Thursday, July 3, 2008

The Bear Stearns Two

"A federal grand jury in Brooklyn, New York, indicted two former Bear Stearns Cos. hedge-fund managers, alleging they misled investors when their fund was in peril, lied about their financial interest in the portfolios and destroyed evidence in the investigation. ... The 27-page indictment paints a picture of the scramble by the managers, Ralph Cioffi and Matthew Tanin, to keep their hedge funds alive. ... The managers pleaded not guilty and were released. Messers' Cioffi and Tannin [C&T] posted $4 million and $1.5 million bonds, respectively, secured by various properties. ... 'We are shocked and disappointed that the government has seen fit to fix blame on these two decent men,' said Edward Little, Mr. Cioffi's lawyer in a prepared statement. ... In a separate statement, Susan Brune, who represents Mr. Tannin, described him as 'a scapegoat for a widespread market crisis.' ... Defense lawyers are likely to argue that debates about the economy and the stability of the credit markets were standard fare last year as U.S. housing prices began a long slide", my emphasis, WSJ, 20 June 2008.

"When I heard that federal authorities has arrested the people that the government tells us were responsible for much of the subprime meltdown, I anxiously awaited the perp walk that would befall some notorious characters. Would we see Ben Bernanke wearing handcuffs, still dressed in his cams after having thrown even more money from the helicopter? Would the person shuffling before the media be Alan Greenspan, the architect of 18 years of legal counterfeiting? Had the federal authorities finally come to their senses and arrested the people most responsible for the chicanery and outright theft of the savings and investments of millions of people? ... Instead, I was to find that the Great Villians of Wall Street are [C&T], two former Bear Stearns hedge fund managers. ... Moreover, we can be sure that this is going to be the beginning of a busy prosecutorial season in which government officials will attempt to criminalize the actions of people who, in the end, were far less responsible for the meltdown than officials from the [Fed] and the U.S. Department of the Treasury. Indeed, the latest criminal charges are based on the fact that [C&T] privately had doubts about the quality and future of their hedge fund, but did not tell investors about their doubts. Lest anyone believe that such a state of affairs is 'criminal,' perhaps we should then wonder why Greenspan and Bernanke are let off the hook? After all, both men--and especially Bernanke--have made optimistic statements before Congress, only to be proven wrong. ... The larger point is that [C&T] are scapegoats, pure and simple. ... As more indictments come down the pipe, don't expect the media to ask the hard questions", William Anderson, (WA) at, 20 June 2008.

"Anyone surprised by last week's arrest of two former Bear Stearns hedge fund managers must have slept through the Enron era. If Enron, WorldCom, Tyco--and the list goes on--taught us anything, it is that whenever the investing public suffers staggering losses on Wall Street, we can expect to see someone hauled off in handcuffs. ... Despite the complex nature of the subprime meltdown, the government has presented an indictment that reads very much like a garden-variety fraud. ... There is no question that at some point permissible spin crosses the line and becomes willful misrepresentation. That is really what this prosecution is all about. ... All of these alleged misrepresentations go to the question of intent--whether the statements made by [C&T] to their investors were knowingly false--and form the basis of the charges of securities fruad, wire fraud and insider trading. But this case also raises the more troubling question of whether all of Wall Street's ills can--or should--be reduced to criminal prosecutions, rather than leaving it up to appropriate financial regulators. ... Let's put this case in some perspective. This is not Enron. ... Nor is it Tyco. ... Rather, this is part of a much larger failure that extends well beyond these two defendants and their former employer to include many of our largest financial institutions. ... But these two hedge fund managers were not alone in reaping huge profits for years from the subprime market", my emphasis, Robert Mintz (RM) at the WSJ, 26 June 2008.

I wonder if Little and Brune will conduct a "scorched earth defense"? Whaaaat? For a first witness, call, drumroll please, Helicopter Ben (HB). Ask him if he and the other Fed heads discuss the condition of the economy. Introduce Fed minutes as subject to judicial notice. Who knows? If C&T regularly discussed the same things HB & Co., did, I can see it now: Hank Paulson (HP), "formerly" of Goldman Sachs (GS) calls Benton Campbell (BC), US attorney for NY's Eastern District and mirable dictu, the indictment is quashed. Alternatively, the jury will wonder why HP and HB aren't on trial. I can see HB in the witness box as an "adverse" witness, yet C&T's expert.

I agree with WA, C&T look like scapegoats to me. I went to the WSJ's website and found the 27-page indictment. I conclude C&T are guilty of something thousands of others are: puffery and incompetence. I saw two statements in the indictment, which if proven, look criminal. They were statements of fact, not opinion. Why did BC select C&T for prosecution? My answer: to help HP's case for increasing the Fed's powers to protect investment banks (IB). On 19 June Chris Cox, SEC chairman had a piece in the WSJ, looking to expand supposed regulation of IB, see my 2 July 2008 post. The only thing I saw in it was granting IB Fed discount window access. The indictment indicated to me that C&T did not understand the products they sold. They could have used Eugene Fama's or Bob Hamada's class at Chicago. They might have learned something. Another witness for C&T, Moody's Yuri Yoshizawa. She only looks backwards. Also, drumroll please, the GSer who said we saw a 25-sigma event, see my 15 August 2007 post. Why not indict him? A 25-sigma event, wow! A mere 6-sigma event is a 1.01 billion to one shot!

I agree with RM about the "larger failure". Perhaps RM, now with McCarter & English and a former federal prosecutor can explain to us why C&T were selected for prosecution. I think I have the answer.

1 comment:

Anonymous said...

Well maybe this is just warm-up for some action in the Morgan Stanley CDS bear raid... or some other recent CDS debacle... and the mother of CDS stories... AIG... what happened there?