Career Advice Feb 02 2012

MF Global Risk Chiefs Had Same Warning, Different Styles

By julie steinberg

When the former risk chiefs of MF Global testify at a congressional hearing, they are expected to defend their tenure under Chief Executive Jon S. Corzine and say they warned him about the risks of the firm's disastrous bet on European sovereign debt. What will be less apparent, however, is the contrasting management styles of the two men.

Michael Stockman, 54, became chief risk officer after Michael Roseman was pushed out in January 2011. Roseman, 50, had clashed with Corzine over the expanding bets on European bonds, going to the board to express his concerns that the trade was getting too big and could sink the company, according to testimony reviewed by The Wall Street Journal and FINS. Roseman stayed through March to ease the transition, but the trades eventually led MF Global to file for bankruptcy last October.

While Roseman was hands-on and went with his colleagues out for beers, Stockman was an introvert, often closeting himself alone in his office, say people familiar with the matter. Stockman's personality, however, belied an attitude toward risk that was less ambitious than that of the do-it-by-the-rules approach of Roseman, people familiar with the matter say. A lawyer for Stockman declined to comment. A lawyer for Roseman said he was unavailable for comment.

Stockman's experience with both mortgage trading and risk management may have caught the eye of senior executives at MF Global, people familiar with the matter say. He got his start trading mortgages at Salomon Brothers from 1985 until 1988, then traded mortgages at Goldman Sachs and Morgan Stanley. He overlapped with Corzine and MF Global Chief Operating Officer Bradley Abelow while at Goldman.

After leaving Morgan Stanley, Stockman landed at Warburg Dillon Read, which eventually became UBS. He worked there from August 1995 through January 2008, holding various positions in risk and in the front-office.

Stockman's experience may have caught the eye of senior executives

When Stockman arrived at MF Global, Corzine was expanding the firm's proprietary trading business, particularly in mortgage trading. Corzine had hired several high-level traders with mortgage experience and Stockman brought on a consultant for the risk management group specifically to oversee mortgage trading risk, according to people familiar with the matter.

Neat Fit

Stockman's career, which spanned stints at large firms, fit in neatly with Corzine's plan to transform the broker-dealer into a full-fledged investment bank like Goldman Sachs. "We have a CEO and a senior management team who have a vision for this thing to go from broker to broker-dealer to investment bank, and I believe in the vision and the growth strategy," Stockman said in May of last year to his business school alma mater, Tuck School of Business at Dartmouth.

Once he arrived at MF Global, Stockman approached risk differently than Roseman had, sources say. He tried to differentiate himself from his predecessor and wanted to show senior management he was aware of a broader initiative to focus on revenue-generating projects and reduce costs.

Roseman and other senior risk managers had worked on a project called eLimits, which aimed to build a database that would consolidate and display electronic trading limits for clients, or the volume or magnitude of trades a client was allowed to conduct. Work was halted on this project after Stockman came on board, people familiar with the matter said.

On the eLimits project, "Roseman believed all it takes is one incident that could blow up the firm," a source familiar with the matter said. "Stockman had the attitude, 'well it's not really related to P&L.'" More specifically, Roseman's mandate was to avoid a repeat of a rogue trade in 2008 that had cost the firm $140 million, and he was willing to "spend the money to prevent one little thing slipping through the cracks," the source said.

Stockman, on the other hand, didn't want to "spend every last dime chasing systems to provide blanket coverage for eLimits."

Roseman had also pushed the firm to deploy a new risk management system called Murex that would have allowed MF Global to trade riskier products, such as OTC derivatives, and have the risk platform in place to manage those trades.

Cost of Projects

The risk department had wanted to see the project through, but Stockman had the initiative reassigned to the fixed income desk, people familiar with the matter said. Deploying Murex would have cost the firm about $10 million to implement and roll out over the first few years, on top of the $6 million it had been spending on risk systems before.

One source familiar with the matter said a complaint about Stockman was made to the executive committee last spring and again during the summer. The complaints focused on his "lack of support or interest in some projects," the source said. The source said no action was taken by senior management.

Others say Stockman was simply taking time to consider what projects he wanted to prioritize. In the summer of 2011, the credit risk team had proposed upgrades to an existing system that would have cost $200,000 and Stockman said he needed time to think about it. Before the team could return to the issue, the firm filed for bankruptcy.

People familiar with the matter said that Stockman was less interested than Roseman in bonding with the risk team, rarely coming out of his office to see how projects were coming along. Roseman was visible among his staff members, people familiar with the matter say, and would make the rounds to find out what employees were working on.

Still, "even though Stockman was less outgoing than Roseman, it didn't mean he was less involved," a person familiar with the matter said.

Reporting Hierarchy

While Stockman may have been more reserved than his predecessor, both men eventually disagreed with Corzine on the growing European trades. According to a report in the New York Times, Stockman's authority was reduced after Roseman left the firm. But a person familiar with the matter said they were unfamiliar with any reduction in responsibilities and that Stockman was able to express his concerns with the risks as much as Roseman did.

What did change was the reporting hierarchy. Roseman had reported to Corzine, but when Abelow joined the firm as chief operating officer in March 2011, the risk officer reported to him instead. Stockman also reported to Abelow when he joined the firm.

The European trades that led to MF Global's demise began in the summer of 2010 and ballooned to $1.5 billion by mid-September of that year. At that point, Roseman told Corzine and the board he was concerned about the size of the trades. After Roseman left, Stockman also urged the board to be cautious, according to expected testimony reviewed by The Wall Street Journal and FINS.

In the summer of 2011, Stockman expressed an interest in other job opportunities, but it's unclear if he looked seriously, said one person familiar with the matter.

--Aaron Lucchetti contributed to this story.

Write to Julie Steinberg at Julie.Steinberg@wsj.com

Write to Aaron Lucchetti at Aaron.Lucchetti@wsj.com




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