It is now old news that two Bear Stearns executives have been arrested and face a myriad of charges from conspiracy, securities fraud to wire fraud.  Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin were charged on Thursday, and Cioffi was also charged with insider trading.

The fund managers administered the two hedge funds that supposedly was a low-risk strategy, backed by a pool of debt securities such as mortgages.  The funds went ballistic in the summer of 2007 resulting in some 1.4 billion dollars in losses to investors.  Allegedly, the two told investors in March ‘07 that they funds were in great shape, when the truth of the matter was that they were near collapse.  Charges come from emails that the two exchanged during that period.  Quoting the New York Times, they emailed:  “I’m fearful of these markets,” one wrote.
The other said later, “Believe it or not - I’ve been able to convince people to add more money.” He concluded that “I think we should close the funds now.”  Obviously, they didn’t.

Three days later, the pair told investors not to worry, and we then find that Mr. Cioffi had already pulled some assets from one of them.

The pair’s lawyers of course deny any wrongdoing on their part.  The lawyers say that even the Fed and US Treasury were not aware of what was happening in the market.  Somehow, I have a hard time swallowing that.

The FBI is beginning an ongoing investigation into the mortgage market collapse, and have identified some 406 people from March 1 to June 18 in a national probe called “Operation Malicious Mortgage”.  All these charges are mortgage market related.

I have a hard time believing that anyone with an intimate knowledge of the mortgage market could not see this coming.  I do not buy the theory that “nobody knew.”  If that were the case, heaven help the investors that are allowing these people to manage their money.  From what little dealings I have had in the stock market, even I knew when to get in - when to get out.  There are so many market indicators out there that to deny knowledge is criminal, IMHO.  The bottom line from my POV is simply a market that was non transparent, and a lot of people who were driven by greed.  Meanwhile, everyone suffers.  I find that to be a real shame.