Judge Chief Risk Officers by Their Paychecks

Michael Stockman and Michael Roseman may have had the same title at MF Global, chief risk officer, but their testimony Thursday for the House Oversight Committee highlighted distinct differences in actual roles, responsibilities, and personal perspectives.

The job of CRO is one of the toughest in financial services. In these difficult times, what's needed is a CRO who will raise concerns, back them up with enough facts to convince even those most skeptical and take the consequences of his convictions. But if the CRO doesn't have the right independence, expertise and stature in the organization, his objections will most likely be ignored and perhaps cost him a career.

MF Global went a long way under former CRO Michael Roseman and his boss, prior MF Global CEO Bernie Dan, towards implementing the risk management best practices now being required under the Federal Reserve Board's recently proposed standards. Those standards, required by the Dodd-Frank Act, mandate publicly traded bank holding companies with $10 billion or more in total consolidated assets to establish a risk committee of the board of directors with an appropriate number of independent directors and at least one risk management expert.

Dan hired Roseman in 2008 to quickly fix the problems he inherited from Kevin Davis, who resigned as MF Global CEO in October of 2008. Davis presided over heavy financial damage after the collapse of Lehman Brothers and a February 2008 trading loss of $141.5 million from a wild wheat trader.

Davis also took Chris Flowers' money to survive those losses. Flowers, scion of private investment firm J.C. Flowers, bought $300 million in preferred stock to bail out MF Global after the wheat trading scandal. Flowers probably became frustrated, however, by the low interest rate environment and declining trading volumes that depressed MF Global's traditional sources of revenue. The tight controls over concentration and liquidity risk implemented by Dan and Roseman after Davis left stood in the way of a more risky and, potentially, more profitable proprietary trading strategy.

Flowers, whose firm was given a seat on the MF Global Board as a result of his investment, recruited Jon Corzine to replace Bernie Dan as CEO. Corzine, as CEO and chairman of the board, personally led an aggressive new proprietary trading strategy that included repo-to-maturity trades backed up by large positions in European sovereign debt.

MF Global was now tacking into the wind.

Corzine replaced CRO Roseman with Stockman in early 2011. Corzine testified in a prior hearing that Stockman had more experience, given stints at UBS and Goldman Sachs, with the type of investment bank he wanted MF Global to become. Roseman, on the other hand, testified that his "views on risk," more conservative and contrary to Corzine’s, no doubt influenced the company's decision to fire him.

Stockman said in his testimony yesterday that he believed his responsibilities and position were similar to Roseman's.

However several significant differences are now apparent. Stockman reported to Brad Abelow, MF Global's new COO, also a Goldman Sachs alumni and consigliere to Corzine during his tenure as governor of New Jersey. Stockman gave reports to the board only as requested. Most often he prepared reports and gave them to Abelow and Corzine.

Roseman reported directly to CEO Bernie Dan and to Corzine when he replaced Dan. From a corporate governance best practices perspective, I would say Corzine roadblocked CRO Stockman and put trusted advisor Abelow between Stockman and himself as chief trader and between Stockman and the Board.

Roseman had formal, direct access to the CEO and to the board. He led the design and implementation of the firm's enterprise risk management program and reported the results on a routine basis. He was not afraid to speak up when he saw danger ahead, even if it, in the end, cost him his job.

Stockman repeatedly admitted yesterday that he was not involved, or not there, for key executive decisions and key C-level meetings during his tenure. He was questioned extensively about his lack of direct involvement with the MF Global "break the glass" contingency plan developed in early October. He said hadn't seen the final plan until Congressional staff sent it to him. Finally, in spite of an important title at his previous job at UBS, chief risk officer for the Americas, Stockman admitted he was not involved in senior executive meetings when business strategy was discussed there either.

Stockman's view of his responsibility for monitoring liquidity risk was different than Roseman's. "The chief risk officer did not have formal responsibility for managing the company’s liquidity risk," said Stockman, but "my staff and I performed numerous analyses measuring the company’s potential liquidity needs under various stress scenarios." Stockman trusted, but did not verify, the claims of MF Global finance and treasury executives who told him, "the company possessed adequate liquidity sources to address such potential needs."

Roseman lost his job when he strongly warned Corzine and the board of concentration and liquidity risks associated with Corzine's strategy that were exacerbated by economic crisis developing in Europe. Roseman said that MF Global's strategy was only as good as its ability to support it with sufficient capital and liquidity. 

Where Roseman saw significant reason to be concerned at the end of 2010, Stockman says he did not start to worry or warn the board about liquidity until July of 2011. He made a presentation to the board in August on the subject but, apparently, no one listened. That month MF Global borrowed $325 million in the bond market in spite of Stockman's supposedly stern warning about the company's diminishing ability to meet its obligations.

Finally, the measure of a man is sometimes taken based simply on what he's paid. If Stockman had significantly more experience with risk management in investment banks, I would have expected Stockman to have higher organizational status and receive premium compensation compared to Roseman.

Stockman signed a two-year employment agreement with MF Global, but did not receive a signing bonus or stock options immediately, unlike CEO Corzine, COO Abelow, or General Counsel Laurie Ferber. His employment agreement describes a reporting relationship "initially" to the Chief Operating Officer Abelow, but this was subject to change. "If not to the COO, then to an officer of a comparable senior level." Stockman actually bought 10,000 shares of MF Global on the open market within weeks of starting the job but eventually received a restricted stock grant with a three-year vesting at the end of May 2011.

Roseman received a generous severance when he left in January 2011, according to the annual report. Roseman was paid severance totaling $1,350,000 under his employment agreement including his 2011 target cash bonus amount of $500,000, his 2011 target equity bonus amount of $500,000 and his entire 2011 salary. All of Mr. Roseman's unvested restricted stock (18,987 units) vested as of March 31, 2011.

Congressman Steve Pearce (R-New Mexico) asked Stockman at the hearing about his salary. Stockman replied that his starting salary in February 2011 was $300,000. When the Congressman turned to Roseman to ask the same question, it was the first time I saw Michael Roseman crack even a faint smile.  "My final salary was $350,000" said Roseman.

Many of the legislators yesterday chastised Stockman for being a yes-man to Corzine. Like many of Corzine's other hires at MF Global replacing seasoned industry veterans with loyalists and lackeys, Stockman seems to have been more interested in going through the motions of compliance rather than ensuring a safe and sound result.

Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.