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Bear Fund Managers Go Free, Big Questions Unanswered


Because jury acquittals are absolute and cannot be appealed in the U.S., the not-guilty verdicts of two former Bear Stearns hedge fund managers on Tuesday ought to have provided a sense of closure. They did not.

This end without a true resolution was set in place more than a year ago, when federal prosecutors decided that their best chance of winning a conviction was to try to prove that Ralph Cioffi and Matthew Tannin lied to their fund investors. The prosecutors did not design their case to end with a day in court where there was any real finding-out about whether the two men knew the harm they were causing to millions of people, the financial system, and the economy as they gambled for two years with tens of billions of dollars on securities backed by subprime mortgages.

Instead, the prosecutors set a more modest goal: Prove that Cioffi and Tannin lied on specific occasions to a few dozen well-off, and presumably sophisticated, people about the funds’ condition. The Feds tried to avoid having to say anything more about collateralized debt obligations, repos with brokerage houses, and total return swaps than was absolutely necessary. Their decision was logical: There is a long history of cases in which jurors simply did not understand complicated transactions. (That the prosecutors could not achieve their seemingly more modest goal may discourage other law enforcers from trying to make cases from complicated dealings that brought the failures of Lehman Brothers and AIG.)

To be sure, prosecutors may not have held back evidence that Cioffi and Tannin did anything criminal in leveraging their funds to buy more and more subprime. The men are presumed innocent.

But left unexplored and unanswered for the public is to what extent Cioffi and Tannin were responsible for significant losses at Citigroup and Bank of America. The men were certainly involved. They put together deals that worked to finance subprime mortgages with cash that investors had originally sent to money market funds. The deals pumped up the credit bubble. Their hedge funds obtained essential leverage from Citigroup for three such deals, a series of CDO-squareds named Klio. When the CDOs began to unravel in last summer 2007, Citi was suddenly stuck with the losses that triggered the resignation of CEO Chuck Prince. The Bear funds did a fourth CDO-squared with leverage from Bank of America. The fourth and biggest CDO, for some $4 billion in spring 2007, was the final blow-out of Wall Street’s excesses in subprime mortgage finance.

Such basic facts of Cioffi and Tannin’s use of the CDOs are disclosed in deal documents. There’s no telling what more the prosecutors, with their subpoena power, might have found out about these very transactions that undermined what used to be the two biggest banks in the nation. There’s no telling because the prosecutors took the smaller matters to the jury, and lost.


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