Former Bear Stearns Hedge Fund Managers Arrested By FBI

Ralph Cioffi and Matthew Tannin, the managers of two collapsed internal Bear Stearns funds that were the first casualties of the credit crisis, have been arrested by the FBI.  In a sign of what may result in a rash of criminal indictments, regulators have shown they are serious about doling out the punishment to those responsible for investor losses.  I find it interesting that they would start with these two guys.  According to the Wall Street Journal, prosecutors are zeroing in on an email that Mr. Tannin sent to his senior colleague Mr. Cioffi, indicating his concerns that the markets for the structured products they held as investments were "toast."  He also suggested they consider shutting down the funds.  Mr. Cioffi responded and suggested that the two meet to discuss his concerns.  The two apparently met, discussed the issues and decided Mr. Tannin's concerns were unfounded.  However, Mr. Cioffi did withdraw $2 million of his own money from one of the funds in March, which would contradict his assertion that he felt the funds were on solid footing.  Four days after their supposed meeting, Mr. Tannin told investors in a conference call that he was "quite comfortable" with their holdings.  In the weeks that followed, investor redemptions and margin calls forced them to dump positions into an unfriendly market and wiped out the funds.  While it is certainly true that these two guys are guilty of being terrible investors, I certainly hope the Feds have more than this email to base their case.  Frankly, if you are managing other people's money and you never worry about the markets moving against your trading positions, you're in the wrong business.  It's not that I don't think these guys should suffer if they truly misled investors, I just have a hard time believing they are were the worst offenders on the long list of those who used the credit market boom to deceive investors.  It seems as if much more egregious conduct occurred during the boom that should be prosecuted.  Should everyone involved in securitization of subprime and Alt-A mortgages be investigated for baking unrealistic default rates into the pie?  What about all of those AAA ratings on securities that are now trading at distressed levels?  Don't the ratings agencies need to be investigated for misleading investors?  How about every mortgage broker that steered an unsophisticated borrower into an unsuitable mortgage because he received higher fees on those types of products?

I, for one, will be interested to see whether two guys who managed funds that were supposed to be complex and sophisticated can get away with claiming they were too stupid to see the storm building.  Wall Street will be nervously awaiting the result of the this trial as well, perhaps while cleaning out their email boxes...