Yesterday we noted [9]how a CBO analyst may have been terminated for her conflicting views on model assumptions, especially when they veered away from the Wall Street-defined norm. Today, we find that the same approach to dissent may have been the reason why MF Global ended up taking inordinate risk, and ultimately blowing up, leaving over a billion in client money transitioning from liquid to gas phase overnight. According to Reuters, "The former chief risk officer at MF Global who raised red flags about the firm's aggressive trading bets told lawmakers that his warnings contributed to the firm's decision to let him go in early 2011. Michael Roseman, who was ousted in January 2011 from the now-bankrupt futures brokerage, said he rang alarm bells about the firm's exposure to European sovereign debt a year before the firm collapsed in late October of 2011." Roseman's statement on whether his skepticism to Corzine's get rich quick scheme was the reason for his termination? ""My views on risk certainly played a factor in that decision," Roseman told a House Financial Services subcommittee, about why he was asked to leave the firm." And so the status quo continues: any time anyone ever dares to disagree with broad misconceptions, whether it is regarding infinitely rising home prices, broad global compression trades, or the ability of European banks to onboard toxic CDOs in perpetuity is always promptly shown the door. The flipside to this complete lack of checks and balances? Why the bailout culture of course, in which finding one company responsible for gross complacency would mean all are guilty. Which is nobody will ever go to prison as it would set the "worst" possible precedent ever: that one is ultimately responsible for their own stupidity. Said otherwise: the best qualification one can hope to add to one's resume: "distinguished yes man with honors."
More from Reuters [10]:
Before MF Global's collapse, then Chief Executive Jon Corzine pushed the firm to take on a more aggressive trading strategy, including a $6.3 billion dollar bet on European debt, executed through repo-to-maturity transactions.
Corzine, once CEO at Goldman Sachs (GS.N) and a former New Jersey governor and U.S. senator, also was pushing the futures brokerage to evolve into something closer to an investment bank.
Roseman said such a strategy required a lot of capital and a lot of liquidity, two things that ran out at the firm.
"I do think the strategy maybe exceeded the ability of the resources," he said.
At this point Roseman's replacement chimed in as well:
Lawmakers pressed Stockman if he was brought in as a "yes" man, after Roseman got ousted following his warnings to Corzine and the board.
"Did you ever think that maybe they ran off Mr. Roseman and brought you in to be kind of the guy that doesn't see, tell, know? Did that ever occur to you?" Republican Steven Pearce asked Stockman.
Stockman replied, "No sir."
Pearce also laid into Stockman about his testimony that he was "deeply saddened" by MF Global's collapse and its impact on shareholders and customers.
"Have you suggested that maybe you ought to give your pay back and put it into a scholarship fund for these kids that aren't going to go to college? Sitting out there, some hog farmer who is trying to make ends meet. My dad raised pigs. I know what it's like. He's trying to pay for the next sack of feed," Pearce said.
Stockman was reluctant to speculate on what specifically doomed MF Global.
Roseman, however, said MF Global would have been on a very different path if it had not ramped up its European debt exposure.
"In my opinion, they would still be here," Roseman said.
True. However, this would not allow "vaporize" to be in the running for most popular word to describe virtually every aspect of modern capital markets. And that trade off is surely not worth it.