As Jon Corzine was directing his company to take more than $6 billion in bullish positions in risky European sovereign debt, the former MF Global CEO reportedly ignored prophetic warnings from his chief risk officer about the bet’s dangerous downsides.
According to The Wall Street Journal, Michael Roseman, who was in charge of controlling risks, expressed serious concerns to both Corzine and MF Global’s board of directors several times last year before eventually resigning.
The revelation that MF Global had $6.3 billion in net exposure to the bonds of troubled countries like Italy and Spain triggered a run on the bank that eventually forced the futures brokerage into bankruptcy on October 31.
Roseman, who was brought on in 2008 to overhaul MF Global’s risk systems after a rogue trader cost the company $140 million, warned that MF Global didn’t have enough cash to buffer against these risky positions and also presented scary scenarios about the ripple effects of a credit rating downgrade, the Journal reported.
However, Corzine argued these scenarios were too extreme and likely impossible and that the company’s exposure was limited and worth the risks, the paper reported. Corzine also suggested he might leave MF Global if the board didn’t trust his judgment about the bets, the Journal said.
Corzine, the former governor of New Jersey and CEO of Goldman Sachs (NYSE:GS), is expected to testify on the MF Global collapse at a House Agriculture Committee hearing on Thursday.
Each time Corzine wanted to increase the bullish eurozone bets above previously-established risk thresholds, Roseman had to ask the board for permission, the Journal reported. Roseman detailed the risks that made him feel uncomfortable, the paper reported.
Eventually, Roseman was replaced by a new chief risk officer in January, prompting him to leave the company in March.
Corzine was denied permission by the board at least one time this year to increase the eurozone bets further, the Journal reported.
After suffering key ratings downgrades in October, MF Global eventually succumbed to the pressures, becoming one of the top 10 bankruptcies in U.S. history.