman disputed.
When Mr. Stockman joined MF Gobal, he did not immediately adopt his predecessor’s unease with the European positions. He began working in January but did not raise concerns about the European bets until July.
“For the first several months of my tenure, based on analyses performed by my department, I believed that the risk profile associated with the company’s European sovereign debt position was acceptable in light of then-prevailing market conditions,” Mr. Stockman said.
But then the positions grew to more than $6 billion, at the same time as Europe’s debt crisis was ballooning.
“As credit markets deteriorated in the summer of 2011, I came to the view that it would be prudent for the company to mitigate the increased risks.”
The board eventually heeded the concerns. But it was too late.
Moody’s downgraded MF Global’s credit rating on Oct. 24, and within a week, the firm was in bankruptcy. At the time, the firm also disclosed that $1.2 billion in customer money had vanished from the firm.
Three months later, that money remains at large. But Mr. Stockman said on Thursday he was unable to offer any insights into the whereabouts of the money.
“I am, of course, aware of and deeply saddened by numerous press reports that more than $1 billion in customer funds are missing and unaccounted for,” he said. But “I have no personal knowledge of any missing funds or unreconciled customer accounts.”