Corzine Reportedly Ignored Warnings About Bonds

The Wall Street Journal reports Tuesday that MF Global's former chairman and CEO Jon S. Corzine ignored several internal warnings about the risks associated with taking on exposure to Europe before the company declared bankruptcy. Lynn Neary talks to Wall Street Journal reporter Julie Steinberg, one of the article's coauthors, for more.

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LYNN NEARY, HOST:

The Wall Street Journal reports today that former MF Global CEO Jon Corzine ignored internal warnings about the risks of betting on European bonds. Before resigning last month, Corzine took the company down a disastrous path that ended in bankruptcy. According to the journal, MF Global's chief risk officer warned Corzine personally about the dangers of investing in the bonds of Italy, Portugal, Ireland and other troubled eurozone countries, but Corzine threatened to quit if the company's board did not support his position. Julie Steinberg coauthored the story in today's Wall Street Journal, and she joins us now. Welcome to the program, Julie.

JULIE STEINBERG: Thank you.

NEARY: Now, Michael Roseman was the company's chief risk officer. What exactly did he tell Corzine and the board?

STEINBERG: It was Mr. Roseman's job to present the request for the board to increase the limits on these trades, and he told them what could happen if the firm was downgraded, if something happened to the spreads, essentially laid out possible scenarios for what might happen with these trades. And he made sure that his view on the risk was carefully articulated.

NEARY: And he actually did meet privately with Jon Corzine as well to discuss this. Is that right?

STEINBERG: He did. He had a series of meetings with Jon Corzine. Some were in private. Some of them attended by members of the risk, treasury and finance teams in order to air his concerns.

NEARY: Yeah. Now, these are two very different kind of men. As I understand it, Corzine is a risk-taker. Roseman, he felt, was risk-averse. So this is kind of a setup for a fairly dramatic confrontation, I would think.

STEINBERG: Exactly. You have two people coming from very different positions. Everyone knows that Mr. Corzine likes to take a lot of risk as evidence by his tenure at Goldman Sachs, and Mr. Roseman was brought in specifically to implement risk management systems after MF Global had undergone a disastrous rouge trading incident in 2008 that cost the company about 140 million, so completely diametrically opposed viewpoints on how to treat risk.

NEARY: But why weren't Roseman's warnings taken more seriously by the board?

STEINBERG: I think with Jon Corzine in place, it becomes very easy to be seduced by what the company could have been, and I think when you're a director on that board, it becomes easy to say, all right, we trust him. He (unintelligible) Goldman Sachs. He was the governor of New Jersey. He's got this great track record. Let's let him guide us. So Roseman, after airing his concerns for about six months, he was told by the company that he was being replaced. They were bringing in a new chief risk officer, Michael Stockman, who had spent about 13 years as a risk official at UBS, and he was going to stay on to help with the transition through March of 2011 but ultimately was replaced.

NEARY: And the new risk officer presumably supported the position that Jon Corzine had taken on the risks involved.

STEINBERG: That's interesting. At first, he seemed to, but then, ultimately, my sources tell me that he also had concerns about the risk and actually aired them to the board.

NEARY: So as we mentioned before, this was in the end a disastrous path. Roseman was correct, and the company is now not only bankrupt but under investigation for improperly using client funds.

STEINBERG: Yes. See, that's the - everyone is looking for these missing funds. Now, when the company declared bankruptcy and the brokerage was being liquidated as of last month, they stumbled across a shortfall, initially estimated to be around 600 million, now thought to be hovering in the 1.2-billion range. And they just don't know where that money is, causing some to suspect that the firm may have used that money to cover its own positions and make up for losses. It's not true. Nobody knows that yet, but that's what some suspect.

NEARY: And the implications of that are exactly?

STEINBERG: Well, you're supposed to keep a very strict line between client funds, in this case the commodities and securities accounts held by the brokerage, and the money that the firm will use for its own trading purposes. So Mr. Corzine could be facing a lot of serious questions or perhaps criminal charges.

NEARY: All right. Well, thanks so much for joining us today, Julie.

STEINBERG: Thanks so much for having me.

NEARY: Julie Steinberg is a reporter at FINS.com, a finance career website from the Wall Street Journal.

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