Wow! It always amazes me when I appear on radio or television how much of a response I get. This morning I was on Bloomberg Radio: The First Word at 8:20 AM (ET) discussing the high-profile indictments of Cioffi and Tannin (the Bear Stearns' Hedge Funds collapse). No sooner did the interview conclude, then a few folks let me know how much they enjoyed my comments. Although I can't recreate verbatim my responses during the live show, I've set forth my general points below.
What will the prosecutors likely argue against Cioffi and Tannin?
Much like Carl Sagan's famous lines for his astronomy show, this case is about billions and billions and billions of dollars lost in the credit market. This prosecution is about criminal misconduct that contributed to that historic market collapse, which has devastated Wall Street and robbed the life savings of many investors. Cioffi and Tannin are low-life con-artists dressed in Wall Street bankers' suits--these crooks are not victims of any subprime fraud; to the contrary, they're just run of the mill fraudsters who lied in order to make more money and hide their mismanagement of the funds. We don't have to guess what they really knew or thought because we have emails from them. It's all there in lurid detail: What they knew, when they knew it, and how they conspired to hide the truth from their investors. It's time to send a message to Wall Street that the public is sick and tired of this culture of dishonesty.
What will the defense lawyers likely say about their clients?
Cioffi and Tannin had the misfortune to be standing on the beach and seeing a Tsunami wave coming right at them. They didn't cause that wave, they couldn't prevent it from hitting, and they had no way to survive in its path. These defendants were victimized by the collapse in the credit markets that took everyone by surprise, and did so with incredible speed. None of the vaunted computer models sounded the alarms. Show me a regulatory agency that issued warnings in 2006. As to the emails, those are "thoughts," and last we looked, you can't convict folks for crimes of thought. However, if you really read those emails, you will see that these defendants were petrified that the market was headed for catastrophe and they tried to do everything they could to protect their funds. In their panic, they may have done some stupid things, but stupidity is not a crime -- thankfully, otherwise we would all be in jail. At the end of the day, don't let the government make these two men scapegoats for the failure of Wall Street's regulators to do their jobs.
Stripped down to its basics, those are the battle lines on which the U.S. Attorney's and the SEC's cases will be fought. Without question, the criminal indictment and the civil complaint present compelling cases replete with troubling emails. On the other hand, more than a bit of what I read smacks of 20-20 hindsight, and I will need far more convincing that these defendants made material misrepresentations that a reasonable investor would have relied upon in deciding to remain in the funds or to invest further dollars. I am mindful that most of the investors in the two hedge funds were either high net worth individuals or financial institutions.
So, what's the Bill Singer take on this developing story?
In my opinion we've had a major fire on Wall Street. The first question is whether it was one of natural causes or arson. However, regardless of whether you determine that the fire was natural (the hedge funds simply collapsed from normal, cyclical market forces) or was arson (Cioffi and Tannin criminally mismanaged the fund and defrauded investors into adding dollars or staying put), let me add a twist.
What if I were to tell you the following?
As to the building that burned down, the building inspector was paid off to permit housing code and fire code violations. Many of the necessary inspections were late or done half heartedly. Also, the contractors were corrupt and didn't do legally acceptable construction work. Alarms were not properly installed. Sprinklers were not connected to a water supply. When 911 got the first call about "smoke," they delayed contacting the fire department. When the fire department got the call, the truck was broken and couldn't quickly respond. When the firefighters got to the fire, the hydrants weren't working.
Regardless of whether Cioffi and/or Tannin are guilty, I still say there is an unindicted co-conspirator here. The entire U.S. regulatory system has to share much of the blame for the allegations in the complaints and for the damage done to the overall economy. Our regulators are a pathetic bucket brigade with one leaky bucket trying to put out a blazing inferno. There are just too many overpaid executives not getting the job done. There are too many cronies appointed to perform critical tasks, and those folks are not up to the task. None of the lessons of Hurricane Katrina were learned. It's time to overhaul the failed system of regulating Wall Street; and "no," we don't need more regulations--you can get a hernia carrying the existing securities laws and regulations. What we need is more effective regulation, and that starts with hiring more effective regulators.
What infuriates me with the handling of this crisis is best explained by quoting two statements:
1. June 17, 2008 Press Release: Two Senior Managers of Failed Bear Stearns Hedge Funds Indicted on Conspiraccy and Fraud Charges (the United States Attorney's Office/Eastern District of New York), page 4: The United States Attorney for the Eastern District of New York is a member of the Corporate Fraud Task Force, a multi-agency group formed by President Bush in July 2002 to restore public and investor confidence in America's corporations following a number of major corporate scandals. In the past five years, the task force has yielded more than 1,200 corporate fraud convictions.
And yet this high-powered task force didn't spot the subprime crisis or the collapse of the credit markets, which have cost at least $500 billion in losses? Why didn't the Bear Stearns Hedge Fund meltdown pop up on that radar screen? What red flags did the Task Force see and what warning did they send? Is this how we restore confidence?
2. United States of America v. Ralph Cioffi, et al., at paragraph 56 of the Indictment: The United States Securities and Exchange Commission ("SEC") and others began investigating the Funds' collapse in the Summer of 2007 . . .
Absolutely incredible! The top regulatory cops in our regulatory scheme only first go into action in the summer following the hedge funds' collapse? How did they not hear of anything troubling beforehand and start an earlier investigation? And if the answer is "because . . . " then why wouldn't those same explanations excuse Cioffi and Tannin? And folks wonder what's wrong on Wall Street. Nineteen pages into the indictment, and only after 55-paragraphs of allegations, do we first learn that the SEC "and others" did anything about anything.
While we're prosecuting Cioffi and Tannin, how about we investigate those who were supposed to prevent this type of catastrophe and apparently were asleep on the job?
Quis custodiet ipsos custodes?