Bear Stearns : the gig is up , Bank Robbers to be charged this week

We wrote on Friday, December 21, 2007 in a post Bank robbers don't carry guns and wear masks these days about Barclays Bank seeking damages from Bear Stearns .


It appears that the smart stockpickers at Barclays had lent up to US$400 million to BS's asset management division (BSAM). It claims that it was defrauded by the unit and Matthew Tannin, a Bear Stearns fund manager, with the help of Vermonter Ralph Cioffi, 54, another executive.

BS at the time said , "we believe this lawsuit is an attempt by Barclays to avoid taking responsibility for its own actions."

Barclays alleges (with good cause) that Mr Ralph R. Cioffi ( A Trustee of The Boys' Club of New York ) and Mr Tannin misled them about the value and security of the funds, the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund. In the court papers Barclays (who had just written off US$1.7bn of shareholders funds in loans and mortgages) also claims that Bear Stearns dumped troubled investments in the riskier of the two funds. (Bankers , my word is my bond etc., ?????)The suit describes Bear Stearns' conduct as "wilful, malicious, reckless and without regard to Barclays' rights and interests".

Barclays has been under pressure over its exposure to the credit crunch, which has frequently depressed its shares. The bank announced the month prior to this action that it had written off US$1.7bn in loans and mortgages.

Their claim states: "Bear Stearns, BSAM and Cioffi hatched a plan to make more money for themselves and further, to use the Enhanced Funds a repository for risky, poor-quality investments by creating a new investment vechicle called Everquest Financial Ltd ... co-led by Cioffi and through which he stood to benefit personally."

As a small sideshow Mr Cioffi was at the time already under investigation by the Securities and Exchange Commission, the American regulator, over allegations that he withdrew about US$2 million of his own money from one of the funds before its collapse. A 23-year veteran of Bear Stearns, and one of its most highly compensated employees (8 figure bonuses claimed) over the previous 3 years due to his hedge funds' double-digit returns, Cioffi had millions of dollars worth of restricted stock - which are now worthless.



BS lady Elizabeth Ventura who gets got star billing as Senior Managing Director, Investor Relations and Corporate Communications, said on Dec 17th 2007 that Mr Cioffi had "stopped working for the company " the previous week but wouldn't expand on the reasons for his exit.

Anyway what goes around comes around and the with Saturn/Neptune cycle ending as Saturn transits into Virgo, Reuters reports that time is up for the rogue BS traders Cioffi and Tanner.

The U.S. Attorney's office in Brooklyn, New York is completing interviews this week and has indicated to lawyers that indictments will follow. Any charges brought would be the first brought against Wall Street executives or fund managers stemming from the subprime mortgage crisis. The Times today claims criminal charges will be brought against the dealing duo that they deliberately misled investors about the funds' health, and intentionally overstated the value of their funds assets.


A September 2007 Business Week report said that at a London conference in February, 2006, Matthew Tannin, a senior managing director at Bear, told investors that buying into one of the hedge funds he was hawking, the Bear Stearns High-Grade Structured Credit Strategies Fund, was akin to putting money in an ordinary bank account, according to "a person in attendance"


A commentator to the above story calling themselves Brandon Davis was extraordinarily perceptive ...." This is just the beginning of the end for the "collateralized debt obligations" feeding trough. " Sep 13, 2007 10:01 PM

Most of this was all detailed in a post Saturday, September 01, 2007 Bear Stearns - serial NY Bankruptcy Court appearances - fugitive UK citizen in the dock in Vienna - white collar crime - banking Caribbean style which provided details of 2 BS funds that got creamed in so-called collateralized debt obligations, or CDOs, backed by home-loan bonds and other "assets" were"Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 07-12383 " which raised US $642 million on the launch last last summer. (Ralph Cioffi managed the fund and to lose 20% in it's brief 10 month life - they had "re-stated losses" in April from 6.5% to 18.97% or 23% for the year).

A sister and less ambitiously titled fund - " Bear Stearns High- Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd., 07-12384," fared better but flunked all the same. Together both funds lost investors US$1.6Bn and their collapse is said to have "triggered" the summer time "Credit Crunch".

Barclays said that in early 2007 " calls and emails were dodged as they sought performance information " - which was when Cioffi was extracting his own US$2 MN from the crashing "Master" fund. We now know that Cioffi also had with his team inveted an entity called Klios*** in April, 2006, one Klio CDO bought $114 million worth of securities from one of the Bear funds.

Such trades, says Steven B. Caruso, an attorney who represents several Bear hedge fund investors, may be "indicative of an incestuous, self-serving relationship that appears to have been designed to establish a false marketplace." So with Pluto going into Capricorn late last Spring all the bad debt and financial wizardry the investment and commercial banks had engaged in was just ready to pop.

Reuters say, in the po faced way they do, "Former bond portfolio managers Ralph Cioffi and Matthew Tannin could be charged with securities fraud within the next week, according to one of the people familiar with the matter(OOTPFWTM). A lawyer for Tannin declined to comment when contacted by Reuters. Cioffi's lawyer could not immediately be reached."

Remarkably (OOTPFWTM) said no that no charges would be filed against Bear Stearns (the firm) or its top management, which is of course now part of JP Morgan , whose lawyers did not respond ....

At the end of May U.S. District Judge Robert Sweet in Manhattan upheld a bankruptcy court's decision last year requiring that the 2 bankrupt BS funds be liquidated in U.S. courts after an appeal by the liquidators (Simon Whicker and Kristen Beighton, of KPMG). See report on Judge Lifland in the (Bloomberg) S. Bankruptcy Court, Southern District of New York (Manhattan) post here Saturday, September 01, 2007 Bear Stearns - serial NY Bankruptcy Court appearances - fugitive UK citizen in the dock in Vienna - white collar crime - banking Caribbean style This decision will have implications for other funds that seek protection under Chapter 15 of the U.S. Bankruptcy Code, which covers cross-border insolvencies - it will also expose some very interesting aspects about how the money markets and so called mortgage backed securities were bundled up and sold. See Sidley Austin LLP etc.,
-------------------------------------------------------------
Footnote : Maybe in the History of the 2007 Crash the Klio will prove to have a fundamental and starring role. Cioffi needed money for his funds and he tapped into a new investor in the mortgage market - money market funds- the $2 trillion universe of money-market accounts in which individuals and corporations temporarily stash their spare cash.

The Klio was an aggressive form of collateralized debt obligation, or CDO that he launched. It is now evident that this new source of mortgage funding contributed to much of the $10 billion-plus in writedowns that Citigroup (C) and Bank of America (BAC) were forced to tell their shareholders about last November.

Cioffi's CDOs, initially branded "Klio Funding," were entities that sold commercial paper and other short-term debt to buy higher-yielding, longer-term securities. The Klios made money market men's eyes sparkle. OK they paid a higher interest rate than the usual short-term debt. Iinvestors didn't need to worry about the risky assets the Klios owned because Citigroup had agreed to refund their initial stake plus interest, through what's known as a "liquidity put," if the market soured. Cioffi engineered three such deals in 2004 and 2005, raising $10 billion in all.
Citigroup got fees, Cioffi collected fees, from each deal he purchased billions in mortgage-backed securities and pieces of other CDOs for his three Klios. He bought many of the assets directly from the two Bear hedge funds he managed. The move also supplied the hedge funds with cash.

Klios also had a welcome feature , hedge funds like the BS duo Cioffi managed would typically borrow short periods of time, days or weeks. Under the terms of the Klio deals, Cioffi could use the money for at least a year.

This magic formula spread - hedge fund money jugglers, CDO managers, and banks, including Barclays, Bank of America, and Société Générale, took the lead from Cioffi. As Klios offered a refund policy, money-market managers didn't have to worry about whether home buyers would pay back their loans. Their investments were protected even if the owners eventually defaulted on their mortgages. (See reports of Feb 2006 investors meeting in London )

Indeed, as the bubble inflated, there was little incentive for the array of middlemen collecting fees—mortgage brokers, real estate appraisers, bankers, money managers, and others—to do the proper checks.

From 2004 through 2007, Wall Street raised some $100 billion through these innovative CDOs, essentially creating a whole new way for the industry to finance risky subprime loans. That success, in turn, inspired copycat products such as structured investment vehicles, which also sold short-term debt. At their peak, in February, 2007, SIV assets were said tio have reached US$300 billion.

Barclays have announced some losses but observers believe many others lie hidden. Société Générale transferred all of its risk to a large, global financial institution to wind down at arms length.

With the Moon in Aries the fall had to come and Cioffi set up another (and final) CDO, High Grade Structured Credit CDO 2007-1. This issued short-term paper and offered investors a money-back guarantee from Bank of America. Cioffi had raised nearly $4 billion by late May, making it the biggest CDO of the year. Weeks after the CDO closed, BS twin Hedge Funds managed by the Dynamic Duo collapsed.

By early August the market to use CDOs to raise cash was dead. Money-market funds had stopped buying the short-term debt, and the credit markets froze. Citigroup and Bank of America were forced to make good on their guarantees to investors in Cioffi's CDOs, triggering huge (and as yet unknown) losses at the two banks.

"The good times of too-high price almost always engender much fraud. All people are most credulous when they are most happy; and when much money has just been made, . . . . there is a happy opportunity for ingenious mendacity."

Walter Bagehot Lombard Street 1873