[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]







                   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












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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
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

           James H. Clinger, Staff Director and Chief Counsel
              Subcommittee on Oversight and Investigations

                   RANDY NEUGEBAUER, Texas, Chairman

MICHAEL G. FITZPATRICK,              MICHAEL E. CAPUANO, Massachusetts, 
    Pennsylvania, Vice Chairman          Ranking Member
PETER T. KING, New York              STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          MAXINE WATERS, California
STEVAN PEARCE, New Mexico            JOE BACA, California
BILL POSEY, Florida                  BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York         KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio               JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas   JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee












                            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

 
                   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, 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.
    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 1\1/2\ 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 1\1/2\ 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?
    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 
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 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.
    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 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-to-maturities (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.
    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.
    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 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 re-
craft. 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-the-glass'' 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 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?
    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.
    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-and-a-half, give or take a billion, and that didn't get 
you nervous? You thought that was acceptable?
    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-the-glass'' 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-
the-glass'' strategy. There had to be something that caused 
them to 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 
``break-the-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 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. 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?
    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.
    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? 
Third-hand 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.
    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 
wind-down 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--
    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.
    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.
    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 realize 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, 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.
    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?
    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 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?
    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?
    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?
    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.
    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 window-
dressing, 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.
    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--
    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 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 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?
    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 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.
    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?
    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.
    [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.
    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 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 trading 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.
    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.
    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, 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 entailed 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, 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 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--
    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?
    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.
    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.
    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.
    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.
    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?
    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 
non-ethical 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.
    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?
    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.
    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.
    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.
    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.]






                            A P P E N D I X



                            February 2, 2012








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