WASHINGTON (Reuters) - Just a week before futures brokerage MF Global filed for bankruptcy, the firm’s chief financial officer told analysts at Standard & Poor’s that its capital position had “never been stronger,” according to the ratings agency.
The behind-the-scenes details about MF Global’s dealings with McGraw Hill’s Standard & Poor’s came in a January 17 letter from the rating agency’s managing director Craig Parmelee to lawmakers investigating the role that ratings agencies and risk officers played in the collapse of MF Global.
MF Global filed for bankruptcy on October 31 after investors and customers became rattled over the firm’s $6.3 billion bet on European sovereign debt.
Congressman Randy Neugebauer, who chairs a House Financial Services investigative panel, is presiding over a hearing on Thursday to study the vigilance of the rating agencies, which did not significantly downgrade MF Global until just days before, or hours after, it filed for bankruptcy.
In the letter to Neugebauer, Parmelee said that MF Global’s Chief Financial Officer Henri Steenkamp sent an email on October 24 to S&P saying that “MF Global’s capital and liquidity has never been stronger” and that “MF Global is in its strongest position ever as public entity.”
The email from Steenkamp to S&P analysts was sent on the same day the rating firm’s competitor, Moody’s Corp, downgraded MF Global to near-junk status. Steenkamp also made similar comments during an earnings call the following day.
A spokesperson for MF Global Holdings said Steenkamp’s statement was “accurate at the time” it was written.
A spokesman for S&P declined to comment.
The S&P letter was first reported by Bloomberg News.
Representatives from S&P and Moody’s are expected to testify at Thursday’s hearing, along with Michael Roseman, the former chief risk officer who is said to have raised red flags about aggressive trading bets at MF Global.
Michael Stockman, who succeeded Roseman as chief risk officer for MF Global, is expected to testify.
Lawmakers are likely to dig into questions surrounding just how much information the rating agencies had about MF Global’s financial position, and possibly why they did not take rating actions sooner.
MF Global’s collapse was partially triggered by Moody’s October 24 downgrade of MF Global. Moody’s and Fimalac SA’s Fitch Ratings later both downgraded MF Global to junk on October 27.
S&P, meanwhile, warned of a possible downgrade on October 26, but did not take any rating action until after MF Global filed for bankruptcy.
The rating actions all came in October even though in May 2011 MF Global revealed in a company filing that it made repurchase-to-maturity trades collateralized with European sovereign debt in the footnote of a filing with the U.S. Securities and Exchange Commission.
When asked by lawmakers whether S&P was aware of this disclosure, Parmelee said S&P “had received no advance notice” about the disclosure, but that it “appeared to cause virtually no immediate reaction in the markets.”
“In fact, in August 2011, more than six weeks after the initial disclosure, MF Global successfully issued hundreds of millions of dollars of bonds with relative ease, suggesting that investors continued to have confidence in the firm and its prospects,” he added.
Reporting by Sarah N. Lynch; Editing by Gary Hill, Phil Berlowitz
Our Standards: The Thomson Reuters Trust Principles.