The linked article at the bottom is kind of lengthy, but I advise you take it all in if this subject is of interest to you. I’ll offer a brief summary in the post, but my tangent is a little off from the message of Fortune’s article.
Take a look at these fellows. Matthew Tannin is on the left, with Ralph Cioffi on the right. They used to be highly paid hedge fund managers at Bear Stearns. Now they’re rocking orange jumpsuits courtesy of the FBI. They have been charged with intentionally misleading investors in two hedge funds that were highly invested in sub-prime mortgages. But Washington and the media have charged them with something worse: the cause of the sub-prime meltdown.
That’s just not right. This is basically what happened: Last year, these nice gents started to notice some problems with the investments their hedge funds were holding. Primarily, they knew what was about to happen with the sub-prime market. Cioffi (right) moved $2 million of his own cash out his hedge fund due to fall soon and into a safer (relatively) hedge fund. At that time he told investors in his fund he still had $6 million invested when in fact it was $4. Worse though, he along with the other fellow told investors there were no problems and the future looked bright for their funds.
Tannin (left) stated in an email in April 2007 (right when the ball dropped on this mess) that if their measurements were right “then the entire sub-prime market is toast.” He also stated of the situation that it “looks pretty damn ugly. … If we believe [our internal modeling] is ANYWHERE CLOSE to accurate I think we should close the funds now.” This was at the same time they were telling investors its all good and Cioffi was moving his own funds around behind their backs. Our laws say this is a no-no; can’t lie to the people whose money you manage.
Naturally this is not a defense of what they did. This is a terrible occurrence and I feel for those that lost so much money at the beginning of the meltdown. But, had I been able to afford their huge fees, I would have never invested in these hedge funds. Rule #1 of investing is to not buy anything you don’t understand. No one understood this market because they didn’t realize what happened until it was too late.
Yes these guys lied. Yes they played a role in the “false reality” that sub-prime mortgages are safe investments. Yes they played the margin game that made the situation worse. But they are not the king-pins of this operation as the media and Congress will brand them. There will be more arrests, but thousands will get away with the same thing Tannin and Cioffi almost got away with.
Make sure you click through to read all the little snippets from email correspondences prior to the meltdown. Its a great read.
An aside: Dave Ramsey is fond of advising funds with a good 10-year track record. None of these funds had been opened for 10 years. Score one for the bald guy.
 By The Weakonomist |
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