The trial for Ralph Cioffi and Matthew Tannin, managers of the two failed Bear Stearns hedge funds that wound up bringing down the investment giant, begins today:
Cioffi and Tannin stand accused by the U.S. government of conspiracy, securities fraud, and wire fraud. Cioffi was also charged with insider trading. According to the government, by March 2007, Cioffi and Tannin believed the two hedge funds they supervised were “in grave condition and at risk of collapse” but failed to inform the funds’ investors and creditors and instead “made misrepresentations to stave off withdrawal of investor funds and increased margin calls from creditors in the ultimately futile hope that the funds’ prospects would improve and that the defendants’ incomes and reputations would remain intact.”
Investors lost more than $1 billion when the funds were liquidated in July 2007. Attorneys for the two men argue — on the contrary — that their clients did nothing illegal or criminal but merely had poor judgment and made investment mistakes at a time when the markets were crumbling in catastrophic, unprecedented ways.
If Cioffi and Tannin are found guilty, they’ll be the first people jailed for being part of the cause of the financial crisis. And from the looks of the case, and William D. Cohan’s account in House of Cards, it does appear that they are guilty. But we should know upfront that, even if they are found guilty of essentially lying to investors, that there were people who helped cause the meltdown that did so in perfectly legal ways given the incentives created by government rules and regulations. The ultimate cause of the crisis wasn’t evil bankers, though they share part of the blame. We need to remember the decades of government interventions in the marketplace that helped build the piles of toxic debt that wound up dragging the financial industry down.