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THE COLLAPSE OF MF GLOBAL, PART 2 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

FEBRUARY 2, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–98 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

RANDY NEUGEBAUER, Texas, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEPHEN LEE FINCHER, Tennessee 

MICHAEL E. CAPUANO, Massachusetts, 

Ranking Member 

STEPHEN F. LYNCH, Massachusetts 

MAXINE WATERS, California 

JOE BACA, California 

BRAD MILLER, North Carolina 

KEITH ELLISON, Minnesota 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 2, 2012 .............................................................................................. 1 

Appendix: 

February 2, 2012 .............................................................................................. 65 

WITNESSES 

THURSDAY, FEBRUARY 2, 2012 

Cantor, Richard, Chief Credit Officer, Moody’s Investors Service ....................... 43 

Gellert, James H., Chairman and Chief Executive Officer, Rapid Ratings 

International, Inc. ................................................................................................ 45 

Parmelee, Craig, Managing Director and Lead Analytical Manager for North 

American Financial Institutions Ratings, Standard & Poor’s Ratings Services ......................................................................................................................... 42 

Roseman, Michael K., former Chief Risk Officer, MF Global Holdings, Ltd. ..... 4 

Stockman, Michael G., former Chief Risk Officer, MF Global Holdings, Ltd ..... 7 

APPENDIX 

Prepared statements: 

Cantor, Richard ................................................................................................ 66 

Gellert, James H. .............................................................................................. 74 

Parmelee, Craig ................................................................................................ 103 

Roseman, Michael K. ........................................................................................ 113 

Stockman, Michael G. ...................................................................................... 120 

(1) 

THE COLLAPSE OF MF GLOBAL, PART 2 

Thursday, February 2, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:01 a.m., in room 

2128, Rayburn House Office Building, Hon. Randy Neugebauer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Pearce, Posey, 

Renacci, Canseco, Fincher; Capuano, Waters, Baca, Miller of North 

Carolina, Himes, and Carney. 

Also present: Representatives Grimm and Royce. 

Chairman NEUGEBAUER. The committee will come to order. 

We will have opening statements—previously agreed to be 10 

minutes for each side. 

Also, Mr. Grimm and Mr. Royce have joined us today. While they 

are not members of the subcommittee, they are members of the full 

Financial Services Committee. I ask unanimous consent that members of the Financial Services Committee who are not members of 

the subcommittee may join us today and participate in the hearing. 

So, good morning. This is our second hearing on the collapse of 

MF Global. And the purposes of these hearings is really to try to 

find out exactly what happened, why a very old company ended up 

in bankruptcy where creditors and shareholders and, unfortunately, customers lost money. 

We may have additional hearings. This investigation continues— 

one of the things that we hope to accomplish from this series of 

hearings and from the investigation that we have been conducting 

is to then publish a report to kind of give a timeline and also some 

findings of how these customers lost their money, how a company 

that was allowed to kind of slip through the regulatory groups 

that—with them being knowledgeable of some of the problems that 

were going on. 

We are going to hear from some people today who were inside 

the organization, and we are going to hear today from some people 

who were outside in the rating agencies. We have Mr. Stockman 

and Mr. Roseman here today who were risk officers inside the organization. 

And, again, the bottom line here is trying to figure out what happened. 

Because what we have seen in other problems that we have had 

in the marketplace is that there are those who are saying, ‘‘Well, 

2 

if we would have had Dodd-Frank in place or if we had had this 

regulation in place or if we had this or that, etc.’’ And, one of the 

things that happens is people jump to conclusions and try to overreact to that. 

What we want to do is get to the bottom of what happened here 

and then make a finding. And one of the things that I think we 

have seen is that when we look back at the 2008 crisis, a lot of people said it was the fact that we had a lack of regulation. But the 

truth of the matter is, had we taken the time to ascertain exactly 

what happened, I think what we would have found is that 2008 

happened not because we didn’t have enough regulations, but in 

many cases because maybe we had regulators who were not doing 

their jobs, and market behavior that was not acceptable. 

And so, the purpose of this hearing—and the hearings that we 

have had in the past and may have in the future—is, again, as I 

said, to get to the bottom of the situation. And so, I will look forward to hearing from our witnesses today. 

With that, I yield to my good friend, Mr. Capuano, the ranking 

member of the subcommittee. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Chairman, thank you for having this hearing, and I thank 

the witnesses for coming today. 

This is another hearing in a series of this particular issue. And 

I don’t know who has made conclusions about what happened here 

at MF Global. I haven’t met any thoughtful person who knows 

much about it who has. Everybody I know, including myself and all 

my colleagues on this side, are simply asking questions. 

And I will tell you, for me, as a supporter of Dodd-Frank, I have 

no idea yet whether Dodd-Frank could have or should have addressed this issue. There is simply not enough knowledge on the 

table yet. 

For all I know, it might be just simple basic criminality. For all 

I know, it may just be excessive risk. I don’t know yet. And I 

haven’t talked to anybody who has drawn a conclusion yet. So I am 

here to learn, if you want the truth, not to draw conclusions. 

And I didn’t come here either today or to the last hearing or 

probably the next hearing I hope we have in the not too distant future with those conclusions. That is why I am here. I have lots of 

different questions. 

I still fear that we may be ahead of the curve, and it is a good 

thing to be ahead of the curve for a change. We are probably going 

to have a whole bunch of questions, as we did at the last hearing, 

that probably cannot yet be answered. But I think it is important 

to ask them and to continue this investigation to see not just in 

this one instance. 

As I have said before and I will continue to say, it is always bad 

for any company to lose a billion dollars. But, really, if there is a 

criminal aspect to it—somebody just misappropriated somebody’s 

funds—that is not what Congress does. That is the Justice Department, that is the SEC. Those are other people. 

What I believe that we are here for is to see if this particular 

case represents any threat to the system, whether others are doing 

it, whether there is a hole in regulation, whether there is or if 

there is need for either enforcement or regulation or not. 

3 

That is what I am trying to ascertain. And hopefully, today, we 

will take a few more steps toward being able to do that. 

With that, I yield back. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the vice chairman of the subcommittee, Mr. Fitzpatrick, 

is recognized for 11⁄2 minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

I believe this issue requires our persistent attention because 

there were actually many failures that have already been exposed, 

among them failure of the CEO and the board to heed warnings of 

their own internal risk managers. Also, I believe there was a clear 

failure of the major credit rating agencies to identify the massive 

risk that MF Global had taken on. 

The reason why these particular failures warrant the attention 

of Congress is because it affects our constituents and their money. 

This morning, I received an e-mail from a constituent with a substantial amount of still-missing funds. 

The NRSROs, particularly the largest three credit rating agencies are and will likely remain for some time major market movers. 

It is not a coincidence that when Moody’s downgraded MF Global, 

and S&P issued its warning, MF Global collapsed soon after. 

Of course, it was risky bets that caused MF Global to collapse, 

not the ratings, but the actions taken by Moody’s and S&P, I think, 

hastened the result. 

I expect it to be argued that the financial troubles in MF were 

identified as soon as possible. And the fact that their situation was 

so precarious validated the abrupt actions of the agencies. 

However, there is a demonstrable pattern of this happening 

again and again; Enron, Lehman, and WorldCom caused major 

market disruptions. Bad companies and bad securities are being 

rated favorably right up until the minute the house of cards collapses. 

If we can avoid these abrupt shocks to the system, our financial 

system will be sounder and investors will be more confident. When 

a situation like MF Global occurs, it is our responsibility to examine how it happened, carefully consider reforms and, most importantly, make sure it doesn’t happen again. 

So, Mr. Chairman, again, I appreciate your facilitating this hearing. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. And now, Mr. 

Royce is recognized for 11⁄2 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. It has been 3 months 

since the initial hearing, and still, most of the questions are unanswered in terms of what happened to the $1.2 billion in customer 

funds. 

The most pressing public policy left unaddressed in all of this is, 

of course, the breach in segregated customer funds. I guess the 

shocking part is that the rules on this have been around for 75 

years, and according to the regulatory community, they are not 

rules that are difficult to understand. They are not rules that are 

particularly difficult to enforce. They are the foundation of the 

CFTC’s customer protection regime. 

So one question is, how did the CFTC fail in its most basic task 

here? 

4 

Despite what some have said and might say again today, I will 

just give this perspective from CFTC commissioner O’Malia, who 

said, ‘‘The perception that MF Global happened because of lack of 

regulation is mistaken. Both our governing statute, the Community 

Exchange Act, and our regulations require an intermediary, require 

MF Global to segregate futures customer funds. 

There have also been calls for SIPC-like coverage for the futures 

and swaps markets. Again, I think this would be a mistake. Expanding the safety net to this vast market would be unworkable 

and would compound the moral hazard problem already present 

throughout much of our financial sector. 

It does appear, however, that there are several steps which can 

and should be taken. The focus must be on improving market discipline and ensuring the most basic regulatory functions are met 

by these agencies. 

And I thank you, Mr. Chairman, for holding this hearing. 

Chairman NEUGEBAUER. I thank the gentleman. And Mr. Grimm 

is recognized for 1 minute. 

Mr. GRIMM. Thank you, Mr. Chairman. 

I have a little bit of a different perspective on this. There is no 

question that customer funds being transferred—I think it speaks 

for itself—never should have happened, period. The law is clear. 

But on top of that, it is further compounded by one of the biggest 

travesties in market history. Who made a decision to allow this 

bankruptcy to be a SIPA bankruptcy and not under the commodities bankruptcy laws? 

What we did was someone stole their money and then those customers who had their money stolen just got hit even worse, because 

the bankruptcy laws are going to work against them. 

That is one of the biggest travesties definitely in market history 

and undermines the entire U.S. markets, certainly commodities 

and futures. 

With that, I yield back. 

Chairman NEUGEBAUER. I thank the gentlemen. And I believe 

that is all the opening statements. I remind Members that their 

opening statements will be made a part of the record. 

Now, I will introduce our first panel today: Mr. Michael Roseman, former chief risk officer, MF Global Holdings Limited; and 

Mr. Michael Stockman, former global chief risk officer, MF Global 

Holdings Limited. 

Gentlemen, before we proceed, I will ask you to raise your right 

hand. 

[Witnesses sworn.] 

Thank you. Without objection, your written statements will be 

made a part of the record, and you will each be recognized for a 

5-minute summary of your testimony. 

Mr. Roseman? 

STATEMENT OF MICHAEL K. ROSEMAN, FORMER CHIEF RISK 

OFFICER, MF GLOBAL HOLDINGS, LTD. 

Mr. ROSEMAN. Chairman Neugebauer, Ranking Member Capuano, and members of the subcommittee, my name is Michael Roseman. I was the risk officer of MF Global Group from August 2008 

to January 2011. Thank you for the opportunity to testify today. I 

5 

hope that my comments will help you to continue to build on your 

knowledge of the events that led to the collapse of MF Global. 

Regarding my background, I started my professional career as an 

aerospace engineer after graduating from the University of Delaware as an aerospace engineer. 

In 1994, I received an MBA from the Kenan-Flagler Business 

School at the University of North Carolina and pursued a career 

in financial services. 

I first joined Sanwa Financial Products with responsibility for 

the risk analysis function. The following year, I moved to the trading team and co-managed the U.S. dollar OTC option portfolio for 

a number of years before returning to risk management as global 

head of market risk. 

In 2001, I joined the Bank of Montreal as the head of U.S. risk 

oversight for all trading, underwriting, and investment activities in 

the United States and with the mandate to strengthen risk management activities and capabilities in the United States. 

Then, in 2004, I joined Newedge as the chief risk officer of the 

Americas, again with a mandate to elevate the risk management 

capabilities to fully support the growing brokerage businesses. 

In each of these experiences, I led and coordinated significant efforts to implement new best practice policies, systems, analytics, 

and controls, and supported businesses to bring both transparency 

to and governance of the risks across organizations. 

In August of 2008, I joined MF Global as the chief risk officer 

(CRO) reporting to the CEO with responsibility for the risk department worldwide. I also had a mandate to elevate the risk management capabilities, support the strategic objectives, and address the 

risk management recommendations made by two consulting firms 

that had been hired by the company. 

As the CRO, I provided leadership for and oversaw the adherence 

to the enterprise risk management framework across all categories 

of risk, including chairing of the monthly enterprise risk committee. 

Further, I was a member of the executive management team and 

provided regular CRO reports to the board. Over the next 2 years, 

I coordinated closely with executive management and the board to 

implement a new comprehensive enterprise risk management 

framework, including establishment of new risk management committees, enterprise risk policies, and a board-approved risk appetite 

statement with associated delegations of authority across all categories of risk. 

Among other things, I coordinated the efforts to enhance the risk 

systems, implement new analytics and risk measures, strengthen 

the 24-hour global risk monitoring, and implement comprehensive 

enterprise-wide controls across the organization, and with the CEO 

to establish a culture of sound risk management throughout the 

company. 

As a key part of my CRO responsibility, I reviewed MF Global’s 

firm-wide exposure to the evolving risks. I regularly presented 

these exposures in the context of the approved risk appetite to executive management and to the board. 

Both executive management and the board received a monthly 

enterprise risk report that detailed firm-wide exposures against the 

6 

risk appetite and approved limits. As CRO, I also presented the 

board limit requests from executive management, along with their 

associated risks. 

Regarding the sovereign debt positions, MF Global had both 

country-level credit limits and specific sovereign limits in place to 

control the exposure of all activities in all countries, as well as to 

control specific sovereign exposures. 

With respect to Italy, Spain, Portugal, Ireland, and Greece, there 

were sovereign limits in place to support the European brokerage 

activity prior to Mr. Corzine joining MF Global. These limits were 

well within the company’s approved risk appetite, and were adjusted when conditions began to deteriorate in Greece. And I believe the positions in March 2010 were less than $500 million in 

total across these issuers. 

In June and July of 2010, I received requests to adjust the European sovereign limits from business units. I reviewed the positions 

and limits in detail with the business heads and with Mr. Corzine. 

I expressed my cautions on the requests, outlined a potential capital risk implied by the credit default swap market along with continued political and financial uncertainty in the relevant countries. 

While Mr. Corzine and I had different views on potential sovereign default risk, we agreed upon a $1 billion total limit across 

the named sovereigns. By mid-September, I recall that the position’s limits had increased to some $1.5 billion to $2 billion. 

During this time period, I expressed my increasing concerns with 

regard to the potential capital risk associated with the growing positions and began to express cautions on the growing liquidity risk. 

Additionally, around this time, the strategy significantly increased the positions of the repo-to-maturity trades which was 

being evaluated, given the profitability of the transactions and the 

importance of generating earnings. 

At this point, I indicated to Mr. Corzine that we would need to 

consult the board for approval of increased sovereign limits given 

the increased materiality of the risk as related to the board’s approved risk appetite. 

As such, a decision was made to consult with the board to discuss the strategy, the risks, and the sovereign limits. And subsequently, sovereign limits were presented to and approved by the 

board. 

By late October, I recall the positions were approaching some 

$3.5 billion to $4 billion, and I was asked to present another request to the board on behalf of executive management to increase 

the total sovereign limit to $4.75 billion. 

At this point, not only was I concerned with the capital risk, but 

given the size, I was now concerned with the liquidity risk relative 

to the risk appetite and taking into account the liquidity risks presented by other positions held by the company. 

I again discussed my concerns about the positions and the risk 

scenarios with Mr. Corzine and with others. However, the risk scenarios I presented were challenged as being implausible. At the 

end of November 2010 board meeting, I presented the new requests, along with a detailed analysis of the potential liquidity risk 

stress scenarios. 

7 

These scenarios included potential variation margin requirements from price changes of the securities, as well as potential initial margin calls from the repo counterparties. 

These scenarios were presented at both the individual sovereign 

levels, as well as the coordinated levels across all sovereigns and 

all repo counterparties. 

I also provided an analysis of the CDS market and highlighted 

the significant capital risk, given the sovereign default risk associated with unresolved issues in Europe. 

During this meeting, all of the risks were debated. In particular, 

the liquidity scenarios were debated and were challenged by some 

members of the board as not being plausible. Ultimately, the board 

approved the requests, conditioned on the limits being evaluated 

again in 2011, which is when I left the company. 

I would be happy to answer the subcommittee’s questions. 

[The prepared statement of Mr. Roseman can be found on page 

113 of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

Mr. Stockman, you are now recognized. 

STATEMENT OF MICHAEL G. STOCKMAN, FORMER CHIEF RISK 

OFFICER, MF GLOBAL HOLDINGS, LTD 

Mr. STOCKMAN. Thank you, sir. 

Chairman Neugebauer, Ranking Member Capuano, and distinguished members of the subcommittee, thank you for the opportunity to make this brief statement. 

I am deeply saddened by the bankruptcy of MF Global and its 

impact on its customers, shareholders, and employees. Although I 

was only at the company for approximately 9 months, I hope my 

testimony today will help the committee in obtaining a clearer picture of what happened at MF Global during my tenure at the company. 

I have worked in the financial services industry for more than 

25 years. Of particular note, I served as a risk officer at UBS for 

over a decade, eventually rising to the position of chief risk officer 

for the Americas for that institution. 

Since 2006, I have been a member of the MBA advisory board 

at the Tuck School of Business up at Dartmouth College, where I 

have also served as a visiting scholar in the fall of 2009. 

I began interviewing for the position of chief risk officer at MF 

Global in the fall of 2010. During the interview process, I was informed that MF Global was in the process of transitioning its business model from a traditional commodities broker to a full-scale investment bank and that the company was seeking a new chief risk 

officer with the experience and skill set to assist in that transition. 

In or about January 2011, MF Global offered me the position of 

chief risk officer and I joined the company in that capacity, reporting directly to the chief operating officer. My responsibilities included, among other things, assessing market and credit risk for 

the company. I provided analysis about these risks to senior management and the board, who used this information in setting the 

company’s business strategy. 

I was ably assisted in the performance of my duties by a strong 

staff of approximately 60 dedicated employees, located in company 

8 

offices around the world, including the United States, Europe, and 

Asia. 

Although the chief risk officer did not have formal responsibility 

for managing the company’s liquidity risk, my staff and I performed numerous analyses measuring the company’s potential liquidity needs under various stress scenarios. 

My understanding is that my portfolio of responsibilities as a 

CRO was largely the same as my predecessor, Mr. Roseman. There 

has been substantial discussion about MF Global’s participation in 

transactions involving European sovereign debt known as repo-tomaturities (RTMs). 

The company’s European sovereign debt trading strategy was 

firmly in place when I joined the company in late January 2011, 

as mentioned by Mr. Roseman. At that time, the board had approved a sovereign limit of $4.75 billion. 

After I joined MF Global, the risk department regularly analyzed 

the company’s sovereign RTM positions. For the first several 

months of my tenure, based on analyses performed by the department, I believed that the risk profile associated with the company’s 

sovereign deposition was acceptable in light of the then-prevailing 

market conditions. 

Among the many metrics supporting this assessment were credit 

ratings, credit spreads, and probabilities of default, among other 

things. 

In addition, the risk department, under my direction, analyzed 

potential liquidity needs associated with these trades under 

stressed market conditions and had received information from 

other departments that the company possessed adequate liquidity 

sources to address such potential needs. 

As the 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 associated with its European sovereign 

debt trading positions and to consider entering into hedging transactions to reduce the company’s exposure. 

In July of 2011, I initiated several discussions with senior management to express this view and explore such risk mitigation 

strategies. I also highlighted the increased default and liquidity 

risks associated with the sovereign RTMs in written and oral presentations to the board at the August 2011 board meeting. 

In my view, the board and senior management were highly sophisticated. The strategy was in place, and they knew and understood how the RTMs worked. They were well aware of the increased risk caused by weakening market conditions in the summer, as highlighted in my reports to the board. 

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 positions in European sovereign debt and to allow existing long positions to roll off as the underlying securities reached 

maturity, thereby reducing the company’s exposure over time. 

It is my understanding that none of the sovereign debt securities 

underlying the RTMs have defaulted or been restructured, and all 

of the securities in the RTM portfolio that reach maturity have 

been paid in full. 

9 

I am, of course, aware and deeply saddened about the numerous 

press reports of the more than one billion dollars in customer funds 

that are missing and unaccounted for. I have no personal knowledge of any missing funds or unreconciled customer accounts. 

While at MF Global, I did not have responsibility for treasury 

functions such as fund transfers and the maintenance of segregated 

customer funds. Like everyone else, I am truly hopeful that all the 

missing customer funds will be located and promptly returned to 

their rightful owners. That concludes my statement, and I look forward to being as helpful as I can today. 

[The prepared statement of Mr. Stockman can be found on page 

120 of the appendix.] 

Chairman NEUGEBAUER. Thank you. We will now go to questions. 

Mr. Stockman, in a March 2011 memo to the board, you highlighted some of the market risk associated with the firm’s European RTM trades, and under the heading of ‘‘late market risk,’’ you 

identify liquidity risks that are associated with potential haircuts 

from MF Global’s counterparties. 

One scenario I think that is in that report requires that if that 

scenario were to play out, the company would have to come up with 

about 761 million additional dollars. Are you familiar with this 

memo? 

Mr. STOCKMAN. Yes, sir. 

Chairman NEUGEBAUER. Yes. And do you agree with the conclusions that you reached in that memo about the market risk and liquidity risk associated with the European RTM trades? 

Mr. STOCKMAN. Yes. I think that was a fair representation of 

some stressed market conditions that we should analyze. 

Chairman NEUGEBAUER. And then I believe in October, you produced a document which I think we called ‘‘break-the-glass’’ scenarios. 

And I think in this particular document, you said, forget scenarios one and two; we are in a different environment now. So, you 

outlined additional scenarios where additional liquidity requirements would be needed, based on some additional scenarios. Is that 

correct? 

Mr. STOCKMAN. Sir, was that in the August document? 

Chairman NEUGEBAUER. No, this was, I believe, in October. It is 

‘‘Stress Scenario Analysis Downgrade MF Global, Potential Impact 

of MF Global.’’ 

Mr. STOCKMAN. I see. The scenarios referred to in the March 

memo are specific to the sovereign risk. And the ‘‘break-the-glass’’ 

scenario, albeit may have some similar numerology, I am not sure 

that we are talking apples and oranges just yet. 

Chairman NEUGEBAUER. Let me ask you, did you prepare this 

document, the October document? 

Mr. STOCKMAN. I did not prepare that document. That was the 

work product of the finance and treasury group. I had a senior 

member of my staff assist in the preparation of that document. And 

while I was at the company, I actually did not see a final outcome 

of the document there that you are referring to. 

10 

Chairman NEUGEBAUER. So they were doing a stress scenario 

analysis and you are the risk management officer and you didn’t 

see this document? 

Mr. STOCKMAN. I did not see the final outcome of that document 

while I was at the firm. 

Chairman NEUGEBAUER. So the stress scenarios that you were 

familiar with were the ones that were done in August. Is that correct? 

Mr. STOCKMAN. Correct. 

Chairman NEUGEBAUER. And you had a different scenario in 

your August memo than you had in your March memo. Is that correct? 

Mr. STOCKMAN. Agreed. Understood, yes, sir. 

Chairman NEUGEBAUER. Yes. And what was the difference? 

Mr. STOCKMAN. The difference in moving from the March scenario to the August scenarios were, as the market conditions had 

changed over time, my risk department and myself always tried to 

keep pace with updating the market conditions and stress scenarios as the market conditions changed. And so what— 

Mr. PEARCE. Mr. Chairman, could you have him pull the microphone just a little bit closer? 

Chairman NEUGEBAUER. Okay. 

Mr. STOCKMAN. I’m sorry. 

Chairman NEUGEBAUER. Yes. 

Mr. STOCKMAN. So the scenarios that you are referring to, scenarios one and two in March were effectively updated to incorporate more recent market conditions—and apologies for the different numerology, but the basic point was those updated scenarios 

were to capture some of the more recent market volatility and so 

forth. 

Chairman NEUGEBAUER. Did you have greater concern about the 

liquidity and market risks in August than you had in March? 

Mr. STOCKMAN. As a general matter, that is correct. 

Chairman NEUGEBAUER. And did you express that to Mr. Corzine 

and to the board? 

Mr. STOCKMAN. Yes, sir, in a series of meetings as I became more 

concerned; in particular, in July. 

Chairman NEUGEBAUER. In that scenario that you did in August, 

did you still feel like the company had the ability to meet the liquidity needs, should those scenarios play out? 

Mr. STOCKMAN. I apologize. Could you just ask that question 

again? 

Chairman NEUGEBAUER. Yes. So scenarios three and four that 

you did in August require you spell out additional liquidity requirements should those scenarios play out. Were you able to validate 

that if those scenarios did play out, that there was sufficient liquidity for the firm to sustain those scenarios? 

Mr. STOCKMAN. I see what you are just asking. Sure. Eventually 

these various discussions about either risk mitigation and, in particular, increased liquidity scenarios, were discussed and debated 

at the board. 

So I would have to suggest—that suggests that there was full information to senior management and board members, and with the 

11 

understanding that these scenarios could play out and that potential liquidity would be available. 

Chairman NEUGEBAUER. Would be available. And what would— 

Mr. STOCKMAN. To the best of my recollection. 

Chairman NEUGEBAUER. But you didn’t. You just reported, but 

you did not verify whether the liquidity was available. Was that 

not part of your responsibility? 

Mr. STOCKMAN. The actual liquidity function is part of the CFO 

and treasury area with respect to sources of liquidity. And as it relates to the various discussions and information that I was disseminating in July, those individuals responsible for ensuring that liquidity was available saw this information and then made an informed judgment. 

Chairman NEUGEBAUER. So I just want to go back here and recraft. In March, you said to the board that you were concerned, and 

previously, Mr. Roseman had said he was concerned about these 

positions. In August, you became more concerned about these positions. And then in October, the company put together a ‘‘break-theglass’’ thing with much more aggressive scenarios. 

And then on October the 24th, during an investor call, Mr. 

Corzine—this is 7 days before the bankruptcy—stated that MF 

Global’s RTM positions have relatively little underlying principal 

risk and that the structure of these transactions themselves essentially eliminates market and financing risk. 

Do you agree with that statement? 

Mr. STOCKMAN. I apologize. Could you just run that statement by 

me again? 

Chairman NEUGEBAUER. Mr. Corzine, on October the 24th, said 

in a statement with investors, a call with investors, that MF 

Global’s RTM positions had relatively little underlying principal 

risk, and that the structure of these transactions themselves essentially eliminates market and financing risks. 

Mr. STOCKMAN. I had no reason to doubt Mr. Corzine’s comments 

at that point. 

Chairman NEUGEBAUER. You wouldn’t doubt it? Is that your testimony? 

Mr. STOCKMAN. Yes. 

Chairman NEUGEBAUER. And 7 days later, the company goes 

bankrupt? How do you justify that? 

Mr. STOCKMAN. Sir, the downfall of MF Global in those final 

weeks was a very complex issue and contained the confluence of at 

least three challenging events: one, the negative earnings related 

to a tax write-off, tax-deferred asset write-off; second, the downgrades that were happening at that point in time; and third, the 

perception in the marketplace regarding the riskiness of the sovereign strategy. 

All seemed to come together in a very short period of time, so 

that the outcome unfortunately was unpredictable as we walked 

through that challenging period of time. 

Chairman NEUGEBAUER. I see my time has expired. 

And now, Mr. Capuano is recognized for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

And I want to thank my colleagues for their indulgence—you are 

allowing me to run in and out. I apologize, but I have another 

12 

markup down the hall at Transportation on a very important bill. 

So, I will be in and out all day. 

Mr. Roseman, I want to ask you some questions based on your 

written testimony. I am just going to actually ask them in the 

order that they appear. On page three, you make a statement that, 

‘‘over time, stakeholders, including the rating agencies, etc., etc., 

gained confidence in MF Global’s improvements.’’ 

I have the record of both S&P’s and Moody’s ratings of MF Global and the only time that there was, I guess you could consider it 

an upgrade, was Friday, July 18, 2008, when all they did was just 

take away the negative outlook. They kept the triple-B rating, but 

all they did was take away the negative outlook. And that was actually before you took office at MF Global. 

Am I missing something? Am I missing information that I should 

have? 

Mr. ROSEMAN. During discussions with the rating agencies, with 

myself and others in executive management, they did continue to 

express their interest. 

Mr. CAPUANO. But they didn’t take action on ratings. They said 

good things, but then didn’t take it into account when it came to 

a rating. 

Mr. ROSEMAN. Then I maybe misstated in my written testimony. 

Mr. CAPUANO. That is fair. Okay. 

I guess from your testimony, it certainly seems as though, presuming that in June or July—I’m sorry, May of 2010, you agreed 

on a $1 billion nominal limit across-the-board. And yet by mid-September, only a few months later, obviously the people who ran the 

business had completely ignored that board approval, your agreement, and had blown through it almost to the amount of $2 billion. 

And then later on, 1 month after that, they have doubled it 

again. There is no indication here that the board took any action 

in between that time, so there was an agreement at $1 billion. 

They ended up at $4 billion by October of 2010. 

I am just curious, am I reading this correctly? 

Mr. ROSEMAN. No, you are not, sir. 

Mr. CAPUANO. Okay. 

Mr. ROSEMAN. When the $1 billion limit was approved, that was 

taken under management delegation authority for risk from the 

board, so that approval did not have to go to the board of directors. 

Subsequently, any other limit increases before the $2 billion were 

also taken internally and approved by myself and Mr. Corzine. 

They did not pose what I considered a material issue relative to 

risk appetite, per se. 

Mr. CAPUANO. So you are saying that you and Mr. Corzine were 

authorized and did in fact agree to go to $2 billion? 

Mr. ROSEMAN. Up to $2 billion when it became— 

Mr. CAPUANO. That is mid-September 2010. What about the $4 

billion by October of 2010? 

Mr. ROSEMAN. Sir, when it got to some $2 billion, I don’t remember the exact number, then I indicated to Mr. Corzine that we 

would have to approach the board of directors for approval for further increases. 

Mr. CAPUANO. So he went to $4 billion without your agreement 

and without board approval? 

13 

Mr. ROSEMAN. No. I believe at that time, I recall going to the 

board and discussing the strategy and the limits to get further increases, and there were a few periods in between my written statements where there were meetings with the board’s executive committee to approve the limits. 

Mr. CAPUANO. So then you are suggesting—again, the written 

testimony is not that clear, then. You are telling me now that at 

no time did the investment limits exceed what was agreed to by 

you and/or the board? 

Mr. ROSEMAN. That is my recollection, yes. 

Mr. CAPUANO. Okay. That is fair enough. Your statement, in my 

opinion, is not that clear because if they had, I guess during that 

time, did anybody know you were doing that? Were you telling— 

I guess the board did now, obviously. Were you telling the general 

public? Were you telling your investors? Were you telling the credit 

rating agencies? 

Mr. ROSEMAN. Prior to that time, within the $2 billion number, 

in my opinion because the risks were controlled, the positions were 

controlled, the maturity buckets in 3-month, 6-month, 12-month 

periods, it did not pose a material risk to the company. 

Mr. CAPUANO. That is not what I asked. I asked: Were you telling the credit rating agencies? Were you informing your investors 

that you had indeed hit that number? 

Mr. ROSEMAN. I am not aware of myself notifying, to answer your 

question specifically, the rating agencies. And I am not aware, it 

is possible, that others had notified them of those positions. But 

again, we have to keep in account the materiality of the positions 

and the short-datedness of the positions. 

Mr. CAPUANO. So basically, you think there was nothing wrong 

going on up until $4 billion, when the board then approved up to 

what, $4.75 billion, if I am reading this correctly? 

Mr. ROSEMAN. I would say my comfort level and the board’s risk 

appetite started getting exceeded the approved-risk appetite at that 

time, I should clarify, got exceeded around $2 billion. That required 

to go back— 

Mr. CAPUANO. So around $2 billion, you and the board were both 

getting uncomfortable? 

Mr. ROSEMAN. No. It is relative to the stated-risk appetite that 

had been approved, given the prior strategies of the company. At 

that point, because the strategy was evolving, it was escalated to 

the board for approval of those specific limits; control the risk. 

Mr. CAPUANO. I am missing something. I am asking simple questions. You are telling me the board approved up to $4 billion, and 

you are saying that you and the board were getting uncomfortable 

in the $2 billion range? 

Mr. ROSEMAN. No. I specifically started becoming more uncomfortable at $2 billion, and I felt there was an excess of the approved 

boards-approved risk appetite statement at that point in time. 

Mr. CAPUANO. And did you tell anybody that? 

Mr. ROSEMAN. Yes. I presented it to the board. 

Mr. CAPUANO. Did you tell the credit rating agencies that? 

Mr. ROSEMAN. At that point in time, that was, I don’t think an 

issue to bring to the credit agencies until after discussions potentially with the board. 

14 

Mr. CAPUANO. They were rating you this entire time. They had 

you in a pretty good watch actually. They kept either affirming or 

downgrading you pretty much repeatedly from 2008. I have never 

seen this many credit ratings of a firm by two major credit rating 

agencies so frequently. 

It seems like every couple of months, somebody was rating you. 

Mr. ROSEMAN. You have to remember to keep in context to MF 

Global’s history. 

As you know, in February of 2008, shortly after the IPO, the 

company suffered a wheat trading, wheat trading, rogue trading— 

Mr. CAPUANO. Yes, I understand that, but I get that is a separate 

item. I will give you the benefit of the doubt that you addressed 

that issue. That is why you were hired and okay, that was a problem, but that was a minor problem you took care of it. 

I am wondering going forward, as you are getting credit rating 

agencies in your face every couple of months, then were you telling 

them that you were uncomfortable at the levels they were at? 

Mr. ROSEMAN. First, sir, I didn’t meet with the rating agencies 

regularly. I wasn’t the— 

Mr. CAPUANO. So the credit rating agencies were rating you 

without talking to the risk manager? 

Mr. ROSEMAN. Periodically, I would. Not every month or every 3 

months, but I would say on a regular basis, maybe once or twice 

a year. 

Mr. CAPUANO. And when you talked to them, did you tell them 

that you were uncomfortable? 

Mr. ROSEMAN. Having said that, sir, they had up until that point 

in time, I firmly believe they had a strong transparency on the risk 

of the organization. 

Mr. CAPUANO. So you told them that, gee, we are over $2 billion, 

I am starting to get a little nervous? 

Mr. ROSEMAN. I did not say that to them. 

Mr. CAPUANO. Okay, that is what I was trying to get at. 

Mr. Roseman—I’m sorry, Mr. Stockman, when you took office in 

January of 2011, were you aware of your predecessor’s concerns of 

the $2 billion limit? 

Mr. STOCKMAN. Mr. Roseman and I did not spend a lot of time 

together in the overlap and as a general matter, these were a large 

position but I was not specifically aware of concerns at that point 

upon joining. 

Mr. CAPUANO. So that as he was leaving, neither did he tell you 

nor was any documentation that you came across during your period of time that indicated, gee, once they hit $2 billion, my predecessor got a little nervous, maybe I should think about this? 

Mr. STOCKMAN. I explored upon arrival a couple of board meeting 

minutes that covered that period from, to the best of my recollection, November, December, before I joined to try and explore a little bit what had been undertaken just before I joined and in those 

minutes was no specific indication of concern but it certainly did 

highlight the risks. 

Mr. CAPUANO. So you didn’t find anything that basically said 

that a bell went off and when you came in, there were four-anda-half, give or take a billion, and that didn’t get you nervous? You 

thought that was acceptable? 

15 

Mr. STOCKMAN. I am saying this a little differently, in those 

board memo minutes, there was an indication certainly that the 

risks were discussed and highlighted by Mr. Roseman and with the 

board and that gave me some confidence that there was a full understanding of— 

Mr. CAPUANO. I apologize, I am way over my time. I appreciate 

the generosity of the chairman. 

One last question, and I will just jump to it. 

At the end, you say you have no personal knowledge of where the 

money is or what happened. Do you think that maybe this excessive risk and the pressure might have caused the losses that were 

seen in these excessive risks might have maybe encouraged some 

of the employees there to either bend or stretch or even possibly 

break rules? 

Mr. STOCKMAN. Sir, I don’t think so, and it would be very hard 

at this point in time and I hope that some point in time we really 

do understand the details of that situation and in particular, as it 

relates to these sovereign risks and the analysis that when the last 

chapter does come through, I think we will be able to see with a 

bit more clarity what in fact the— 

Mr. CAPUANO. Thank you. 

Mr. Chairman, thank you very much for your indulgence. 

Chairman NEUGEBAUER. Thank you. 

I just have one quick follow-up for Mr. Stockman. I just want to 

go back to this ‘‘break-the-glass’’ report on October the 13th and it 

says that this report was prepared by Treasury and Finance and 

Risk teams, that would be your team. Is that right? 

Mr. STOCKMAN. Correct, that is what I mentioned before, a senior 

member from my team provided assistance on some of those scenarios. 

Chairman NEUGEBAUER. So this is a plan where these people 

think they are about to go under, this is a ‘‘break-the-glass’’ deal. 

You are the chief risk officer and you are not a part of this plan? 

Mr. STOCKMAN. As I said, I had a senior officer doing some of the 

risk analysis as it relates to the production of that particular document. I was not part of the specific risk team who contributed to 

that and the Treasury and Finance area really drove the assessment, so yes, I had not seen the final outcome. 

Chairman NEUGEBAUER. But you are aware that a document is 

being prepared, they are getting in the bunker and you agree with 

Mr. Corzine’s statement on October 24th that everything is fine 

having knowledge that the senior management is working on a 

plan to go to the foxhole? 

Mr. STOCKMAN. Yes, to the best of my knowledge, the ‘‘break-theglass’’ scenario is really a contingency plan that would have been 

an intelligent thing to do and under a number of different cases, 

in particular for a company that was just above investment grade. 

So I think that those, as I said, the ‘‘break-the-glass’’ scenario is 

something that was an intelligent contingency plan to be looking 

at. 

Chairman NEUGEBAUER. What prompted them to do that? It 

wasn’t hey, it is October, why don’t we put together a ‘‘break-theglass’’ strategy. There had to be something that caused them to 

16 

think that, wouldn’t you think that they needed to develop a plan 

like that? 

Mr. STOCKMAN. To the best of my recollection it was a board request and again, I think to find out some detail as to what the request and how it was prepared, would have to be really directed 

towards our Finance and Treasury group who really drove that. 

Chairman NEUGEBAUER. I appreciate the committee’s indulgence. 

Now, I yield to Mr. Fitzpatrick, the vice chairman of the subcommittee. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Mr. Stockman, you just indicated that the ‘‘break-the-glass’’ plan 

was a board request? Was there anybody within the organization 

who had equal concerns to indicate it was a board concern? 

Mr. STOCKMAN. I’m sorry. I didn’t hear the question. 

Mr. FITZPATRICK. You indicated the generation of this document, 

‘‘break-the-glass’’ around mid-October, was a board request, would 

that have come from within the organization at all? 

Mr. STOCKMAN. To the best of my understanding, it came from 

the board. 

Mr. FITZPATRICK. Directly from the board. 

You indicated that you didn’t spend much time in the transition 

with Mr. Roseman. Did you spend any time as you passed off the 

obligations of chief risk officer? 

Mr. STOCKMAN. Yes. 

Mr. FITZPATRICK. How much time did you spend with him? 

Mr. STOCKMAN. Michael and I spent an hour together 2, 3, 4 

weeks into my initial—when I first arrived and Michael was helpful in the transition as well with a series of—including a series of 

e-mails that I vaguely remember receiving, but I couldn’t speak to 

exactly their— 

Mr. FITZPATRICK. Mr. Roseman indicates his concern about the 

risk in excess of $2 billion of sovereign debt? 

Mr. STOCKMAN. As a general matter, during that brief discussion 

that we had for an hour, to the best of my recollection, it was certainly indicated as an item of interest as it relates to the company, 

but I don’t recall any specific discussions on concerns about sovereign risk. 

Mr. FITZPATRICK. I want to go back to the October 13th ‘‘breakthe-glass’’ scenario which you indicated in response to the chairman’s question that you were not directly involved in this plan. Is 

that correct? 

Mr. STOCKMAN. Correct. 

Mr. FITZPATRICK. Now, you are the chief risk officer responsible 

for how many employees of the organization? 

Mr. STOCKMAN. On my team, approximately 60. 

Mr. FITZPATRICK. Sixty? Your office is in the same building as 

them? 

Mr. STOCKMAN. Yes. 

Mr. FITZPATRICK. Liquidity was a key concern of this plan, correct? 

Mr. STOCKMAN. The first time I had an opportunity to really look 

at it carefully was just a day ago when it was provided to me. 

Mr. FITZPATRICK. Sir, our committee obtained internal notes from 

S&Ps October 28th management meeting and the notes contained 

17 

a discussion of MF Global’s ‘‘big European exposure.’’ The analyst 

who drafted these notes also writes that MF Global is scrambling 

for funding and it had lost its liquidity. 

Now, I would like to take you to October 24th, a day right in the 

middle of when this ‘‘break-the-glass’’ plan was being drafted and 

implemented and just 4 days before S&P said that MF Global was 

scrambling for funding. 

On the 24th, the MF Global CFO wrote an e-mail to S&P analysts stating, among other things, that he believed MF Global’s capital and liquidity ‘‘has never been stronger,’’ and that, ‘‘MF Global 

is in its strongest position ever as a public entity.’’ 

Can you reconcile those two statements for our committee? 

Mr. STOCKMAN. I can’t. I don’t know in what context our CFO 

sent that note out. So I couldn’t, and to the best of my recollection, 

I was not part of that dialogue. So I really couldn’t speak to that. 

Mr. FITZPATRICK. Did you speak with Mr. Steenkamp? Did you 

speak with him around that time? 

Mr. STOCKMAN. Not on this subject, no. 

Mr. FITZPATRICK. Given what you know about the liquidity challenges that MF Global was facing now on October 24th, and which 

the ‘‘break-the-glass’’ plan had foreseen, how do you think that Mr. 

Steenkamp could make this representation to a credit rating agency? 

Mr. STOCKMAN. Yes, again, I would be speculating as to what 

context Mr. Steenkamp was referring to. And it would be hard for 

me to give you a comment as to why and what the context was for 

that particular note. 

Mr. FITZPATRICK. Were there internal meetings between your 

treasury people, your risk people, and your finance people in the 

creation of this document? 

Mr. STOCKMAN. There were. 

Mr. FITZPATRICK. And were you involved in any of those meetings? 

Mr. STOCKMAN. Very early on, as the treasury and finance team 

was pulling the document together, and as I mentioned before, subsequent—excuse me, after that point in time, a senior member of 

my staff assisted in the creation of that document as it relates to 

some of the various stress scenarios. 

Mr. FITZPATRICK. Mr. Stockman, $1.2 billion of customer money 

is missing. I have constituents who have lost a significant amount 

of money. Your risk team is putting together what is essentially an 

Armageddon plan for the organization, and you want the committee to believe that you had no direct involvement in the creation 

of the plan and you never saw the plan until very recently? 

Mr. STOCKMAN. Again, sir, I mentioned that a contingency plan 

such as that was certainly sensible. And that is—I am just giving 

you the stated truth of my involvement in it. 

Mr. FITZPATRICK. I thank the chairman. 

Chairman NEUGEBAUER. I now recognize Mr. Miller for 5 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

Mr. Stockman, in response to Mr. Capuano’s questions, you said 

that you only spent an hour with Mr. Roseman and that the subject of his concerns about the sovereign debt positions did come up. 

18 

But you also knew that you were being hired from the outside to 

replace a CRO who was being asked to leave. Did you have any 

conversations in your interviews about why Mr. Roseman was leaving and if it had to do with his risk appetite? 

Mr. STOCKMAN. In those conversations, it was a congenial meeting. We talked a little bit about—it was a congenial meeting. We 

talked about how the concept of my being hired was really related 

to the company’s stated goals of transitioning from a broker, futures commissions broker, to a broker-dealer, and that my skill set 

had more history and was more aligned with what the firm was 

trying to do. 

So it was really more about that as it relates to their hiring. 

Mr. MILLER OF NORTH CAROLINA. And that is the reason they 

gave you that Mr. Roseman was being asked to leave? Did they discuss his risk appetite? Did they have a discussion with you about 

risk appetite for the firm, what they wanted to have for the firm? 

Mr. STOCKMAN. As a general matter, yes, we talked about—if you 

are referring to the point of when I got to the firm, we certainly 

talked about stated goals going forward and the types of analysis 

and assessment that would have to be performed in order to accommodate that. 

Mr. MILLER OF NORTH CAROLINA. According to published reports, 

Mr. Roseman had direct access to the CEO and to the board. And 

when you came in, your access was no longer to the CEO, no longer 

to the board, but to the COO. Did you have a discussion about that 

change in organization? 

Mr. STOCKMAN. Yes. It made— 

Mr. MILLER OF NORTH CAROLINA. Did you have any questions 

about whether concerns that you might have about risk would 

make it to the board? 

Mr. STOCKMAN. No, sir, my—I reported directly to the COO and 

had responsibilities to report to the board from time to time on risk 

matters to the best of my understanding— 

Mr. MILLER OF NORTH CAROLINA. Did you ask why you were no 

longer talking to the board? 

Mr. STOCKMAN. No, sir, let me make sure I correct you on this. 

While I reported directly to the COO, I also had obligations to the 

board to report on risks and highlight risks similar to my predecessor. So I had access to the board, if that is the— 

Mr. MILLER OF NORTH CAROLINA. Okay. Published reports are 

that your role basically consisted of helping prepare PowerPoint 

presentations for Jon Corzine to make to the board. Is that incorrect? 

Mr. STOCKMAN. That is incorrect. 

Mr. MILLER OF NORTH CAROLINA. Okay. Mr. Neugebauer read a 

statement that Mr. Corzine made to investors shortly before the 

collapse that the repo-to-maturity presented no threat to capital of 

any consequence. A week before the collapse, the CFO, Mr. 

Steenkamp, told Standard & Poor’s, S&P, that MF Global was in 

its strongest position ever. And actually, while Moody’s had downgraded MF Global to junk status 4 days earlier, at the time of the 

collapse, S&P still had MF Global at investment grade. 

Were you consulted in any way on the representations made by 

Mr. Corzine or by Mr. Steenkamp? 

19 

Mr. STOCKMAN. I was not. 

Mr. MILLER OF NORTH CAROLINA. Did you know those representations were being made? 

Mr. STOCKMAN. Mr. Corzine’s comments, I believe, were public, 

if I understood the quote that you were referring to. And the representation, as I mentioned before from Mr. Steenkamp, I was not 

involved or couldn’t represent him on what the context was that he 

was— 

Mr. MILLER OF NORTH CAROLINA. Did you pass along to anybody 

that you disagreed with those representations, that you thought 

there was, in fact, risk? Who did you tell? 

Mr. STOCKMAN. Sir, as I mentioned, as far as the risk highlights 

and risk reporting goes, for example, at the August board meeting, 

there was quite a detailed representation of both verbal and a 

PowerPoint presented. Is that the sort of example you are referring 

to? 

Mr. MILLER OF NORTH CAROLINA. Okay. You had an auditor, 

PricewaterhouseCoopers. Did they raise any concerns about the 

previous reporting relationship between Mr. Roseman and the CEO 

and the board and the change that you reported to the COO? 

Did they raise any concerns with the processes that MF Global 

had in place for proprietary trading and account segregation? Was 

PricewaterhouseCoopers, did they know about all this, did they 

know about the changes that were made, did they know about the 

ending of the direct reporting to the board by the CRO? 

Mr. STOCKMAN. I was not involved in any direct relationships or 

discussions with Pricewaterhouse. 

Mr. MILLER OF NORTH CAROLINA. Are you aware of any? Did 

anyone tell you they talked to PricewaterhouseCoopers or that 

PricewaterhouseCoopers had raised any kind of concern or they 

had said, ‘‘It is okay with us?’’ 

Mr. STOCKMAN. Not to my understanding. 

Mr. MILLER OF NORTH CAROLINA. You know of no discussion at 

all, of any conversation, any communication with 

PricewaterhouseCoopers about the changes in the organization of 

MF Global, the changes in the reporting relationship between the 

CRO and the board or any changes or anything regarding the processes for proprietary trading and account segregation? 

Mr. STOCKMAN. To the best of my recollection, I was not involved 

in those discussions. 

Mr. MILLER OF NORTH CAROLINA. Did you have a conversation at 

a water cooler? Did you hear anything? Was there a rumor? 

Mr. STOCKMAN. Again, I wasn’t responsible for the 

PricewaterhouseCoopers relationship or what— 

Mr. MILLER OF NORTH CAROLINA. I know that. Did you hear 

about it? Every organization is a rumor mill. Were there no discussions within the organization? 

Did you hear from anybody whether PriceWaterhouseCoopers 

was okay with all of this? 

Mr. STOCKMAN. Again, I come back to my original comment. To 

the best of my recollection, I was not aware of specific conversations regarding the items you just mentioned. 

Mr. MILLER OF NORTH CAROLINA. My time has expired. 

20 

Chairman NEUGEBAUER. Now, Mr. Posey is recognized for 5 minutes. 

Mr. POSEY. Thank you very much, Mr. Chairman. It appears— 

just trying to put the pieces of the puzzle together as simply as possible—that Mr. Roseman was a chief financial officer until he 

stopped telling Mr. Corzine what he wanted to hear. And so, then 

Mr. Stockman was hired to tell Mr. Corzine what he wanted to 

hear. Just saying. That is clearly how it appears so far. 

I read an article, ‘‘Sold Out: MF Global Investor Protections 

Trampled in Private Meeting Between Government Regulators.’’ 

I would like to begin by asking Mr. Stockman just a few questions about that meeting. Do you know about the meeting with the 

SEC, JPMorgan, Goldman Sachs, and others? 

Mr. STOCKMAN. No, sir, I wasn’t involved with those meetings, if 

I understand which ones they were. 

Mr. POSEY. Did you know about the meeting? 

Mr. STOCKMAN. I was aware as a general matter, but I was not 

involved with those meetings. 

Mr. POSEY. Do you know the names of those who were there? 

Mr. STOCKMAN. I do not. 

Mr. POSEY. How did you find out about the meeting? 

Mr. STOCKMAN. If it is the SEC meetings that you are referring 

to, some of this was in the public and as a general matter— 

Mr. POSEY. Rumor mill or— 

Mr. STOCKMAN. I don’t recall exactly where, but as I said, I was 

not involved with those. 

Mr. POSEY. Do you know the names of anyone who was there, 

under oath? 

Mr. STOCKMAN. Under oath, to the best of my knowledge, again, 

making sure I understand which meetings you are referring to, I 

wasn’t aware of who was at those meetings. 

Mr. POSEY. Clearly, the October 31st meeting, which you mentioned, was with the SEC. Do you know the names of anyone who 

was at that meeting? Rumored? First-hand? Second-hand? Thirdhand Fifth-hand? I want to know if you know about anyone or 

about anyone who was at that meeting. 

Mr. STOCKMAN. I do not. 

Mr. POSEY. Did you find out after that meeting what transactions were made by MF Global Holdings? 

Mr. STOCKMAN. No, sir. 

Mr. POSEY. You don’t know what decisions came out of that 

meeting, what they decided to do with assets, how they decided to 

hose the investors? You don’t know any of that? You have not 

heard of any of that anywhere? 

Mr. STOCKMAN. Sir, if you are referring to the final days of the 

company wind-down, is that what you are referring to? 

Mr. POSEY. You are the risk manager. I am just a Congressman 

trying to put pieces together. You have more knowledge of this in 

your little finger than everybody up in this board has, and we are 

trying to get you to tell us a little bit, so that we may better protect 

the public, and maybe for the first time in 4 years have some accountability for the thieves who are plundering the public. It is important for you to be honest with us and tell us everything you 

know about this situation in order to do that. 

21 

Your testimony, what you knew about it, did you want say, this 

is all I know about it; you said, this is all I care to say about it. 

This meeting is very, very critical what went on at this meeting. 

I want to know everything that you know about that meeting, and 

I am not going to stop asking questions about it on record, under 

oath, until the chairman makes me, unless you start answering 

some of them. 

Mr. STOCKMAN. I wouldn’t be able to answer to the question in 

any different way, because I was not there, or involved at that 

meeting. 

Mr. POSEY. The last question I asked you was the result of what 

came out of the meeting. Certainly, you knew what transpired after 

the meeting, didn’t you? There was a decision about selling some 

assets, who was going to get priority of the assets. Tell me what 

you know about that subsequent to the meeting, please. 

Mr. STOCKMAN. Subsequent to the meeting, I was not involved in 

the wind-down of the company or in its decision to file for bankruptcy. So I was not in the area, so to speak, when actual specific 

decisions were being made regarding which assets to sell in the 

wind-down. 

Mr. POSEY. So you are saying you don’t even know what decisions were made? 

Mr. STOCKMAN. I am saying that I was not involved in the winddown of the company during that period of time, when assets and 

decisions were being made to reduce exposure. 

Mr. POSEY. Who do you think is the best person to know what 

went on in that meeting? 

Mr. STOCKMAN. Again— 

Mr. POSEY. Under oath, I know. 

Mr. STOCKMAN. I am really just saying that not having been a 

participant or invited to the meeting that you are referring to, I 

think it wouldn’t be hard to figure out who the attendees were. But 

as you asked before— 

Mr. POSEY. Out of 400 million people in the United States of 

America, it could have been any of them; is that what you are telling me? 

Mr. STOCKMAN. No, sir. I am just saying, simply saying, that not 

having either been invited to that meeting or a participant at that 

meeting, that I wouldn’t know— 

Mr. POSEY. And you have no clue who would have been there? 

Mr. STOCKMAN. It would make sense that some senior management would have been there. 

Mr. POSEY. And some names maybe? 

Mr. STOCKMAN. Our senior management is—again, it is hard for 

me to be very specific because this particular meeting, I was neither invited nor a participant. So it is just— 

Mr. POSEY. Listen. You were not a lowly clerk in that organization. You know darn good and well what is going on within that 

organization. And you know darn good and well who you think 

should have been at that meeting. I am just asking you to be honest with us and do it. 

Mr. STOCKMAN. Again, I just have to keep coming back to, I could 

only imagine— 

22 

Mr. POSEY. Mr. Roseman, can you give me any ideas? Obviously, 

you needed to be replaced by this guy. But maybe you have a little 

bit better knowledge of how that organization works. 

Mr. ROSEMAN. Clearly, I wasn’t there, but in Mr. Stockman’s defense, it sounds like he wasn’t at the meeting. But after the fact, 

I am sure there was some direction that was given to individuals. 

I wasn’t there, so I can’t respond whether or not he knows what 

actions were given out or otherwise. 

Mr. POSEY. Who do you think would have been in attendance at 

the meeting? 

Mr. ROSEMAN. Certainly, if it were a very concerning meeting 

like you are suggesting, I would expect Mr. Corzine to be there. I 

would have expected Mr. Abelow to be there, and maybe a few 

other members of executive management, but at least these two individuals. 

Mr. POSEY. Okay. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I hate to do this, gentleman, but we are 

going to have to— 

Mr. ROSEMAN. That is speculation, though, of course. 

Chairman NEUGEBAUER. —move on. Ms. Waters? 

Ms. WATERS. Thank you very much, Mr. Chairman. It is clear to 

me what was taking place at MF Capital. And I think that this information has come out in a previous hearing or previous hearings. 

Mr. Corzine basically was a one-man show. He was the chairman 

and CEO, and he threatened the board when they got in the way 

of his sovereign trading. He was glad when Mr. Roseman left. He 

hired his own people. He did his thing. 

And so, I think there is no question that Mr. Corzine violated 

many of the rules of the game, in terms of being the chief and prolific trader who emerges out of all of this information. My real concern is what happened to the customer assets and the loss of $1.2 

billion in these customer funds? Mr. Stockman, what do you know 

about the decision that was made to utilize these customer funds 

despite the fact they were supposed to be segregated and protected? 

Mr. STOCKMAN. Ma’am, in my opening statement, I noted that I 

have no specific knowledge of client funds or segregated funds. And 

as far as my job duties, they were not involved with the treasury 

or— 

Ms. WATERS. What nonspecific knowledge do you have? 

Mr. STOCKMAN. I have no specific or nonspecific knowledge of— 

Ms. WATERS. So you knew nothing about any decisions that were 

made to use these customer funds? You know nothing about that? 

Is that correct? 

Mr. STOCKMAN. That is correct. 

Ms. WATERS. All right. Given everything that has happened, 

what would you do differently? 

Mr. STOCKMAN. That is a terrific question. We think that when 

the final chapter is written, I believe, at the moment, it is a little 

preliminary to make specific decisions and recommendations— 

Ms. WATERS. I didn’t ask for recommendations. You were the risk 

officer. You had the responsibility of at least alerting the board of 

directors or somebody about what was taking place. Obviously, you 

didn’t do it. 

23 

What would you do differently today? I don’t want to talk about 

any recommendations. I don’t want to talk about any—I simply 

want to know, if the position that you are in now, having been the 

risk officer, everybody looking at you and wondering where were 

you? You were absent or not absent. What would you do differently? 

Mr. STOCKMAN. Ma’am, I think the absent comment—I want to 

challenge you on that a little bit, which is to say that myself and 

my risk management team, we did our job during this period. We 

highlighted, analyzed, assessed risks, made transparent and clear 

to both senior management and the board the risks that we were 

running at the firm. 

Ms. WATERS. Who did you give this information to? 

Mr. STOCKMAN. Senior management and the board. And then, informed and sophisticated business judgments were made, based on 

my department’s assessments. 

Ms. WATERS. You may have said this already—excuse me; we 

only have so much time. In your report to the board or the management, did you say that this company was being placed in a highly 

risky situation with the sovereign debt trading that Mr. Corzine 

was involved in? 

Mr. STOCKMAN. Ma’am, for example, in the August board report, 

it was clearly highlighted in both written and verbal presentations 

to the board and senior management: number one, increased risk 

in the marketplace overall from the summer of volatility; number 

two, widening credit spreads; number three, increasing probabilities of default; number four, lowering liquidity in the marketplace; and number five, in particular, the increasing liquidity 

stress— 

Ms. WATERS. So in essence, you felt you did your job? Is that 

right? 

Mr. STOCKMAN. That is correct. 

Ms. WATERS. And there is nothing that you would have done differently? 

Mr. STOCKMAN. Ma’am, obviously, let me say with the benefit of 

20–20 hindsight, there are things that we would have done differently, knowing what we know now. 

Ms. WATERS. My time has expired. I yield back. 

Chairman NEUGEBAUER. We thank the gentlewoman. 

Mr. Renacci is recognized for 5 minutes. 

Mr. RENACCI. Thank you, Mr. Chairman. 

Mr. Stockman, I am over here on this side. 

Mr. STOCKMAN. Okay. 

Mr. RENACCI. Again, looking at all the questions you are hearing 

and getting, you are probably starting to understand that Mr. 

Roseman at least saw some issues, brought them to the board and, 

at the time, the board wasn’t happy with the decisions he was 

making, so they went out and hired somebody else. And that was 

you. 

So my question was, who recruited you? How did you come to 

this position? 

Mr. STOCKMAN. I came to the position through a search firm and 

then went through an extensive interviewing process. 

24 

Mr. RENACCI. Okay. Who ended up hiring you ultimately? Mr. 

Corzine? 

Mr. STOCKMAN. Do you mean, effectively, who made the decision? 

Mr. RENACCI. Yes. 

Mr. STOCKMAN. I was hired and directly reported to Mr. Abelow. 

Mr. RENACCI. So, Mr. Corzine had no influence in that decision? 

Mr. STOCKMAN. Oh, I am sure, as a matter of senior management, when you recruit for a senior position, I certainly interviewed with Mr. Corzine, but there was an extensive interview 

process with both Mr. Corzine and the board. 

Mr. RENACCI. Were you asked during the interview process your 

opinion at any time of MF Global’s appetite in taking a greater position in the European backed RTMs? 

Mr. STOCKMAN. The European backed RTMs specifically, to the 

best of my recollection, didn’t come up during the interview process 

which, as a general matter, wouldn’t be that unusual as it relates 

to proprietary positions for somebody who isn’t hired yet. 

Mr. RENACCI. Do you believe in any way that MF Global’s increased appetite, maybe during this discussion, this interview process, would have been a prerequisite of you being hired? Or do you 

think that was totally not a position or their decision? 

Mr. STOCKMAN. Yes. I believe it was not a prerequisite and, as 

I mentioned, not specifically discussed. And it was really about— 

the interview and hiring process was really about my skill set and 

where the firm had its stated goals were and where it was going. 

Mr. RENACCI. Okay. You said in your testimony that you noticed 

after you were hired, there was some concern noted, I think in the 

board minutes, that Mr. Roseman had addressed with the board, 

related to increased positions being taken in European-backed 

RTMs. What did you do after that? Did you just ignore that? Did 

you look into it? You were the risk officer. What did you do with 

that information? 

Mr. STOCKMAN. I began, soon after I arrived at the firm, to do 

my own analysis. And I was assisted by my department, and that 

analysis included a number of features and grew more sophisticated with every month that went by during my tenure. So the 

analysis included a number of elements; in particular, liquidity 

risk. 

Mr. RENACCI. You also said in your testimony that you felt their 

positions were acceptable. Is that correct? 

Mr. STOCKMAN. Correct. In the context of the first 3 or 4 months, 

while market conditions were what they were, much more benign 

and favorable, I found that the risk and reward were acceptable. 

And then, as we have discussed, in July, I had a change of view. 

Mr. RENACCI. So as all this was going on, as you look back 

through the minutes, you had no concerns about the potential outcome? You were comfortable that everything was going okay, right 

down to the last minute? 

Mr. STOCKMAN. Sir, I highlighted the risks, as I mentioned, in 

very specific form and fashion. And in those early few months, as 

I mentioned, I found them acceptable. Market conditions changed. 

And so did my view. 

Mr. RENACCI. My background is financial also. And I have had 

to deal with a lot of companies. There comes a time when you realVerDate Nov 24 2008 18:20 Sep 28, 2012 Jkt 075070 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\75070.TXT TERRIE
25 

ize things are going in the wrong direction and you really start to 

throw up some flags. Did you ever do that? Or did you— 

Mr. STOCKMAN. In July, as market conditions changed, that is 

when I began to recommend that the company think through carefully, not only really understanding the increased risk profile but 

that we consider hedging or reduction strategies. 

Mr. RENACCI. Mr. Roseman, regarding the ‘‘break-the-glass’’ plan, 

are margin calls or liquidity risk the kind of risk with which a chief 

risk officer at MF Global might concern himself? 

Mr. ROSEMAN. Certainly, liquidity risk is always a material concern. If you look at all companies that have failed, ultimately, it 

is generated by a liquidity risk event, or more often than not. Certainly, you need to have a very good understanding of the liquidity 

risk that the organization is facing, including margin calls. 

Mr. RENACCI. You did throw up the red flag to Mr. Corzine a couple of times. Can you just briefly tell me what his opinion was of 

your red flag being thrown up? 

Mr. ROSEMAN. Initially, there was certainly disagreement on the 

potential price risk or default risk associated with the positions in 

regard to capital risk. At that point in time, as I put in my written 

and verbal statements, there wasn’t necessarily concern about liquidity risk because the firm had more than enough liquidity to 

handle the initial positions. 

As the positions started to grow in the fall, that is when I expressed my growing concerns about the liquidity risk, and the risk 

department presented to me, and I presented to Mr. Corzine, plausible—what I considered potential scenarios around initial margin 

and variation margin. 

Mr. RENACCI. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Carney is recognized for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. 

This is fairly complicated for me, so I just want to try to better 

understand some of the basics here. I would like to start a little 

bit where Mr. Renacci left off with you, Mr. Roseman, about when 

you raised the flag, and if you could explain for me what you think 

caused the problem here. 

You started to outline it, and then the answer that you just finished with Mr. Renacci, if you could just walk me through that in 

as simple a way as you can, and tell me how you thought the risk 

management process here fell apart or didn’t work right, and how 

it maybe should have happened. 

Mr. ROSEMAN. The first thing that I think the committee needs 

to realize is, as Mr. Stockman stated as well, the sovereign positions and the associated risk with those positions were very well 

communicated, very transparent within the organization and to 

Mr. Corzine and to the board. 

Mr. CARNEY. The risks associated with everything that was going 

on were clearly laid out to Mr. Corzine and the board and they decided to go forward, notwithstanding some of those understanding 

what the risks were. 

Mr. ROSEMAN. In fairness to them, as in other events, for events 

that haven’t occurred before, sometimes there is a difference of 

opinion on the view of what might happen. The challenge there, 

26 

though, is if you get it wrong, then you have an event such as what 

happened with MF Global. 

Mr. CARNEY. So in your position as global risk manager, what is 

your role in that conversation? 

Mr. ROSEMAN. My role is to articulate my view on what the risks 

are to the organization. And I also ensure there is enough cushion 

within the company’s means to support the risk and make sure 

that the risks that the company is taking are aligned with the 

strategy of the company and that is an ongoing concern. 

Mr. CARNEY. So, you obviously were moved out of the position 

and Mr. Stockman was put in the position. Is that because management was unhappy with the advice that you were providing? 

Mr. ROSEMAN. I’m sorry. You are asking why I was replaced? 

Mr. CARNEY. Yes. 

Mr. ROSEMAN. I am really not in a position to answer that. I 

would say that my views on risk certainly played a factor in the 

decision. 

Mr. CARNEY. So regardless of that happening, what happened 

after you left, and where do you think the company went wrong 

from that point on? 

Mr. ROSEMAN. In my opinion, there is a sovereign strategy in 

itself, but in a broader context the firm was pursuing an investment banking strategy that was clearly articulated by Mr. Corzine 

to the public, to shareholders, and to others. That strategy certainly required resources, capital, liquidity to fully support. It was 

important to manage the strategy within the means. And I do 

think that strategy maybe exceeded the ability of the resources. 

Mr. CARNEY. Are there lessons here with respect to how systemic 

risk is implicated with this particular case that should concern us 

as members of the Financial Services Committee? 

Mr. ROSEMAN. I’m sorry. Could you repeat that? 

Mr. CARNEY. Are there systemic issues that we ought to be concerned about as members of this committee with respect to what 

happened at MF Global? 

Mr. ROSEMAN. As I put in my written statement, I think one of 

the main takeaways is, again, firms need to be very mindful of the 

concentration risk that they are running and the implications of 

the stress scenarios related to that concentration risk. Clearly, during the mortgage crisis, it was the same. Some of the firms that 

failed had concentrations in the mortgage securities, and we know 

the outcome that occurred there. 

I certainly think, again, that needs to be revisited. 

Mr. CARNEY. The issue of concentration? 

Mr. ROSEMAN. Concentration risks, large positions within a company that a company may hold. 

Mr. CARNEY. Right. Thank you very much. I see my time has expired, so I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now, the gentleman from New Mexico, Mr. Pearce, is recognized 

for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

At my prayer breakfast this morning, we talked about how man doesn’t live by bread alone; $1.2 billion worth of bread has been 

disappearing off the table out there. 

27 

Mr Stockman, what was your salary when you were hired? 

Mr. STOCKMAN. My salary began at $300,000. 

Mr. PEARCE. How much? 

Mr. STOCKMAN. $300,000 U.S. 

Mr. PEARCE. And what about you, Mr. Roseman, when you departed either ceremoniously or unceremoniously? 

Mr. ROSEMAN. At $350,000. 

Mr. PEARCE. $350,000. So you have chief operating officers, you 

have CEOs, you have a chief executive officer, you have a chief risk 

officer. They all begin with a ‘‘C.’’ Does that mean anything, Mr. 

Stockman? In other words, it doesn’t sound like you are in many 

of the real management meetings. You are just kind of left out of 

those. Am I hearing you correctly? 

Mr. STOCKMAN. Sir, my responsibilities— 

Mr. PEARCE. I didn’t ask about your responsibilities. I said you 

were left out of the key meetings. You didn’t know. You were answering some of the questions from the other side and you didn’t 

know who might be at those meetings. You didn’t answer Mr. 

Posey. 

So it appears that you weren’t there. When you were with other 

firms, did you get to sit in on senior management meetings at those 

other firms as a risk officer or whatever level you were? 

Mr. STOCKMAN. At meetings that were appropriate to— 

Mr. PEARCE. At UBS, did you get to sit in on things where they 

talked about the risk of the company, the future of the company? 

Mr. STOCKMAN. The— 

Mr. PEARCE. Just ‘‘yes’’ or ‘‘no’’ would work. 

Mr. STOCKMAN. I’m sorry? 

Mr. PEARCE. ‘‘Yes’’ or ‘‘no’’ would work. Did you sit in on the key 

meetings where the risk and the future of the company was at 

stake? 

Mr. STOCKMAN. As chief risk officer of the Americas at UBS, I 

did not sit in at the highest levels. 

Mr. PEARCE. You were not. Is that right? You were not? 

Mr. STOCKMAN. No. 

Mr. PEARCE. Okay. So Friday, October the 21st, that management team met with Moody’s. Did they come back and report to 

you, kind of as the chief risk officer, that, ‘‘Oof, things might not 

be going so good over there; they are now a little bit worried about 

what they are seeing.’’ Did they come back and relay that to you, 

the chief risk officer? 

You are the head guy in charge. You are not wearing a hard hat 

in risk management. You are right up there with the fancy 

pinstriped suit guys. Did they come back and tell you anything at 

all about what Moody’s says might be happening to you? 

Mr. STOCKMAN. The key contact at Moody’s was our CFO. 

Mr. PEARCE. I didn’t ask that. I said, did they come back and tell 

you anything? Kind of raise the storm flag— 

Mr. STOCKMAN. Not directly to me. 

Mr. PEARCE. They didn’t share anything with you? 

Mr. STOCKMAN. Correct. 

Mr. PEARCE. Did you ever think that maybe they ran off Mr. 

Roseman and brought you in to be the kind of a guy who doesn’t 

see, tell, know? Did that ever occur to you? 

28 

Mr. STOCKMAN. No, sir. 

Mr. PEARCE. It didn’t? 

Mr. STOCKMAN. No. 

Mr. PEARCE. What about off-balance sheet stuff? I am looking 

here at your ‘‘break-the-glass’’ thing, and it says, ‘‘we are going to 

prevent the off-balance sheet drains.’’ When I read that—and I 

know I am just a suspicious character—it brings to mind Enron 

doing all this fancy stuff around the edges and having fast-moving 

traders, and they are moving all up and down and shucking and 

jiving and moving around. 

Did it ever occur to you that maybe off-balance sheet stuff was 

something that you shouldn’t be signing off on as a chief risk officer, the CRO, the ‘‘C’’ in the risk deal? Did it ever occur to you that 

you should maybe say something about that? 

Mr. STOCKMAN. The off-balance sheet treatment, I think— 

Mr. PEARCE. Would you move the microphone a little closer? 

Mr. STOCKMAN. The off-balance sheet treatment that you are referring to, if you are referring to the sovereigns, was fully established prior to my— 

Mr. PEARCE. I didn’t ask you if it was fully established. I said, 

did you ever think you ought to say something about that? Is it 

normal where you are doing off balance sheet trading at UBS? 

Mr. STOCKMAN. To the best of my recollection, there was off balance sheet trading. But if you are referring to—again, if you are 

referring to MF off balance sheet the— 

Mr. PEARCE. Is off balance sheet legal? 

Mr. STOCKMAN. That is an accounting treatment. 

Mr. PEARCE. Is off balance sheet legal? 

Mr. STOCKMAN. Again, I am not an accounting expert. But 

under— 

Mr. PEARCE. But you are the one who has to certify the risk. And 

so, I don’t care if you are an expert or not on accounting. I am asking you, as the ‘‘C,’’—CRO, CEO, COO, you are one of the C’s—is 

it legal? 

Mr. STOCKMAN. To the best of my understanding, it was performed under accounting principles and— 

Mr. PEARCE. Is it ethical? 

Mr. STOCKMAN. That is a hard question to answer. 

Mr. PEARCE. You are the ‘‘C’’ guy. We hired you. We hired you 

to be the head ‘‘C’’ guy. CRO. You have to say it. Nobody else in 

the organization is responsible for telling some risk of off balance 

sheet stuff. Is it ethical? 

Mr. STOCKMAN. Again, ethical is as it relates to accounting treatment and how the off balance sheet statements are prepared, are 

guided by accounting principles and I don’t have a strong view as 

to— 

Mr. PEARCE. I get the drift. You don’t have to keep going. I get 

the drift, and $1.2 billion worth of people got the drift. We are hiding around the corners, we are doing stuff that we don’t know is 

legal. We certainly will not say it is ethical or unethical. And we 

are deeply sorry. 

I read your testimony. It is the same as Mr. Corzine’s. ‘‘Deeply 

sorry. Deeply, deeply sorry.’’ Did you call one of these—I have a 

guy in my district who lost $5,000 at Christmastime. Did you call 

29 

anyone? $1.2 billion divided by 5,000, that is a lot of people. Did 

you call one of them? 

Mr. STOCKMAN. I have not, sir. And I, again, I— 

Mr. PEARCE. Deeply sorry, though, you are deeply sorry? 

Mr. STOCKMAN. And I— 

Mr. PEARCE. I see. 

Mr. STOCKMAN. —are found by— 

Mr. PEARCE. Have you suggested that maybe you ought to give 

your pay back and put it into a scholarship fund for these kids who 

aren’t going to go to college, or some hog farmer who is trying to 

make ends meet? My dad raised pigs, so I know what it is like. He 

is trying to pay for the next sack of feed, and you guys got up $1.2 

billion and you are hiding around on the definition of whether it 

is legal, on whether it is ethical or unethical? 

I don’t think shame reaches Wall Street, but if it did, maybe you 

should be looking at how much you are paid and what you are paid 

for. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. And now, Mr. 

Canseco. 

Mr. CANSECO. Thank you, Mr. Chairman. 

Mr. Stockman, one very brief question here just to follow up on 

some of the questions that have been asked already. 

Mr. STOCKMAN. Sir, I apologize for interrupting. I wanted to just 

make sure that it was understood, if there was any confusion, that 

I did attend the Moody’s meeting. I am not sure there was, but I 

just wanted to confirm. 

Chairman NEUGEBAUER. Thank you. 

Mr. CANSECO. Let me ask a question now, Mr. Stockman. When 

did MF Global first approach you? I know that you went through 

an agency. But when did you first meet? When did MF Global first 

approach you, either by letter or by phone call or otherwise? 

Mr. STOCKMAN. To the best of my recollection, in September or 

October, possibly October of 2010. 

Mr. CANSECO. Right. And by what means was it? Letter, phone 

call, e-mail? 

Mr. STOCKMAN. Phone call. 

Mr. CANSECO. Phone call. And did you go and visit with them 

shortly thereafter? 

Mr. STOCKMAN. Shortly thereafter, I had a series of interviews, 

yes. 

Mr. CANSECO. Okay. And was it your headhunter or agent who 

called you? Or was it someone at MF Global who called you? 

Mr. STOCKMAN. This was through a search firm. 

Mr. CANSECO. So your search firm called you up and said, ‘‘MF 

Global wants to meet with you.’’ Is that correct? 

Mr. STOCKMAN. Correct. 

Mr. CANSECO. And it was in October? 

Mr. STOCKMAN. To the best of my recollection— 

Mr. CANSECO. Early October or late October? 

Mr. STOCKMAN. I apologize. To the best of my recollection, it was 

in and around that period. 

Mr. CANSECO. Mr. Roseman, you were told that you were no 

longer needed as chief risk officer of MF Global in January of 2011. 

Is that correct? 

30 

Mr. ROSEMAN. Yes, sir. 

Mr. CANSECO. Okay. So the CRO is an important job, and I imagine that, in order to replace you, it would require at least a few 

months of a search process. Do you know when MF Global began 

to search for your replacement? 

Mr. ROSEMAN. I do not, sir. 

Mr. CANSECO. Okay. In what month was your biggest disagreement with Jon Corzine over liquidity risk of European sovereign 

RTMs? 

Mr. ROSEMAN. I would say the discussion started becoming much 

more material in September. 

Mr. CANSECO. Okay. In what month was it that you made your 

presentation to the board, saying that the board should not follow 

Mr. Corzine’s advice to increase MF Global’s European sovereign 

RTMs? 

Mr. ROSEMAN. I did a full presentation in November. 

Mr. CANSECO. Do you have an opinion on whether or not your 

presentation had anything to do with your removal? 

Mr. ROSEMAN. As I said before, I am really not in a position to 

respond to that. but, again, I do think my views on risk would have 

played a part. 

Mr. CANSECO. Thank you for your candor. And I thank you for 

your answers. 

In testifying before the House Agriculture Committee, Mr. Jon 

Corzine said that he replaced you as chief risk officer because MF 

Global, ‘‘needed someone in the chief risk officer position who was 

more fully attuned to the broker-dealer side of our business than 

what Mr. Roseman’s background was about.’’ And there were other 

issues about how people worked with each other.’’ 

So, Mr. Roseman, you have a very impressive resume and a wide 

variety of experience in the financial industry. Do you believe that 

your background was not fully attuned to the broker-dealer side of 

MF Global’s business? 

Mr. ROSEMAN. I would fully disagree with that statement. I certainly had the experience in investment banking prior to MF Global. 

Mr. CANSECO. Okay. So it is true that you have a very strong financial background and experience and a good, strong resume? You 

would agree with me there, right? 

Mr. ROSEMAN. Yes, I appreciate you saying it that way, but I 

would say I certainly had a strong background. 

Mr. CANSECO. All right. Thank you. 

Mr. Stockman, in a letter to a subcommittee, Moody’s indicated 

that they did not understand until August 21, 2011, that the European sovereign debt portfolio was part of MF Global’s trading book. 

Did that surprise you, since MF Global had disclosed this exposure 

several months before? 

Mr. STOCKMAN. Yes, I was not fully attuned to exactly the dialogue but, yes, I would find that surprising. 

Mr. CANSECO. You found it surprising? Even though MF Global 

had disclosed the exposure several months before? So it should 

have been no surprise, right? 

31 

Mr. STOCKMAN. Again, I couldn’t tell you exactly the context in 

which Moody’s was making their statement, but I thought that our 

disclosures were both adequate and robust. 

Mr. CANSECO. What was MF Global’s initial response to inquiries 

from Moody’s about the exposure? 

Mr. STOCKMAN. When you say initial inquiries, can you help me 

with— 

Mr. CANSECO. Don’t parse it. What was the company, MF 

Global’s, response to inquiries from Moody’s? You are the chief risk 

officer. 

Mr. STOCKMAN. Right. As also mentioned by my predecessor, I 

was not the key contact and I had very little direct contact in terms 

of discussions with the rating agency. 

Mr. CANSECO. But let me ask you this. You are the risk officer. 

I don’t care who you told. But when you heard about this, what response would you have given to Moody’s about this, that they didn’t 

realize that European sovereign debt was part of the trading book 

of MF Global? 

Mr. STOCKMAN. Again, I probably would want to talk more, understand more specifically what their reference to the trading book 

and otherwise was, because as I mentioned before, I thought that 

our disclosures were both adequate— 

Mr. CANSECO. And that is what your response would be, that 

your disclosures were adequate? 

Okay. On October 13, 2011, executives at MF Global put together 

a ‘‘break-the-glass’’ presentation that outlined what MF Global 

would do in the event of a credit rating downgrade. That was prepared by the chief risk officer—and that would be you—the CFO, 

and the MF Global treasury department. 

Why did MF Global find it necessary to draft a ‘‘break-the-glass’’ 

presentation? 

Mr. STOCKMAN. As mentioned before, this initiative, to the best 

of my understanding, was at a board request. The CFO and treasurer really drove that strategy, or that analysis. And one of my 

senior officers helped out on creating some of the scenarios in 

there. So that was the genesis of that contingency plan. 

Mr. CANSECO. I see that my time has expired, but I don’t think 

you have been very candid with us. Thank you, Mr. Stockman. 

Chairman NEUGEBAUER. The gentleman from Tennessee, Mr. 

Fincher is recognized. 

Mr. FINCHER. Thank you. Thank you, Mr. Chairman. 

Thank you, gentlemen. 

Did you have previous relationships with any of the board members? 

Mr. Stockman? 

Mr. STOCKMAN. I did not have previous relationships with any of 

the board members, no. 

Mr. FINCHER. You didn’t know them at all? 

Mr. STOCKMAN. No. 

Mr. FINCHER. None of them? 

Mr. Corzine, Governor Corzine? How long did you know him personally? 

Mr. STOCKMAN. I had—I didn’t—sorry. Are you asking how long 

I knew Mr. Corzine? 

32 

Mr. FINCHER. Personally, yes. 

Mr. STOCKMAN. Personally? I didn’t know Mr. Corzine personally, 

but I had worked at Goldman Sachs a number of years prior. 

Mr. FINCHER. You said a few minutes ago that you did your job, 

that you reported information to the board, to Mr. Corzine, and 

they made the decisions. 

Mr. Roseman, you also said you did your job; you reported the 

information. 

Like my colleague, Mr. Pearce, I have a district where many, 

many people lost thousands of dollars—farmers, ranchers. It almost 

looks like they took Mr. Roseman out and replaced Mr. Roseman 

with a ‘‘yes man.’’ 

Does it look that way to you guys? Does it? 

Mr. Roseman, would you comment at all, that you gave them information that they didn’t like so they replaced you and put someone in who gave them information that they liked? 

Mr. ROSEMAN. I have answered that question, actually, twice. In 

fairness, I have to say I am really not in a position to answer that. 

Others made a decision for me. I would say, again, some of my 

views would have played a part, I would believe. 

Mr. FINCHER. Mr. Stockman? 

Mr. STOCKMAN. Sir, I think as in my testimony notes, when I 

joined the firm, doing deep analysis on sovereign positions in particular, I found the risks acceptable and, in particular, so did the 

board and senior management, in terms of finding those risks acceptable. 

And as market conditions changed, in particular in July, I expressed my views as it relates to wanting to recommend hedging 

strategies and bring the risk down. So I would have to, sort of, 

make a difference—excuse me—take exception to your characterization of a ‘‘yes man.’’ 

Mr. FINCHER. So, in your opinion, the money was there to cover 

the margins on whatever the recommendation was? 

Mr. STOCKMAN. Correct, although, to be specific, our treasury 

and finance area would have represented that because that is their 

first line of business. 

Mr. FINCHER. But you would know, in your position? 

You would know? 

Mr. STOCKMAN. Oh, no, I understood but, ultimately, our treasury and finance area is responsible for the liquidity. 

Mr. FINCHER. In the notes that were produced, the member 

writes about his negative assessment of MF Global’s risk management. 

He writes that, ‘‘MF Global is betting the house, so to speak, in 

their current approach to risk management.’’ 

Both of you, do you agree with this assessment, and was Mr. 

Corzine betting the house with the European debt RTM portfolio? 

Mr. STOCKMAN. As I mentioned before, through the genesis of the 

9 months that I was there, the first 3 or 4 months, I would have 

to say the idea of betting the house was inaccurate or not a depiction that I would represent, and that as the risk profiles changed 

in the marketplace, that the same transparency and assessment 

and analysis and informed business judgments were made at that 

senior management level. 

33 

And let us not forget about a sophisticated board being the balance between Jon and these decisions. 

Mr. ROSEMAN. I would certainly suggest that the ability of the 

company to handle the positions was pushed to the maximum. And 

as I outlined before, under adverse liquidity conditions or scenarios, 

it would potentially put the company in harm’s way. 

Mr. FINCHER. Okay. I yield back. No more questions. 

Chairman NEUGEBAUER. I thank the gentleman. And now, the 

gentleman from California, Mr. Royce, is recognized for 5 minutes. 

Mr. ROYCE. Thank you. 

Mr. Roseman, let me ask you about leverage ratios, if I could. 

The 30–1 leverage ratio has often been cited in the financial press. 

And Mr. Corzine testified that he worked to deleverage the firm, 

as he testified to us. 

Can you expand upon the effective leverage, the ratio that actually existed there at MFG while you were there and whether you 

believe the leverage of the firm materially changed under Mr. 

Corzine? 

Mr. ROSEMAN. Yes, I think the important point is not only the 

leverage but what comprises the leverage. So a year before, almost 

all of the leverage that existed was extremely liquid securities and 

it was well presented, for example, to the rating agencies that we 

were holding treasuries—we were holding treasuries, agency notes, 

and what have you, that were very short-dated in nature. 

After Mr. Corzine joined, the composition of the leverage 

changed. That is the important point. 

Mr. ROYCE. You were there in August of 2008. He came in the 

spring of 2010. And as you say, that started to change. Did this 

window-dressing issue begin to arise as well at that time? 

Mr. ROSEMAN. I would say, when we speak in terms of windowdressing, it is a pretty common practice across the street to bring 

the leverage down at the reporting periods. I would also say— 

Mr. ROYCE. But this is 34 percent higher. 

Mr. ROSEMAN. I’m sorry? 

It did come down. It certainly was brought down in the quarter, 

and I am aware of that. The point you need to be aware of that, 

as well, if you can bring the leverage down, it reflects the liquidity 

of the positions. 

So if you can quickly bring them down, that means that they 

don’t pose a threat to the balance sheet, per se. It is the leverage 

you can’t bring down which is the more concerning risk, which 

would be consistent again with what happened during the 

subprime crisis, as well as, again, with some of these other positions that were held by MF Global. 

Mr. ROYCE. Their investments overseas in sovereign debt, I take 

it. 

When asked about the concerns you raised, Mr. Corzine testified 

that, ‘‘We allowed people to speak their minds.’’ That was his response. 

Your testimony here today suggests something slightly different. 

You raised concerns about the positions, as you laid them out to 

the board, and you walked them through the risk scenarios and 

they were ‘‘challenged as being implausible,’’ as you said, and 

shortly thereafter, you were let go. 

34 

But they were ‘‘challenged as being implausible.’’ Can you reconcile those two representations of what was going on in the board 

room there? 

Mr. ROSEMAN. I’m sorry. Can you repeat the first part of— 

Mr. ROYCE. The first part—Mr. Corzine testified that we allowed 

people to speak their mind. 

That was his argument about what went on. But you say when 

you brought up these risk scenarios, you were challenged before the 

board that what you were arguing was implausible was implausible, and, of course, a few months later— 

Mr. ROSEMAN. I don’t know if those two statements are contradictory, per se. He certainly allowed me to express my opinion 

in the board meetings. 

Mr. ROYCE. Okay. But was there a constructive dialogue that 

really raised your concerns there? Were the board members—it is 

one thing to raise an issue. It is another to be told by the chairman 

of the board, ‘‘Well, that is an implausible scenario.’’ I am trying 

to reconcile those two things. 

Mr. ROSEMAN. Within the room, there were certainly differences 

of opinions within the board members on the positions themselves. 

Mr. ROYCE. Yes. 

Mr. ROSEMAN. So they were certainly discussed. 

Mr. ROYCE. One last question. You noted the strategy pursued by 

Mr. Corzine didn’t match the resources of MFG. Can you expand 

a little bit on what you mean by that? What specifically caused the 

failure of MF Global, in your opinion? 

Mr. ROSEMAN. Since I wasn’t there, I am not really familiar with 

all the specific positions that they added to the company subsequent to my departure, so I am probably not in the best position 

to respond to that. 

Mr. ROYCE. Then how about to this? You noted that the strategy 

pursued by Mr. Corzine did not match the resources of MFG. What 

did you mean by that? 

Mr. ROSEMAN. You certainly need sufficient capital globally. We 

were operating a number of different companies around the globe, 

which causes some challenges to moving around funds or capital to 

other entities. And when you employ a strategy, you have to make 

sure you do the analysis on the forward needs. 

They were certainly raising additional capital and what have 

you. So there might have been other plans to raise more funds, 

more capital. I am not aware of it because I wasn’t there. But it 

certainly presents the need to assess the strategy against the resources. 

Mr. ROYCE. Thank you very much, Mr. Roseman. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from New York, Mr. Grimm, is recognized for 5 

minutes. 

Mr. GRIMM. Thank you, Mr. Chairman. 

Mr. Stockman, you have already testified that you were not privy 

to the meeting on October 31st where the SEC and the CFTC allegedly discussed the unwinding with other large entities of MF Global. Let me ask you this, MF Global, would you say that 98 to 99 

percent of its business was commodities? 

Mr. STOCKMAN. The— 

35 

Mr. GRIMM. Commodities and futures. 

Mr. STOCKMAN. In terms of a revenue breakdown, I am not 100 

percent sure, but I think that sounds a little bit high. 

Mr. GRIMM. Over 90 percent? The vast majority of their business 

is commodities and futures? 

Mr. STOCKMAN. If we had to spot it, maybe it was—in terms of 

this growing strategy, commodities and futures, maybe it could 

have been closer to a half. I am really speculating at this point. 

Mr. GRIMM. I think you are speculating quite a bit. 

My curiosity is this: You are a chief risk officer, so obviously, you 

know the industry pretty well. You are paid handsomely to know 

the industry. Is there any reason that you can think of why this 

would be a bankruptcy under the Securities Investment Protection 

Act, a SIPA bankruptcy, versus under the commodities rules? Any 

reason why that would be? 

Mr. STOCKMAN. Sir, I understand the question. And I don’t really 

offer much expertise in—as it relates to bankruptcy specific laws, 

and— 

Mr. GRIMM. Okay. 

Mr. STOCKMAN. —so I am not going to be able to really comment 

on that with any— 

Mr. GRIMM. Mr. Roseman, do you have any idea why a decision 

would be made to do this—do you know of any precedent for this? 

Mr. ROSEMAN. I don’t have the expertise myself as to why it 

would have been—a decision would have been made or why— 

Mr. GRIMM. But from your knowledge of the industry, does it 

seem strange to you? 

Mr. ROSEMAN. It does seem strange. 

Mr. GRIMM. Does it raise a red flag that something is wrong 

here? How long you been in the industry? 

Mr. ROSEMAN. 16 years. 

Mr. GRIMM. 16 years. 

How about you, Mr. Stockman, how many years have you been 

in the industry? 

Mr. STOCKMAN. 25 years. 

Mr. GRIMM. 25 years. 

I am not saying you are an expert on bankruptcy. I am just asking, does it raise a red flag that a company that is mostly in commodities and futures is not going under bankruptcy normally under 

the commodities bankruptcy but it is under the SIPA? Does that 

seem to raise a red flag for you? Does that seem odd or strange? 

Does it give you any reason to question it? 

Mr. STOCKMAN. I think it is a reasonable question, and in deciding the basis on which to answer the question fully is where, unfortunately, we— 

Mr. GRIMM. Okay. You don’t want to answer the question. That 

is fine. If you don’t have an opinion, you don’t have an opinion. 

Explain to me—I am trying to figure this out. We have two companies, right? One is the Inc., MF Global, Inc., and the other is a 

holding company. Is that correct? 

Mr. STOCKMAN. Among others— 

Mr. GRIMM. Right. But the two that we are really honing in on 

today, where the problems lie, I know there are a whole bunch of 

36 

other things, but those are the two main entities that we are focusing on, correct? 

Are you the risk officer for both? 

Mr. STOCKMAN. Correct. 

Mr. GRIMM. You are the risk officer for both? 

Mr. STOCKMAN. Generally speaking, yes; we didn’t really organize ourselves on an entity basis but rather a global basis. But— 

Mr. GRIMM. So what were your responsibilities in the holding 

company? Because it looks like what happened—maybe I am 

crazy—is that the inmates were running the asylum. That is why 

all this happened in the first place, because we have massive leverage happening in the holding company, leverage that a chief risk 

officer said he had problems with the $2 billion and it went way 

beyond there. 

Mr. Corzine didn’t like the answers he was getting from Mr. 

Roseman, so he hired you. Leverage keeps going up, very risky, 

market conditions continue to change, and margin calls happen. 

And when those margin calls happen, the liquidity that Mr. 

Roseman was worried about wasn’t there, and in the final hours, 

in the mayhem, which we have yet to find out, but I think everyone 

has a good idea who transfers money from the segregated accounts, 

from the FCM side, over to the holding company, and that is probably where the money is or that is probably where it got lost, somehow, some way. 

That is just a hypothetical. That is my hypothetical. But I am 

wondering, now, when you look back, if you are the chief risk officer for both, the holding company, what safeguards were in place 

to stop that from happening? 

And before you answer that, I just want to read to you, here is 

the latest from MF Global that went out to customers and it says, 

‘‘Your assets at MF Global are protected from multilevel safeguards, stability, separation, and protection.’’ 

As the chief risk officer for both of these entities, is this true? 

Is there stability, separation, and protection, to the best of your 

knowledge? 

Mr. STOCKMAN. I have no reason to doubt that. 

Mr. GRIMM. Actually, you have a great reason: $1.2 billion is 

missing. 

Thank you very much. 

Chairman NEUGEBAUER. I thank the gentleman. 

What we are going to do now is—and the Chair is going to enforce this—go to a 2-minute lightning round for some members who 

want follow-up questions, and then we will dismiss this panel. 

And so, I am going to go to Mr. Miller and recognize him for 2 

minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you. 

Mr. Roseman had questions about risk appetite. But he also had 

questions about liquidity, about whether there was the money to 

pay a margin call, to cover a margin call if you have one. 

Mr. Stockman, you talked about the limited conversation you had 

with Mr. Roseman. You talked earlier about the interviews that 

you had and the discussion of risk appetite in those interviews. 

How about liquidity? Did you talk to whoever was interviewing 

you, did you talk to Mr. Roseman about liquidity concerns, whether 

37 

you had the money or the liquid assets to meet a margin call if you 

got one? 

Mr. STOCKMAN. Sir, as I pointed out, we analyzed the risks and 

stress— 

Mr. MILLER OF NORTH CAROLINA. Could you start with a yes or 

no? 

Mr. STOCKMAN. I’m sorry, then. Can you repeat the question? 

Mr. MILLER OF NORTH CAROLINA. Did you have a conversation 

with Mr. Roseman about liquidity concerns? 

Mr. STOCKMAN. We did not. 

Mr. MILLER OF NORTH CAROLINA. Did you have a conversation in 

your interviews for the position about liquidity concerns? 

Mr. STOCKMAN. During that period of time, liquidity was fully 

available— 

Mr. MILLER OF NORTH CAROLINA. Is that a ‘‘no?’’ That is a ‘‘no.’’ 

Okay. 

At what point did you ever raise a liquidity concern in the 11 

months, 10 months, however long you were there, with anyone to 

whom you reported? The COO? 

Mr. STOCKMAN. Yes, the— 

Mr. MILLER OF NORTH CAROLINA. When? 

Mr. STOCKMAN. Along the way, in particular in the July time period where liquidity stress needs and actual liquidity posted for 

these— 

Mr. MILLER OF NORTH CAROLINA. Did you make sure those concerns were passed along to the board? 

Mr. STOCKMAN. Absolutely. 

Mr. MILLER OF NORTH CAROLINA. Okay, were they passed along 

to the board? 

Mr. STOCKMAN. Absolutely, it was during a presentation both 

verbal and written. 

Mr. MILLER OF NORTH CAROLINA. Okay. Repo transactions are 

usually with highly liquid assets as collateral, they are usually 

very short term, they are usually, in fact overnight. These were 

repo-to-maturity transactions which basically bought the sovereign 

debt with 100 percent financing by using the debt itself as the collateral. 

It was European debt; the world was holding their breath about 

whether there would be a default on European debt. It appears 

that the reason that these transactions held out the possibility of 

a substantial profit was that it was a bet against the market. The 

sovereign debt was beat down because the world was worried, the 

markets were worried about whether there would be a default. 

It was 100 percent financing. There wasn’t the money to make 

a margin call. You knew that margin call was a possibility. 

What red flags were—and at the same time, Mr. Corzine and 

others were saying, ‘‘There is no problem here.’’ 

You said earlier that you did read Mr. Corzine’s statement to investors, it was a public statement, so you knew about it. To whom 

did you say, whoa, no we have a lot to worry about? Did you say 

it to the board? Did you say it publicly? Did you say it to a regulator? Did you say it to your accountants? To your auditors? Who 

did you say it to? 

38 

Mr. STOCKMAN. Sir, we continued to highlight the risks internally and talked about them in great detail. 

Mr. MILLER OF NORTH CAROLINA. To whom? Just internally? 

Just to the COO? 

Mr. STOCKMAN. To all those who were involved, we continued to 

do our function in terms of reporting the risk and— 

Mr. MILLER OF NORTH CAROLINA. And you knew with 100 percent financing with the possibility of the likelihood of margin call 

and no way to make a margin call and you knew that the top executives were making statements out to investors and to rating 

agencies that they were in a rock solid position and you just talked 

about it internally? 

Mr. STOCKMAN. Sir, prior to the final week, the firm was meeting 

its margin calls and financing these positions and, ultimately, obviously the case speaks for itself what happened in that ensuing 

week. 

Chairman NEUGEBAUER. The Chair recognizes himself. 

Mr. Roseman, going back from your analysis in your time there 

and then kind of watching how this all played out, would MF Global be in bankruptcy today if they had not put on the sovereign debt 

trades? 

Mr. ROSEMAN. In my opinion, they would still be here. 

Chairman NEUGEBAUER. So you believe that contributed to the 

downfall of the company? 

Mr. ROSEMAN. I believe so. 

Chairman NEUGEBAUER. Mr. Stockman? 

Mr. STOCKMAN. As I mentioned before, I think I would like to 

wait for the final chapter to be written— 

Chairman NEUGEBAUER. I think just the question, if—and there 

may be other circumstances, but sometimes that is a domino, but 

if you took that particular piece of it out, if they had not had these 

RTMs on the books, would that company still be here today? 

Mr. STOCKMAN. I think it is that confluence of events that I was 

talking about— 

Chairman NEUGEBAUER. I didn’t ask you about the confluence of 

events, I just asked you if, yes or no, you believe it would or would 

not be here? 

Mr. STOCKMAN. I think it is a possibility that even with the RTM 

positions, we will have to wait for further details that the company 

could have survived. 

Chairman NEUGEBAUER. It is kind of funny that when everybody 

discovered they had RTMs, though, that is when the company went 

down. 

I now yield to Mr. Posey for 2 minutes. 

Mr. POSEY. Thank you, Mr. Chairman. 

It has been reported, Mr. Stockman, that customer assets may 

have gone through a transformation in which they went from a liquid state to a gaseous state; in other words, they just vaporized. 

In your experience, is that possible? 

Mr. STOCKMAN. Sir, as I mentioned before, I have no specific 

knowledge of customer funds and where they may have gone. 

Mr. POSEY. Listen, they pay you $350,000 a year because you 

have 25 years of experience in this business and you can’t answer 

a simple question as to whether or not you think people’s assets 

39 

can just vaporize like there is nobody to blame? It is not God’s 

fault, your fault, or Mr. Corzine’s fault. It is nobody’s fault; they 

just vaporize. It just happened. It is a quirk of nature. 

Do you believe that is possible? 

Mr. STOCKMAN. I think there is a team of experts who are really 

going through all the details, and in my experience I had never— 

Mr. POSEY. As a $350,000-a-year expert, you don’t know if it is 

possible for money to just vaporize? Okay, that is good. 

You are fully aware of the rules requiring customer segregated 

accounts to be segregated, protected at all times. Was Mr. Corzine 

aware of those requirements? 

Mr. STOCKMAN. I would be speculating, but I would imagine he 

would be aware of those requirements. 

Mr. POSEY. How about Laurie Ferber? 

Mr. STOCKMAN. And I would imagine she is, too. 

Mr. POSEY. What involvement did Ms. Ferber have with your 

risk management and compliance functions? 

Mr. STOCKMAN. Laurie didn’t have significant involvement in the 

risk management function. 

Mr. POSEY. Was she aware of MF’s risk positions and the use of 

segregated funds? 

Mr. STOCKMAN. I couldn’t speak specifically to what Laurie may 

or may not have known. 

Mr. POSEY. Did she maintain or have access to control sheets for 

risk positions including repos, proprietary positions, and counterparties? 

Mr. STOCKMAN. I’m sorry, could you say that again? 

Mr. POSEY. Did she maintain or have access to control sheets for 

risk positions including repos, proprietary positions and counterparties? 

Mr. STOCKMAN. I don’t know. 

Mr. POSEY. Was J.C. Flowers a trading counterparty with MF? 

Mr. STOCKMAN. I don’t know. 

Mr. POSEY. Since J.C. Flowers was a board member and investor, 

and Jon Corzine was still employed by J.C. Flowers, I am told, 

wouldn’t that be, in your opinion as a $350,000-a-year, 25-year-experience expert, an inherent conflict of interest? 

Mr. STOCKMAN. Again, I couldn’t speak to specific conflicts of interest. 

Mr. POSEY. Were you aware of any problems— 

Chairman NEUGEBAUER. I’m sorry, the gentleman’s time—we are 

going to have to— 

I would let Members know, if you have additional questions for 

these witnesses, we are going to hold the record open. You may 

submit those questions to them in writing, and we would expect 

the witnesses to respond to those questions as well. 

I now go to the vice chairman of the subcommittee, Mr. 

Fitzpatrick, for 2 minutes. 

Mr. FITZPATRICK. Mr. Stockman, I want to go back to the e-mail 

that the CFO, Mr. Steenkamp, wrote to, I think it was S&P. On 

the 24th of October, he said the company was never in a stronger 

position, great public entity, and you indicated in response to my 

question that you didn’t have any reason to disagree with the 

CFO’s assessment. 

40 

And after I asked you that question, you consulted with somebody and you came back and you indicated that you were at a 

meeting with Moody’s on the 21st of October, is that correct? 

Mr. STOCKMAN. I think I want to just take half a step back. I 

think the answer to the question regarding Mr. Steenkamp’s e-mail 

was that I don’t know in what context he had sent that e-mail nor 

was I part of that e-mail chain, as far as I know. 

Mr. FITZPATRICK. But in terms of context, were you in a meeting 

with Moody’s, a different rating agency, 3 days earlier? 

Mr. STOCKMAN. Yes, I was in that meeting. 

Mr. FITZPATRICK. Was Mr. Steenkamp in that meeting? 

Mr. STOCKMAN. He was. 

Mr. FITZPATRICK. And was the firm downgraded as a result of 

that meeting, 3 days later? 

Mr. STOCKMAN. The firm was downgraded 3 days later but I 

couldn’t be specific as it was a result of that particular specific 

meeting. 

Mr. FITZPATRICK. Was it a result of anything you said at that 

meeting? Did you say anything at the meeting? 

Mr. STOCKMAN. Me personally? 

Mr. FITZPATRICK. Yes. 

Mr. STOCKMAN. I spoke very little, frankly. 

Mr. FITZPATRICK. Did you let Moody’s know that Mr. Roseman 

had concerns about credit risk beyond $2 billion and that you were 

brought in to let Mr. Corzine trade through that $2 billion number? 

Mr. STOCKMAN. That characterization certainly wouldn’t have 

come up at that meeting, no. 

Mr. FITZPATRICK. Did you have an opinion as to the position of 

MF Global at that time separate from Mr. Steenkamp? Did you 

have an opinion of the firm’s viability? This is now 10 days before 

the complete implosion of the firm and the filing of bankruptcy. Did 

you agree that the firm was viable and was in a strong position? 

Mr. STOCKMAN. That is not my area of expertise, and I relied on 

our CFO and finance people to help us understand in specificity the 

liquidity and financial position of our company. 

Chairman NEUGEBAUER. I thank the gentleman. And the final 

question is from Mr. Grimm from New York. You are recognized 

for 2 minutes. 

Mr. GRIMM. Thank you. Mr. Stockman, do you think you should 

be held liable civilly or criminally in any way, shape or form? Just 

yes or no. 

Mr. STOCKMAN. No, sir. 

Mr. GRIMM. How about Mr. Corzine, do you think he should be 

held liable for anything? 

Mr. STOCKMAN. That would be beyond my chance to— 

Mr. GRIMM. You don’t have an opinion? 

Mr. STOCKMAN. I don’t have an opinion. 

Mr. GRIMM. Okay. Just say you don’t have an opinion. Do you 

think it is possibly negligence, maybe even gross negligence, for a 

new risk officer to come in, amidst all of these things going on and 

only spend 1 hour with Mr. Roseman, the prior risk officer, and in 

that 1 hour, you didn’t even speak about the risky positions? 

41 

You don’t think that is a little bit negligent? You are taking over 

the shop as risk officer and you tell me all you spent was 1 hour 

and you didn’t really speak about his concerns for the risks. 

Mr. STOCKMAN. We spoke briefly about the sovereign risk and— 

Mr. GRIMM. I think you testified earlier that you didn’t speak 

about that. 

Mr. STOCKMAN. No, as I mentioned, we spoke briefly on that— 

and continuing on that list of discussion was a touch on sovereign 

risk. 

Mr. GRIMM. A touch on sovereign risk? 

Mr. STOCKMAN. Yes. But more importantly, when I arrived at the 

firm, I did my own analysis, I performed my own—along with my 

team—assessment of those risks. And as you see in my written testimony, the discussion and description of those risks were fully vetted and transparent. 

Mr. GRIMM. But you just also testified that 10 days prior to this, 

you had no reason to believe that the company wasn’t viable? So 

you have done all of this risk analysis, but 10 days prior to the collapse, you didn’t have any reason to believe it wasn’t viable? 

Mr. STOCKMAN. Ten days prior, I wasn’t coming in to work that 

day. 

Mr. GRIMM. Okay. Enough said. You didn’t come into work that 

day. 

Last thing, do you think this could jeopardize the entire commodities and futures markets here in the United States, that people 

think that if they are in segregated accounts, it can be moved over 

and then put into bankruptcy and everyone basically gets the 

shaft? Don’t you think that could jeopardize our entire system here, 

the integrity of the U.S. markets with regard to commodities and 

futures? Is that a true statement? 

Mr. STOCKMAN. It is my sincere hope that this all works out for 

the clients. 

Mr. GRIMM. Mr. Roseman, do you think that it could jeopardize 

the integrity of the markets? 

Mr. ROSEMAN. I— 

Mr. GRIMM. People could lose faith in our system? 

Mr. ROSEMAN. I would hope not. Hopefully, this will get reconciled and they don’t lose faith. 

Mr. GRIMM. Even if it gets reconciled, the point is, people were 

in segregated accounts, promises were made, they were told it was 

safe, and now the money is missing. Even if it gets returned later, 

I think it is safe to say that people lose faith. Thank you very 

much. 

I yield back. 

Chairman NEUGEBAUER. Thank you, gentlemen. And I thank our 

witnesses for your time. With that, this panel is excused, and we 

will call up our second panel: Mr. Craig Parmelee, managing director and lead analytical manager for North American Financial Institutions Ratings, Standard & Poor’s Ratings Services; Mr. Richard Cantor, chief credit officer, Moody’s Investors Services; Mr. 

James Gellert, chairman and chief executive officer, Rapid Ratings 

International Inc. 

I am going to ask the three of you to please stand and raise your 

right hand. 

42 

[Witnesses sworn.] 

Thank you. I am now going to recognize each of you for a 5- 

minute summary of your statement, and just to let you know, your 

full written statements will be made a part of the record. 

Mr. Parmelee, you are recognized for 5 minutes. 

TESTIMONY OF CRAIG PARMELEE, MANAGING DIRECTOR AND 

LEAD ANALYTICAL MANAGER FOR NORTH AMERICAN FINANCIAL INSTITUTIONS RATINGS, STANDARD & POOR’S 

RATINGS SERVICES 

Mr. PARMELEE. Thank you. Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee, good morning. My name is Craig Parmelee. I serve as managing director and 

lead analytical manager for the North American Financial Institutions Team at Standard and Poor’s. 

I am pleased to appear before you this morning to discuss S&P’s 

ratings on MF Global. Over the course of its long history, S&P has 

sought to improve transparency in capital markets by providing 

independent assessments of creditworthiness. At their core, S&P’s 

credit ratings, just like our forward-looking views about the ability 

and willingness of issuers to meet their financial obligations in full 

and on time. 

S&P’s ratings are, thus, expressions of opinion. They are not recommendations to buy, sell or hold securities. And they are not 

statements of facts. 

S&P first rated MF Global in May 2007. Our rating at that time 

was triple D plus, and remained at that level until February 2008. 

We then downgraded the company’s rating to triple D, following its 

announcements regarding a loss from unauthorized trading, and 

based on our view that the company’s high financial leverage, 

among other things. 

In 2010, we downgraded the company yet again, this time to triple D minus, just one notch above speculative gray or non-investment grade status, and lower than the ratings of S&P’s two largest 

competitors. 

In the published reports announcing this downgrade, we stated 

that MF Global’s new CEO, Jon Corzine, had announced a strategy 

to begin transitioning the firm from a traditional commodities 

broker to a full service investment bank. In our report, we noted 

that the strategy would likely result in the company taking on 

more proprietary trading positions, which in our view would be 

riskier than the company’s traditional broker business. 

We further stated that the company’s risk management controls 

continued to be a work in progress. Six months later, in May 2011, 

MF Global disclosed for the first time that it had off balance sheet 

exposure to approximately $6.3 billion of European sovereign debt 

through so-called repurchased maturity transactions that we have 

all heard this morning. It has been referred to as an RTM transaction. 

This disclosure caused no discernible disruption in the capital 

markets, perhaps because the portfolio was made up of highly 

rated sovereign bonds, funded through scheduled maturity in 2012, 

meaning that MF Global would only lose money if one or more of 

the sovereigns defaulted during this relatively short time period. 

43 

Following the May 2011 disclosure, S&P continued to believe 

that MF Global’s underlying credit fundamentals supported the 

trading of triple D minus. 

In October 2011, concerns in the market over escalation of the 

Eurozone credit crisis, combined with a disappointing earnings report from MF Global and other factors, were causing the firm’s investors, their counterparties and others to become quickly and increasingly concerned about the firm. 

Against this backdrop, S&P analysts sought to obtain additional 

information about the RTM portfolio, and were told by MF Global 

executives that the firm believed it was ‘‘in its strongest position 

ever as a public entity.’’ 

Not withstanding management’s optimism, MF Global reported a 

net gap quarterly loss of $191 million the next day. This loss was 

surprising and frightened the markets even further. 

Although Mr. Corzine stated that MF Global remained on strong 

footing and that its RTM portfolio presented minimal risk, the company’s stock price fell by nearly 50 percent the day of the earnings 

announcement. 

One day later, on October 26th, S&P placed MF Global’s ratings 

on credit watch with negative implications, under review for a potential downgrade. This action reflected S&P’s view that continued 

volatility in the capital markets and low interest rates could further harm MF Global’s ability to generate capital. 

As part of this action, we also noted the firm’s RTM exposure 

and increased risk profile. The October 26th report concluded by 

saying that S&P might soon lower MF Global’s rating to speculative or non-investment grade, depending on the firm’s execution of 

a strategic plan which included a potential short-term sale of certain operations. 

On October 31, 2011, MF Global filed for bankruptcy protection. 

As a result, S&P downgraded the firm’s credit rating to D. In 

S&P’s view, MF Global’s collapse was not caused directly by its exposure to the RTM portfolio. 

Rather, we believe MF Global’s demise was driven primarily by 

a rapid downward spiraling of confidence among market participants and counterparties, who questioned the firm’s transparency 

and its ability to attract and maintain investors and generate revenue. 

I thank you for the opportunity to participate in this hearing. I 

would be happy to answer any questions that you may have. 

[The prepared statement of Mr. Parmelee can be found on page 

103 of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Cantor, you are recognized for 5 minutes. 

TESTIMONY OF RICHARD CANTOR, CHIEF CREDIT OFFICER, 

MOODY’S INVESTORS SERVICE 

Mr. CANTOR. Mr. Chairman, members of the subcommittee, good 

morning. 

My name is Richard Cantor. I am the chief credit officer of 

Moody’s Investors Service. In that capacity, I lead the Credit Policy 

Group, and I chair the Credit Policy Committee, which are jointly 

44 

responsibly for the review and approval of Moody’s rating methodology. 

Thank you for this opportunity to address you today. 

Long before the collapse of MF Global, Moody’s regarded the 

company as a franchise that was particularly reliant on customer 

and counterparty confidence. Our rating reflected our view that MF 

Global’s credit profile had speculative characteristics compared to 

other rated credits. 

In fact, for several years, Moody’s viewed MF Global as one of 

the riskiest credits among all U.S. banks and securities firms. 

Today, I will describe the rating actions that Moody’s took before 

MF Global’s bankruptcy, which was brought on by the revelation 

that customer assets were missing. 

But first, it would be helpful to briefly explain the meaning of 

Moody’s credit ratings, and the additional indicators we use to communicate to the market the possible direction of those ratings. 

Moody’s credit ratings are forward-looking opinions that speak to 

relative credit risk on a multiple step scale. This means that 

issuers assigned a higher rating level are less likely to default than 

issuers assigned a lower rating level. 

Some credits are expected to default at every rating level. But no 

one can predict which specific credit at any particular level will default. If that were possible, Moody’s would simply use a two step 

rating scale, default or not default. 

Moody’s expresses its opinions to the markets not only through 

its ratings, but also through the publication of directional rating indicators, called ‘‘Rating Outlooks’’ and ‘‘Rating Reviews,’’ and 

through written research. 

When we announce that a credit rating has a negative rating 

outlook, for example, we are indicating that the issuers’ rating is 

more likely to be downgraded than upgraded over time. Placing a 

rating on the review indicates that the rating is likely to change 

over the near term. 

By 2008, Moody’s viewed MF Global’s creditworthiness as not 

particularly strong, as reflected in its Baa1 rating and its negative 

outlook. Moody’s subsequently downgraded MF Global’s credit rating to Baa2. 

By the end of 2010, the Baa2 ratings had a negative outlook, 

again communicating downward pressure on the ratings. Moody’s 

reassessed MF Global’s credit profile last February in light of the 

company’s weak profitability and high leverage, relative to similarly rated peers. 

We affirmed the negative outlook and issued a press release 

identifying three areas of concern about the company’s performance—earnings, leverage, and risk—which would determine 

Moody’s next rating action over the following 4 to 6 quarters. 

Two quarters later, in August of last year, Moody’s once again 

communicated that it would like to downgrade MF Global if the 

company’s performance did not improve in these three areas. On 

October 21st, Moody’s analysts met with Mr. Corzine and members 

of his management team in advance of the company’s announcement of its quarterly financial results. 

During that meeting, Mr. Corzine made it clear that MF Global’s 

repurchase-to-maturity transactions were purely proprietary tradVerDate Nov 24 2008 18:20 Sep 28, 2012 Jkt 075070 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\75070.TXT TERRIE
45 

ing positions. Prior to that meeting, Moody’s had understood, based 

on discussions with management, that the company was increasing 

its principal trading activities primarily for the purpose of facilitating customer transactions. 

MF Global also revealed to Moody’s at that meeting that it would 

report a significant quarterly loss. As a result, MF Global’s performance had deteriorated in three areas of concern that Moody’s 

had identified last February: earnings; leverage; and risk. 

On the very next business day, Moody’s once again downgraded 

MF Global’s rating, this time to Baa3, and placed it on review for 

a further possible downgrade. 

The following day, MF Global announced a record quarterly loss, 

and an accelerating flight of customers and counterparties rapidly 

took hold. As the crisis of confidence and liquidity gathered pace 

over the subsequent 48 hours, Moody’s downgraded its rating to 

Ba2 and kept the credit on review for a further possible downgrade. 

When MF Global filed for bankruptcy on October 31st, Moody’s 

downgraded the credit rating to Caa1. Moody’s withdrew its ratings 

on MF Global altogether on November 15th. 

Thank you. I look forward to answering your questions. 

[The prepared statement of Mr. Cantor can be found on page 66 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Gellert, you are recognized. 

TESTIMONY OF JAMES H. GELLERT, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, RAPID RATINGS INTERNATIONAL, INC. 

Mr. GELLERT. On behalf of Rapid Ratings’ employees, shareholders, and subscribers, I would like to thank Chairman Neugebauer, Ranking Member Capuano, and the members of the subcommittee for asking me to testify today. I am James Gellert, 

chairman and chief executive officer of Rapid Ratings. 

It is clear by now that MF Global is a tragic story for Wall 

Street, Main Street, and the futures industry. Its bankruptcy follows and trends with other notable financial failures from the last 

12 years in one way; agencies that were paid to provide professional opinions on credit risk failed to give sufficient warning of 

this firm’s risk. 

MF Global carried investment grade ratings from Standard & 

Poors from 2007 until October 31, 2001, and from Moody’s and 

Fitch from 2007 until October 24th, 2011. 

In contrast, Rapid Ratings provided 2 years of warning that MF 

Global was a high-risk, sub-investment grade entity. We are a 

user-paid, not an issuer-paid firm. We use only financial statements, no market inputs, no qualitative analysts. 

We have no contact in the ratings process with management, 

bankers, investors or their advisers. We utilize our proprietary software-based system to rate the financial health of thousands of private and public companies, quarterly. 

Our ratings have an impressive record of far outperforming the 

big three rating agencies. Our financial health rating system (FHR) 

evaluates 62 ratios from company’s income statements and balance 

sheets. 

46 

Our zero to 100 score is the product of a highly complex modeling 

process that measures variations in the financial health of any 

company, effectively benchmarking how well it is able to withstand 

an internal or external shock. We are consistent and we are accurate. 

Over the past 20 years, approximately 90 percent of defaults 

have occurred at 40 and below on our scale. At bankruptcy, we had 

MF Global rated at 23. 

Prior to their last quarterly release, they were rated at 29. Both 

ratings are in our high-risk category and well below investment 

grade, where we have had them for over 2 years. 

These ratings are the rough equivalent to CCC minus and CCC 

on the traditional alpha scale, or 8 to 10 ratings notches below 

where they sat for the big three agencies. 

The FHR system is agnostic through qualitative judgements like 

management star power, unless their actions affect the company’s 

financial health. Through our system, MF Global is a simple story 

of a firm’s declining in performance since 2007 in various measures, including revenue performance, profitability, debt service 

management and others. 

From 2007 through 2011, MF Global’s revenue declined by 63 percent, from $6.1 percent to $2.2 billion. Net profit declined by 

142 percent, from $190 million to negative $79 million. 

In the last 16 quarters, MF Global had 10 quarters with recorded 

losses, and the last 4 saw losses grow by 68 percent over the prior 

12 months. Its most recent quarterly report showed a record loss 

of $191.6 million. 

Without even factoring in risky trading in Euro sovereign debt 

or risk controls and other things, MF Global was unmistakably in 

declining health. Yet Moody’s, S&P, and Fitch barely moved over 

this period. 

Why? 

Number one, the issuer-paid business model is inherently conflicted, making objectivity difficult to administer consistently. Management of rated companies will try hard to get and keep the best 

possible ratings. If they are convincing, their ratings are better 

than not. If ratings analysts don’t properly question what they are 

sold, a rating can be compromised. 

Two, the big three strive for stable ratings and to look through 

the cycle, thus ignoring the short- to medium-term performance 

volatility that can capture a firm’s underlying fundamentals and 

determine long-term success or failure. 

Three, barriers to competition are still great. Despite reform efforts, NRSRO ratings are still firmly embedded all over the financial system. 

Four, and finally, the big three hold little to no accountability 

when things go wrong. The MF Global story inevitably turns to the 

question of timing of ratings changes. Traditional agencies say they 

need to be careful when downgrading a company because they can 

affect market behavior. 

They also rightly assert that many investors want rating stability. These are indeed real concerns. But they pale in comparison 

to the damage done when ratings are downgraded too late or not 

at all. 

47 

We do not advocate ratings volatility. We support a better ratings industry. 

Congressman Fitzpatrick’s recent draft bill responds to these 

points directly. It would require NRSROs to be accountable and 

stand by their ratings on a quarterly basis. 

The market has no way of knowing when the big three are 

proactive, behind schedule or simply inattentive to maintenance of 

an existing rating. While we regularly out-perform the big three, 

we don’t believe that Rapid Rating’s system is simply better than 

others, nor that traditional ratings are always flawed. 

We believe in open competition in the ratings business, so institutional investors, risk professionals and regulators can choose 

among options that best suit their needs. Certainly, those who had 

our early warnings on MF Global were far better served than those 

who relied exclusively on the big three, whose ratings provided 

none. 

It is time to require more timely ratings, more accurate ratings, 

and more competition. We cannot simply rely on traditional agencies that promise much, only to deliver and to defend much less. 

Thank you. 

[The prepared statement of Mr. Gellert can be found on page 74 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentlemen. We will now go 

to questions by the panel. And the Chair recognizes himself for 5 

minutes. 

Mr. Cantor, in Moody’s January 17th letter responding to the 

subcommittee, with reference to the RTM trades, they said that the 

analysts did not have an understanding that MF Global was exposing its own capital in amounts representing a multiple of its outstanding common equity until October 21, 2010. 

But, in fact, in the 10-K filed by MF Global for the period ending 

March 31st, it was published. On 5/20/2011, MF Global disclosed 

those positions in their 10-K. 

But yet Moody’s didn’t know about it, according to your firm’s 

letter, until October 21, 2011. How do you explain that? 

Mr. CANTOR. Of course, all financial services firms are exposing 

their capital at multiple levels to the assets that they hold on balance sheets. Plus, they have a variety of derivative exposures that 

also can be viewed as exposing their capital to multiples. 

So the entirety of the sets of obligations the financial services 

firms enter into will be some significant multiple of its capital. 

In this particular case, we were talking about a specific set of 

transactions which we had interpreted, based on our discussions 

with management in the past, as being transactions that had been 

undertaken with the intention to facilitate customer-based transactions, which would imply that either they were being liquidated 

over a short period of time, when there were customer transactions 

that were taking place, or they were being hedged. 

They were being used in some other purpose, rather than taking 

these strictly proprietary trading positions. 

Chairman NEUGEBAUER. I think we understood that was your response. But we talked to some other people who have looked at 

that 10-K. And based on bringing Mr. Corzine in, and Mr. Corzine’s 

stated goals for this company, that they were moving, or adding to, 

48 

not moving away, but adding proprietary trading, becoming a full 

service investment banking company. 

And so a lot of folks think that would have been the note that 

was—either if you didn’t understand it, you should have followed 

up. But then, as I am sure you are aware, in August, then they 

filed a 10-Q. And basically, did your analysts review the 10-Q filed 

in August? 

Mr. CANTOR. I am not aware that that filing was reviewed. You 

are talking about the 10-Q or the 10-QA or the— 

Chairman NEUGEBAUER. Then, they did a 10-Q in September, 

which detailed $150 million FINRA capital charge, which was related to the European RTM trades. 

Did you look at that? 

Mr. CANTOR. That was a one-page document. That was not, as 

far as I know, reviewed by the analysts at that time. 

Chairman NEUGEBAUER. Would that have been a flag as an analyst in your firm, to ask, what is up with this? That we should go 

back and take a look at this? 

Mr. CANTOR. I don’t believe so. I think what that document indicated was the cash capital that was being required by MF Global’s 

regulator was being increased, because of the different interpretations that were being given to the exposure. 

It wasn’t new information about the exposure, but rather its capital treatment. And the magnitude of the change in capital requirements was not a particularly significant amount from a credit perspective. 

Chairman NEUGEBAUER. So do your analysts read financial 

newspapers? 

Mr. CANTOR. Yes. 

Chairman NEUGEBAUER. Okay. The Wall Street Journal had an 

article on October 17, 2011, that detailed that they had been asked 

to put up additional capital, that there was concern about the company. 

Did your analysts follow up on that? 

Mr. CANTOR. Yes. We had a meeting already scheduled with MF 

Global. And that topic would be discussed. 

Chairman NEUGEBAUER. And what was the date of that meeting? 

Mr. CANTOR. The date of the meeting was the 21st. I think there 

was prior discussion 2 days before that. 

Chairman NEUGEBAUER. So, 4 days after The Wall Street Journal. You all didn’t pick it up in the initial 10-K that came out in 

March. Subsequent 10-Ks that came out, didn’t—became aware 

that they have been asked to put up additional capital. 

So then you read The Wall Street Journal’’ and you decided, hey, 

maybe we should go over to MF Global and see what is going on? 

Mr. CANTOR. No. This is the context of a regular quarterly meeting that we have with MF Global and with other major issuers in 

the market. And we would be reviewing in that meeting all the financial releases that had occurred in the interim, since the previous meeting. 

And we would be discussing that issue, as well as others. If you 

will recall, there was not a lack of knowledge of the European exposure, but rather a difference of view about what that exposure enVerDate Nov 24 2008 18:20 Sep 28, 2012 Jkt 075070 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\75070.TXT TERRIE
49 

tailed and how to interpret that exposure, which wasn’t discussed, 

I believe, in either of the documents that you mentioned. 

Chairman NEUGEBAUER. Obviously, S&P was able to kind of figure that out a little earlier than Moody’s did. And as we hear from 

Mr. Gellert, they had been concerned about the company’s capital 

inability for some time. 

Mr. Gellert, I was going to ask you, the rating was 23 in your 

firm? 

Mr. GELLERT. It was 29 going into October. And at the quarterly 

financial release, we downgraded it again to 23. 

Chairman NEUGEBAUER. And that is on a scale from what? 

Mr. GELLERT. Zero to 100. 

Chairman NEUGEBAUER. Zero to 100? So, 23 is not very good. 

Mr. GELLERT. It is not very good. As a matter of fact, 26 is the 

point on our curve where, over the last 20 years, the highest incidence of individual defaults have occurred. So anything in the 23, 

26, 29 range is definitely a cause for significant concern. 

Chairman NEUGEBAUER. I yield to Mr. Capuano for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Parmelee, would you agree or disagree that a triple D rating 

from your agency is not a really good rating? 

Mr. PARMELEE. Sir, our rating was triple D minus, and it is our 

lowest. It is our lowest— 

Mr. CAPUANO. I know what it is. Would you agree that it is not 

a very good rating? 

Mr. PARMELEE. It is in the middle of our scale. It is our lowest 

investment grade rating. We have 21— 

Mr. CAPUANO. Would you invest in somebody doing investment 

banking with a triple D rating, your personal money? 

Mr. PARMELEE. Sir, it is considered to be an investment grade 

rating. But it is our lowest investment grade rating. That is the 

only point I would make. 

Mr. CAPUANO. Mr. Cantor, your Baa2, pretty low? 

Mr. CANTOR. There is no rating that is a good rating or a bad 

rating. We have a lot of issuance in the United States. 

Mr. CAPUANO. Having received ratings in the past, I would not 

just respectfully, irrespectively disagree. 

When you get that rating, you want a good one. We know the difference between a Baa and an A. You don’t? 

Mr. CANTOR. I meet with issuers very regularly. Some of them 

are extremely pleased to get their Caa1 rating, instead of a Caa2 

rating, or investors are pleased if their bonds are upgraded. 

Mr. CAPUANO. So you are basically tell me your ratings don’t 

mean a thing? 

Mr. CANTOR. There is a trillion dollar junk bond market, right? 

There is a trillion dollar market. Every day, there are junk bonds 

issuance, speculative rate bonds issued. 

Mr. CAPUANO. So it doesn’t matter what rating you rate them? 

Then why bother? 

I don’t want to go down this path. You can avoid the questions 

up to a point. I will get to you in a minute, because I want to follow 

up on the chairman’s question. 

Mr. Cantor, you stated in your written documents that you didn’t 

know that they were doing proprietary trading until October 21, 

50 

2011. Do you know what that tells us, very clearly, very simply? 

Nobody at your firm read the 10-K. 

Is that a fair conclusion, that you did not read the 185-page document in May of 2011? 

Mr. CANTOR. That document was read. 

Mr. CAPUANO. But you missed the fact that they were dealing 

proprietary? 

Mr. CANTOR. We did not understand that the— 

Mr. CAPUANO. So it was unclear? 

Mr. CANTOR. —the size of the position was a proprietary position. 

Mr. CAPUANO. That is not your statement. Your statement is you 

didn’t know it; it was the first time you learned of it. 

Honestly, because I want to go down the road of these 10-Ks. 

Mr. Parmelee, you stated that the 10-K was the first time you 

learned of the off-balance sheet RTMs. Is that a correct statement? 

Mr. PARMELEE. Yes, sir. We didn’t have advance notice. 

Mr. CAPUANO. Okay. Mr. Parmelee, did you know about the off 

balance RTMs? 

Mr. PARMELEE. I learned about the off balance sheet RTMs later 

on. The team was aware. I didn’t learn about those until probably 

the October timeframe. 

Mr. CAPUANO. Mr. Cantor, did your company know about the off 

balance sheet RTMs? 

Mr. CANTOR. Yes. 

Mr. CAPUANO. So you did read the 10-K? 

Mr. CANTOR. I said yes before. 

Mr. CAPUANO. Okay. It is just kind of interesting. If you are getting a lot of money to read something, you would think that you 

would actually read it. 

I guess the reason I am asking this is because, honestly, the off 

balance sheet thing bothers me to no end, and the fact that neither 

of you could have possibly known. 

Yes, let me ask you a very quick question, Mr. Cantor. Mr. 

Parmelee answered it. 

Did you know about the RTMs before the 10-K, the off balance 

sheet RTMs? 

Mr. CANTOR. No. 

Mr. CAPUANO. Okay. So there is no way you could have known 

it, which I understand. That is why they are called off balance 

sheet. I get that. 

And the problem that I have, as I understand it, allowing these 

off balance sheet RTMs is perfectly okay, according to accounting 

rules. 

Am I understanding correctly, Mr. Parmelee? 

Mr. PARMELEE. Yes, sir. 

Mr. CAPUANO. Mr. Cantor, do you agree that my understanding 

is correct? 

Mr. CANTOR. I believe so. 

Mr. CAPUANO. If accounting rules said—now the reason they are 

off balance sheet is because for some reason these things are allowed to be counted as sales, which, for all intents and purposes, 

is an asset. 

And I don’t understand when you have these RTMs, it is basically a wash. Why they are not recorded as a wash, maybe even 

51 

as a liability. And in this particular case, it turns out maybe they 

were a liability. 

So be it. But at least a wash. 

If the accounting rules required them to be put on earlier statements, do you think it would have affected your ratings earlier, Mr. 

Parmelee? 

Mr. PARMELEE. No, sir. We were aware of the—I’m sorry, you are 

saying after it was made public in May? 

We were aware of the RTM portfolio. Our analysts read the financial statements as part of our procedures. They did in this case. 

They told me they did. 

We believe that all the information around that portfolio was 

factored into our rating. And you will recall, the portfolio itself— 

Mr. CAPUANO. So that when you first learned of the multi-billion 

dollar, off balance sheet, risky investments, wouldn’t change your 

opinion at all? 

Mr. PARMELEE. Sir, what is most relevant isn’t whether or not 

it is off balance sheet, but what is actually in the investment itself 

and how much risk does it pose. Our evaluation of the risk was 

that, again, it was made up of five European sovereign bonds. 

Those tended to be very highly rated European sovereigns. 

80 percent of the exposure, or roughly 80 percent— 

Mr. CAPUANO. It didn’t bother you at all that somebody who was 

supposed to be telling you everything hadn’t bothered to tell you 

about this? 

Mr. PARMELEE. Sir, we believe that transparency is a very good 

thing. And we would push for more transparency in financial reporting. Absolutely. 

Mr. CAPUANO. But when you got the transparency, it didn’t 

change your opinion. 

Mr. PARMELEE. Once we learned about it, we factored it in, as 

well as other information, and believed that our rating, the triple 

D minus rating, continued to be appropriate. 

I can comment a little bit on why we weren’t so concerned relative to our rating, if you would like. 

Mr. CAPUANO. Mr. Cantor, if you had known about—if your firm 

had known about these off balance sheet RTMs earlier, would it 

have affected your rating? 

Mr. CANTOR. I am not sure they were present much earlier than 

the disclosure. But— 

Mr. CAPUANO. According to all the testimony we have, they were 

present for months before that, and growing. As a matter of fact, 

the previous panel pretty much said that. 

Mr. CANTOR. A few months, yes. 

But, as I said, there are a number of things to consider. As the 

other panelists said, the inherent credit risk of those transactions 

was fairly modest. It was highly rated. If we were talking about an 

Italian rating agency with a Baa rating agency, we wouldn’t even 

think twice. 

It so happens they are holding other government securities. But 

the positions themselves were not inordinately risky. However, the 

trading strategy that they represented, that the firm was taking on 

a very large proprietary bet, outside of its traditional business, was 

a break from the strategy that we had understood they were— 

52 

Mr. CAPUANO. Let me just break in for a minute. See, again, I 

am a politician. And I understand fully well that transparency is 

critically important. I actually agree with you. 

But I have to tell you, if you walk into my office and you don’t 

tell me something, that is not transparency. And I will say the next 

time you walk into my office, you will not be received quite as well 

as you were previously. 

Mr. CANTOR. I agree with you. 

If we had known that—in fact, we felt that we learned something 

new on October 21st, that we didn’t know before, in that the firm 

had engaged in a large proprietary bet— 

Mr. CAPUANO. Had you learned it earlier, you might have 

changed your opinion earlier? 

Mr. CANTOR. If we knew something earlier, we might have 

changed our opinion earlier. Sure. 

Mr. CAPUANO. I guess what I am asking is if the accounting rules 

required more transparency in this situation, would it or could it 

have changed your opinion? 

Mr. CANTOR. I don’t think the accounting rules would have been 

able to reveal to us the strategy that lay behind that particular position. I think that would have required conversations with management. 

I am not sure more— 

Mr. CAPUANO. The same management that you now say didn’t 

tell you that they were dealing proprietary. So what would meetings with those kinds of people really have helped? 

They wouldn’t have told you something else. I guess what I am 

getting at is, honestly, I think transparency is a critical thing in 

the entire marketplace. I think that is what it is all about, letting 

investors know. 

Your ratings here in this case, in my opinion, they kind of let the 

world know that this was a significantly risky investment. I know 

you don’t want to say that for whatever reason. 

But that is what it tells everybody in America. And you know it. 

And the fact that you are now telling me that if you knew more, 

you wouldn’t have changed your opinion, now raises questions 

about your opinion in the first place, to me. 

That is like saying, wait a minute, I was about to give you guys 

credit for actually being on top of this, or in front of it. And now, 

I am not so sure. 

One of you apparently didn’t read the 10-K. And now you are 

telling me no matter how much information you told me, I thought 

it was perfectly fine. 

And you know something? That is really not a good answer. And 

I guess we will have to pursue this a little bit further later, because I am way over my time again. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, the vice chairman of the subcommittee, Mr. 

Fitzpatrick. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Follow up on Mr. Capuano’s questions with the Moody’s and S&P 

representatives, can you discuss a little bit your surveillance regime, how often? What do you look for? What do you rely on? 

53 

Talk to us about how you do it. 

Mr. PARMELEE. Sure. I am happy to take that. And also following 

up, in this case, for us, we downgraded MF Global about 6 months 

before this disclosure. At the time, we pointed out the fact that we 

expected that the firm would be taking on more risk, including 

more proprietary risk. 

So that was factored in. 

In terms of our surveillance policies, we surveil companies on an 

ongoing basis. Any time there is new information that is put into 

the marketplace, the analysts are responsible to know what that 

information is, to ask follow up questions to the extent they are 

warranted, and to act on it. 

So it is really sort of a regular daily surveillance, based on activity in the marketplace. 

Mr. FITZPATRICK. Mr. Cantor? 

Mr. CANTOR. We look at a lot of things on an ongoing basis, including the macroeconomic environment the firm operates in, and 

the sectoral environment as well. Of course, we review the financial 

filings. We often meet with the firm. 

In the case of MF Global, I think we met with the firm 15 times 

in 2 years, and reviewed financial results and asked further questions. 

Mr. FITZPATRICK. You indicated you met with MF Global 15 

times in a couple of years. Is that specifically to review the rating? 

Mr. CANTOR. Yes. There was a higher frequency of meetings 

there towards the end. But we would certainly meet at least on a 

quarterly basis. 

Mr. FITZPATRICK. So it sounds like both Moody’s and S&P, you 

stand by you ratings and the methodologies? 

Mr. PARMELEE. Yes, sir. 

Mr. CANTOR. Yes. 

Mr. FITZPATRICK. Mr. Cantor, do you feel confident enough in 

those ratings to personally stand by them? 

Mr. CANTOR. Yes. 

Mr. FITZPATRICK. So as the chief credit officer and the managing 

director, would you, at any given time, say that any given rating 

is as precise as it could be, on the best and most up-to-date information available to your company? 

Mr. CANTOR. In an ideal world, everything can be improved. And 

we are always seeking to improve our processes. So one of the 

things I hope to do is always improve the quality of our ratings 

over time. 

Mr. FITZPATRICK. Given that the European sovereign debt holdings at MF Global were—they were disclosed as early as May of 

2011, and realizing that the market did not respond at the time, 

but in retrospect, knowing that these holdings would lead to a 

downgrade that you indicated 6 months later, would you say that 

this was perhaps a surveillance failure? 

Mr. CANTOR. I don’t believe so. I think we had laid out very 

clearly three areas of concern for the firm. We laid out a timeline 

over which we would be evaluating the performance against those 

three benchmarks. 

When we learned that the firm was not meeting those criteria 

that we had laid out, we took immediate action. 

54 

I think it is also important to recognize that while the firm’s 

credit profile had deteriorated and was reflected in rating downgrades, the bankruptcy of MF Global appears to have been caused 

by something very different from what we are talking about right 

now. 

It was caused by these missing funds. 

Mr. FITZPATRICK. We heard from the previous panel that there 

was an October 21st meeting with Moody’s, that the chief risk officer was there, it was kind of like a pro forma meeting, really. He 

wasn’t asked any questions; he didn’t really say anything. 

Is that typical of the kind of review that would be going on at 

that point? 

Mr. CANTOR. I don’t know what was discussed particularly at the 

meeting. I have a copy of the presentation. All the issues that were 

critical for the rating action that was taken immediately I think 

were quite amply discussed. 

Mr. FITZPATRICK. Mr. Parmelee, do you feel confident enough in 

the ratings of your firm of MF Global that you would personally 

stand by them? 

Mr. PARMELEE. Yes, sir. We factored all relevant information into 

the ratings, and that they were an appropriate opinion of the credit 

quality of the firm. 

Mr. FITZPATRICK. That is on an ongoing basis. 

Mr. PARMELEE. Yes, sir. 

Mr. FITZPATRICK. Mr. Gellert, you went to great length in your 

testimony to chart the ratings that your company assigned to MF 

Global. And you also included some description of your methodologies. 

Do any of these ratings reflect the use of information that is not 

available to the NRSROs like Moody’s and S&P and Fitch? 

Mr. GELLERT. No. We generate all of our ratings based off of disclosed financials. So we are not privy to any additional information. 

And we have no contact with management, so we are not bouncing 

questions or ideas off of them. 

So it is all on publicly available information. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. Oh. Mr. Cantor, I just want to follow up 

on one thing you said. 

You believe that the reason that MF Global went bankrupt is because of the missing money? 

Mr. CANTOR. That is my understanding, that like many financial 

services companies in weakening financial positions and having liquidity strains, they were seeking an acquisition partner. And they 

were close to reaching agreement along those lines, which fell apart 

when customer money was missing. 

Chairman NEUGEBAUER. I recognize Mr. Posey from Florida. 

Mr. POSEY. Thank you, Mr. Chairman. 

Just a few general accounting questions. If a company that you 

are rating has a commodity account, like say ExxonMobil or Tyson 

Foods, is the value of the cash or Treasury bills in the segregated 

customer account assumed to have full value? 

Yes or no, each of you, please? 

Mr. CANTOR. Yes. 

Mr. POSEY. Yes? Only one of you has an opinion. 

55 

Mr. PARMELEE. Sir, I don’t know the answer to that. 

Mr. POSEY. I’m sorry? 

Mr. PARMELEE. I don’t know the answer to that. 

Mr. POSEY. Okay. So we have an ‘‘I don’t know’’ from Mr. 

Parmelee, and a ‘‘yes’’ from Mr. Cantor. 

Mr. GELLERT. I believe the answer is yes. But fortunately, our 

system takes care of that and I don’t need to have— 

Mr. POSEY. Okay, so we have an ‘‘I don’t know,’’ a ‘‘yes,’’ and an 

‘‘I believe it is yes.’’ 

Assets in a balance sheet can appreciate or fall in value, be sold 

or be transferred. Do we all agree? 

Let the record show you all agree. 

Potentially, they could also be stolen. Do we all agree? 

Mr. CANTOR. Yes. 

Mr. PARMELEE. Yes, sir. 

Mr. POSEY. Okay. Let the record show they all agree. 

Have any of you ever heard of them being ‘‘vaporized?’’ 

Mr. PARMELEE. No, sir. 

Mr. CANTOR. No. 

Mr. POSEY. No. Okay. Let the record show they all said ‘‘no.’’ 

How would you treat assets on a balance sheet if those assets 

had been stolen? 

Or just to save time, is it correct to assume that they wouldn’t 

be counted, because they would eventually need to be returned to 

their rightful owners. Do you agree with that statement? 

Mr. PARMELEE. Sir, I am not sure I have ever faced that experience. 

Mr. CANTOR. I think I would put stolen assets on the balance 

sheet as zero. But there might be a contingent potential of recovery. 

Mr. GELLERT. We as well have never faced anything like that. 

But we would probably handle it very similarly. 

Mr. POSEY. So Mr. Cantor and Mr. Gellert agree. Mr. Parmelee, 

you don’t know. 

Mr. PARMELEE. Yes, sir. 

Mr. POSEY. I’m sorry? 

Mr. PARMELEE. Yes, sir. 

Mr. POSEY. Yes, sir, what? You don’t know or you would do it 

like they would? 

Mr. PARMELEE. I don’t know, sir. 

Mr. POSEY. Okay. 

In your dealings with MF Global, was Laurie Ferber involved in 

your work? Yes or no? 

Mr. PARMELEE. No, sir. 

Mr. CANTOR. I am not aware. 

Mr. POSEY. And you didn’t have anything with MF Global. So 

okay, you all said ‘‘no.’’ 

She is considered to be an expert on legal issues related to commodity and derivatives trading. Would you agree, Mr. Parmelee? 

Mr. PARMELEE. I don’t know about Laurie Ferber’s background. 

Mr. POSEY. You don’t know who she is? 

Mr. PARMELEE. I don’t know specifically about her background 

and her expertise. I can’t speak to that. 

56 

Mr. POSEY. Okay. So somebody in her position, potentially, you 

feel then could have no expertise in those areas? 

Mr. PARMELEE. I would assume that they would. 

Mr. POSEY. Okay. Mr. Cantor? 

Mr. CANTOR. I really don’t know anything about her. 

Mr. POSEY. Do you know who she is? 

Mr. CANTOR. No, I don’t. 

Mr. POSEY. Okay. 

Mr. Gellert? 

Mr. GELLERT. Again, we have no contact with them. 

Mr. POSEY. Okay. So let the record show nobody knows anything. 

I guess, Mr. Cantor, in rating MF Global, you assumed that they 

would conduct their business in accordance with all the laws and 

regulations, and not that they would loop their customers’ segregated accounts for their own benefit. 

Is that a correct assumption? 

Mr. CANTOR. That is correct. 

Mr. POSEY. Okay. Did you assume that the FTC and the CME 

were fulfilling their responsibilities to audit and verify the proper 

protection of those assets? 

Mr. CANTOR. That is correct. 

Mr. POSEY. Would you all have done the same? 

Mr. PARMELEE. Yes, sir. 

Mr. GELLERT. Yes. 

Mr. POSEY. Did you confirm with MF auditors, 

PricewaterhouseCoopers, that they had verified that controls and 

systems were in place to prevent theft, fraud, and unauthorized 

transfers? 

Mr. PARMELEE. No, sir. We did not speak directly to the auditors. 

But typically, we wouldn’t expect that an auditor would be able to 

share information with us as a third party. 

They would have a confidential relationship with their client. 

Mr. CANTOR. We didn’t speak to them directly. We did recognize 

that they had signed their opinion to the audit opinion that we did 

review. 

Mr. POSEY. Fair enough. 

Mr. GELLERT. Again, we have no contact with advisers, auditors 

or bankers. 

Mr. POSEY. I assume you relied on SEC filings to complete your 

work. Are you aware that some of the 2011 filings may have been 

backdated and otherwise adulterated? 

Mr. PARMELEE. We did rely on the SEC filings. When you say 

backdated and adulterated, I am not aware. So— 

Mr. POSEY. Yes. I said, ‘‘may have been.’’ 

Mr. CANTOR. I have the same answer. 

Mr. POSEY. Okay. But no awareness of the—okay. 

And just following up on Mr. Capuano’s comments, in Moody’s 

letter to Congress, it stated that they did not learn about MF’s 

large TRM trades until October 21st. And I am just wondering, like 

everyone else, how that is possible? 

Mr. CANTOR. Again, we were aware of the disclosures in the 10- 

K. And we had read through the 10-K. So we were aware of their 

positions as reported. 

57 

What we became aware of on the 21st was the motivation for the 

positions and how they were being managed. And at that point in 

time, the description of that type of activity changed our view on 

the firm’s risk appetite, which, along with the two other measures 

that we were tracking—earnings and leverage—led us to take the 

action we had intended to take if we saw that weakening performance along those metrics. 

Mr. POSEY. So could anybody come close to properly assuming 

that just perhaps it was an oversight? 

Mr. CANTOR. I don’t understand what you are asking. We had 

talked about in all our publications of a—of taking a multi-quarter 

approach to evaluating along these dimensions and upon executing 

along that plan. We took the action that we had intended to. 

Mr. POSEY. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I now recognize the gentleman from 

New Mexico, Mr. Pearce. 

Mr. PEARCE. Thank you, Mr. Chairman. 

I guess, Mr. Parmelee, are the ratings system—is that mathematical or is subjective? How do you come up with the ratings? 

Mr. PARMELEE. The ratings incorporate both qualitative and 

quantitative aspects to it. 

Mr. PEARCE. Which way is heavier? 

Mr. PARMELEE. We take a look at the underlying business. We 

make an assessment of the business and how risky that business 

is. And then, we assess the financials. And based on how risky the 

business is, that drives our outlook on the financials. 

Mr. PEARCE. I am looking at your ratings for the firm from about 

2008 through 2011, when it started having trouble, as everybody 

kind of got it right then. 

Were your ratings higher or lower than your friends next to you 

there? 

Mr. PARMELEE. When we made our ratings in November of 2010, 

that took it to a level that is lower than our two largest competitors. 

Mr. PEARCE. But what was it up to in 2010? The BBB rating in 

2008 to 2010, is that higher or lower? 

Mr. PARMELEE. Our highest rating was double B plus over a couple of years. It went down to triple B minus, which is lower, not 

just lower. 

Mr. PEARCE. Okay. 

Who is Richard Moore? 

Mr. PARMELEE. I don’t know Richard Moore personally. 

Mr. PEARCE. I didn’t ask if you know him personally. I just 

asked, who is he? 

Mr. PARMELEE. I know the name from a media report. But I don’t 

know his role. 

Mr. PEARCE. So you might know that he was working for Mr. 

Corzine and he was also on your board of directors? 

Mr. PARMELEE. I didn’t know that, sir. I didn’t know that before 

the media reports came out. 

Mr. PEARCE. You didn’t know that? Okay. 

Is it ethical, this off balance sheet trading? You heard my questions, I think, if you were sitting here for Mr. Stockman. Is that 

ethical? 

58 

Mr. PARMELEE. Sir, I think it is an accounting issue. And what 

is important isn’t whether or not the trade is off balance sheet. 

What is important is understanding the risks that are in the trade. 

But I do think, as I said earlier— 

Mr. PEARCE. So you are saying that it really didn’t matter that Enron was trading, oh, what, $27 billion of its $60 billion? 

Mr. PARMELEE. Sir, I think transparency is important. 

Mr. PEARCE. Okay. Is this firm transparent? Was MF transparent about its off balance sheet stuff? 

Mr. PARMELEE. I think that MF could have been more clear to 

the marketplace around— 

Mr. PEARCE. I am just asking yes or no, are they transparent 

about the off balance sheet stuff? 

Mr. PARMELEE. I think they could have been more transparent 

than they were. 

Mr. PEARCE. Were they transparent enough for you to know what 

was going on? 

Mr. PARMELEE. Once they filed their 10-K report in May, then 

we knew about the off balance sheet exposure. Before that, we did 

not. 

Mr. PEARCE. So it would have affected it if they had not been 

sneaky about it before, if they hadn’t been—if they had been more 

transparent. 

Mr. Gellert, why did you all, way back there in 2010, you begin 

to really put warning signs up. You took them down to a 29, which 

is the equivalent of a CCC, right? 

Mr. GELLERT. That is correct. 

Mr. PEARCE. Yes. So you took them down. 

What was your concern back then? 

Mr. GELLERT. Our concern was a combination of drops in primarily three of our six performance categories. So their sales performance was dropping dramatically. Their profitability performance was dropping dramatically, and their leveraging. So we saw 

significant warning signs across-the-board. We look at some of the 

numbers that I quoted in my opening statement. There was a dramatic change in that business over the past few years. 

Mr. PEARCE. Okay. 

Mr. Cantor, I would like your viewpoints on this ethical or nonethical question, about off balance sheet. 

Mr. CANTOR. I don’t believe it is unethical—off balance— 

Mr. PEARCE. Can you speak more into the microphone? 

Mr. CANTOR. I don’t believe it is unethical to have off balance 

sheet reporting. 

Mr. PEARCE. So if I filed a claim with the Federal Election Commission that declared my net worth to be different because I have 

some off balance sheet stuff, you wouldn’t think that is unethical? 

Would you take issue—would you think the Federal Election 

Commission would take issue with me filing stuff that is off balance sheet? 

Mr. CANTOR. I won’t comment on that. But I believe this exposure was disclosed in the footnotes. So it was pretty transparent. 

Mr. PEARCE. Pretty transparent, except that you all didn’t have 

a clue. 

Mr. CANTOR. I don’t agree with that. 

59 

Mr. PEARCE. You don’t agree with that? 

You are telling me that they weren’t doing anything off balance 

sheet before you got the word, before they filed that 10? 

Mr. CANTOR. Oh, you mean the months—quarters, between quarters? Again— 

Mr. PEARCE. Yes. They were moving stuff in and out so they 

could drive the leverage up and down. Mr. Corzine could come in 

front of it and brag that he is bringing the leverage down in the 

firm, when actually what he is doing is he is selling, or whatever, 

the day before the filing period closes. 

All of that stuff is just—you feel like it is normal, everyday activity? 

Mr. CANTOR. Moody’s position on MF Global was that it had 

weakening earnings. It had rising leverage. And it had a risk appetite that had the potential to grow, given the change in business 

strategy. 

And all three of those things were affecting risk. The taking on 

of European debt positions in—at that point in time itself, was not 

a highly risky credit judgement. 

But the decision to maintain such positions on a proprietary 

basis, essentially take a large side bet, even though the risks themselves were modest, was not consistent with the state business 

strategy, which was more minimalist in its risk intentions than 

had been described to us. 

Mr. PEARCE. My time is kind of gone. But if I could make a comment that I am seeing where the downgrading goes way south in 

about a 7-day period. 

You want us to believe that the performance of the company was 

transparent, and that there was nothing really obvious to anybody 

except Mr. Gellert, who somehow came up with something out of 

his magic formulas that you all didn’t see. 

And you want us to believe that. It stretches the belief capability. 

Thank you very much, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

The ranking member of the subcommittee is recognized for 5 

minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Cantor, just for your information, I would suggest that you 

go back to the 10-K—not you, but whoever the analyst was. On 

page 76 and on page 17, proprietary activities, it is very clearly reported. As a matter of fact, one of them is in bold. 

‘‘Collateralized financing arrangements used in connection with 

proprietary activities expose our company to issuer defaults and liquidity risks.’’ That is the title of a subsection on page 17. 

They go on to say later on that they may have additional margin 

calls, that we may not readily have. 

So people read it. I don’t know if they need to be retrained or 

something. 

Mr. Parmelee, in your testimony, on page nine, near the end, you 

say, ‘‘We believe MF Global’s demise was driven primarily by rapid 

downward spiraling of confidence among market participants and 

counterparties, who questioned the firm’s transparency.’’ 

What transparency were you referring to? 

60 

Mr. PARMELEE. We think that the loss of confidence occurred because of a number of issues. One, concern in transparency around 

the RTM portfolio, at a time when European sovereigns were under 

pressure. Certainly, there was a loss that was reported. It was significant. 

There were credit downgrades that had happened. 

Mr. CAPUANO. No, just the transparency parts of it. 

Mr. PARMELEE. The transparency related to transparency around 

the details of— 

Mr. CAPUANO. Related to the—so you weren’t concerned about it 

when you learned it in May, when they had never told you about 

it before. But now, all of a sudden, you got concerned? 

Mr. PARMELEE. Sir, we think there should have been more transparency about it. That wasn’t the driver of our credit watch action. 

We placed the ratings on credit watch on October 26th. 

Mr. CAPUANO. You say here that their demise is because of the 

lack of transparency. And yet that lack of transparency, which you 

admitted earlier, was revealed to you in May. 

So it took you from May until, oh, actually the day they filed for 

bankruptcy to actually put them below investment grade. It took 

you almost 6 months for that lack of transparency to, all of a sudden, be of concern. 

Mr. PARMELEE. Sir, a series of events occurred, beginning in 

early September, that we believe undermined the confidence of— 

Mr. CAPUANO. No, no. I understand that. I get all that. I know 

what happened in that time period. 

But you said that it was mostly the lack of transparency. I happen to agree with you. 

But I guess my concern is that same lack of transparency, which 

eventually fell apart when you finally acted—that same lack of 

transparency existed in May. 

And I guess once somebody lies to you, doesn’t that tell you 

something about that person or that company? That maybe they 

might have lied to you about something else? Or maybe they might 

continue to lie to you? 

And yet, it took you 6 months to react to it. 

Mr. PARMELEE. And we published about our concern about the 

transition of this company towards being an investment banking 

model. We talked about the expectation for higher risk. 

Mr. CAPUANO. But you didn’t change their rating. You didn’t tell 

anybody in the public. 

Mr. PARMELEE. We did, sir, in November. 

Mr. CAPUANO. See, I don’t know which one of you I should be 

more upset with, the one who says, it took me 6 months to get 

upset, or the one who says, I didn’t catch it in the first place. And 

as soon as I figured it out, that I blew it in the first place, I got 

upset within a couple of days. 

Both of those answers stink. 

Mr. Gellert, relative to transparency, would you agree or disagree 

that the 10-K was pretty clear about proprietary action? 

Mr. GELLERT. I haven’t personally read the 10-K for that language. 

61 

But our system pulls in these numbers and processes them properly. If there is a question of transparency, to me, it is relative to 

the shift in the business model. 

And if the business model has been—if it is the stated objective 

of management to change the business model, I think it is incumbent on anyone who has a relationship with management to ask 

the questions beyond the benefit of the doubt. 

Mr. CAPUANO. You see, gentlemen, here is my problem. I was 

here for the Enron thing. And when Enron came along, we heard 

about off shore off balance sheet. A major accounting firm went out 

of business because of that review of their books. 

When we had a crisis in 2008, our major banks talked to us 

about off balance sheet investments. They called them special investment vehicles, SIVs. They all had them. They all did them. 

And nobody knew about it, except them. 

And now I am being told—or am I being told that it is okay to 

have off balance sheet significant investments, significantly risky 

investments, off the balance sheet. 

Are you telling me that is okay for your rating, Mr. Parmelee, 

that it is perfectly acceptable to you? 

Mr. PARMELEE. Sir, as I have said, if you are equating off balance sheet to a lack of transparency, I agree fully that there needs 

to be more transparency. There ought to be more transparency 

around these transactions. 

Mr. CAPUANO. Mr. Cantor, would you agree that it is perfectly 

okay to have off balance sheet RTMs or any other investment that 

you are not told about? 

Mr. CANTOR. I think it would be helpful to have these types of 

transactions on balance sheets. But I think there is already transparency. The information is in the footnote, as you identified. 

So whether that is on the balance sheet or not, the information 

is transparent. It takes more work to— 

Mr. CAPUANO. So you think everything is perfectly fine. You just 

basically blew it? 

Mr. CANTOR. Again, you can have a lot of debt on assets on your 

balance sheet. You need to interpret, what are those assets? What 

are the risks in those assets? 

Mr. CAPUANO. So you are telling me that your interpretation was 

completely, utterly wrong, basically, because you are telling me 

now that you had enough information to make a judgement. 

Fine. Okay. So your judgement was wrong. 

Mr. CANTOR. Again, it wasn’t the only thing that was important 

to the rating. But one thing that was important to the rating was 

whether the principal positions that the firm was taking on represented a significant increase in risk appetite, or whether it was— 

Mr. CAPUANO. So an excessively leveraged $6 billion bet that is 

off the books is fine by you? 

Mr. CANTOR. Again, it is not so much that it is off the books. 

Mr. CAPUANO. I have to tell you, that really runs—here is my 

problem: I came to this hearing prepared to give you guys credit 

for not being totally right about investment grade, but pretty close. 

Your ratings were not that good. But what you are telling me at 

this hearing has just turned me around back to where I started, 

which is, gee, I am not so sure I can trust you guys anymore. 

62 

You think it is okay to have off balance sheet things that nobody 

reports. 

Mr. Gellert, do you think that it is okay? Or do you want more 

information? 

Mr. GELLERT. I think we can always use a lot more transparency. 

And we end up doing a lot of pro forma sensitivity modeling for our 

clients, when they want to run scenarios, stress testing things that 

are off balance sheet, to try to understand them better, and the implications on our ratings. 

Mr. CAPUANO. I guess I am walking away here thinking that the 

major credit agencies think it is perfectly okay to have massive 

risky investments that are off the books, and that they don’t know 

about, that it is okay for you to tell the public, here is our rating. 

That is an incredible statement to say. And I have to tell you, 

I walk away—I thought today was a day we were going to kiss and 

make up some our past differences of opinions. But I guess it is 

not. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

I want to go back to some of the basics of the rating model that 

you used for MF Global. 

Would you put this company, then, in the same category as Goldman Sachs? In other words, are you looking at various pieces and 

aspects of this business—in other words, they would be in the same 

business category? 

Mr. CANTOR. We rate them using a general methodology, securities industry methodology. So they are broadly embraced by the 

sector. 

Obviously, the firms are very different in scale and scope. But 

they are close. 

Chairman NEUGEBAUER. So basically, the same parameters that 

you would look at Goldman Sachs, you would look at— 

Mr. CANTOR. The starting points of the analysis, yes. 

Chairman NEUGEBAUER. Mr. Parmelee? 

Mr. PARMELEE. When we think about risk, we note that there are 

some comparisons in the type of risk that they take. For Goldman 

Sachs, Goldman Sachs is a bank holding company. We apply our 

bank methodology to Goldman Sachs. 

We released new methodology for rating banks in November of 

2011. 

Chairman NEUGEBAUER. I think where I am going with this is 

that they were trying to emulate, using the Goldman Sachs model. 

And so I wondered if you were looking at them as their old business, their old business model, of a broker/dealer, and primarily in 

commodities? 

Or were you looking at them in the sense that this is a company 

that is broadening their activities? They are getting into proprietary trading. And we need to look at them differently. Because it 

doesn’t appear that you were doing that. 

Mr. PARMELEE. So one important difference is, as a bank holding 

company, Goldman Sachs has access to the discount window and 

other sources of liquidity that MF would not have had. There are 

some comparisons. 

63 

Under our bank methodology, we break out the components of 

the rating. And our standalone credit rating on Goldman Sachs is 

triple B plus. So that would have been two notches above where 

MF Global was. 

So there is some similarity there. 

Chairman NEUGEBAUER. I think you heard the risk manager say 

that he was concerned that this expansion of business probably 

really stretched their capital. And both of your firms had this company rated basically just inside the rope for investment grade. 

Didn’t it concern you when you looked at that 10-K and said, 

okay, this is a company that is maybe marginally capitalized because one of the factors is capital. And now, they are expanding the 

risk of their company. 

Didn’t that kind of ring a bell somewhere? 

Mr. PARMELEE. Sir, importantly, we did think about that. We did 

talk about that in our public documents. When we downgraded the 

company, it was many parts because of the reasons that you point 

out. We had pointed out, 8 months after Jon Corzine joined the 

firm, and he was embarking on a strategy to move towards being 

an investment bank. 

We were concerned about the incremental risk that they would 

be taking on. We noted that in our November release, when we 

downgraded them to the triple D minus level. So that was months 

before the RTM portfolio was made public in the 10-K filing. 

Chairman NEUGEBAUER. And so my final question is, did you, 

after you read the 10-K, ask MF Global for details on their off balance sheet activities? 

Mr. PARMELEE. I didn’t personally, sir. And I am not aware that 

the analysts asked that question directly. 

Chairman NEUGEBAUER. Did Moody’s ask, after looking at that? 

You now testify that you all did read it. So after you read it, did 

you ask them for details on those off balance sheet activities? 

Mr. CANTOR. No, we did not. 

Chairman NEUGEBAUER. It looks like I have run out of questioners. I am sure that is okay with the witnesses. 

We appreciate you coming. I think one of the things that you 

probably hear from my colleagues is that we are concerned about 

every aspect of this. But certainly, there is a responsibility, we believe, in the ratings community to make sure that if people are 

going to continue to have confidence in the system, that we feel like 

that—and the public, more importantly, feels like that the appropriate amount of due diligence that is done on your part. 

And I think today, we have some concerns about that. So we 

thank you, the witnesses, for being here. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

With that, this hearing is adjourned. 

[Whereupon, at 1:21 p.m., the hearing was adjourned.] 

(65) 

A P P E N D I X 

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