BSAM two walk free: Fishknife comments

Bear Stearns Asset Management CDO hedge fund managers Ralph Cioffi and Matthew Tannin were acquitted yesterday of all the fraud charges they faced in a trial in Brooklyn. According to media reports, the jury was unconvinced that emails sent by the two men indicated that they believed their funds were facing collapse, as the US authorities alleged.

Fishknife comments:

Is this the end of the subprime crisis? Legal cases drag on for so long that end of a court case usually comes at the point where the events in question seem irrelevant echoes from a long forgotten past.

That is not quite the case here, but this comes as a sharp reminder of just how far events have moved on since June 2007. Perhaps if we look for an end point of the crisis in years to come, this will serve as a useful marker.

The collapse of the two Bear Stearns Asset Management hedge funds, the Bear Stearns High-Grade Structured Credit Strategies Master Fund and the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Master Fund (we hope this the last time we ever have to write out those fund names in full), marked the start of the crisis. Investors had been increasingly shunning subprime RMBS and the CDOs backed by these assets for several months before. But the BSAM collapse was the blow-out moment and was quickly followed by the shut-down of the new issue subprime and CDO of ABS markets, the unwind of market value CDOs and the Canadian conduit crisis.

So at the very least, the end of the Cioffi and Tannin trial closes an important chapter in the financial history book.

The trial raises one philosophical question that has never been answered satisfactorily as far as we are aware. Is it ever right, legally or morally, to lie about the state of your company’s finances? As the jury ruled, Cioffi and Tannin did not do this. But what if they had?

If the chief executive of an oil trading company misleads the company’s owners by cooking the books, that is clearly wrong. But what about the staff who know that there is a run on their bank? Do they have a duty to tell depositors about the bank’s true state of liquidity? Or do they have a duty to shareholders, creditors and remaining depositors to stop the bank from collapsing by lying? A hedge fund manager facing a wave of withdrawals faces an identical dilemma. And it is one that many individuals have had to grapple with over the last two years.

There may be no good answer to this question. But it would be useful to have an honest debate about what level of deceit is acceptable and under what circumstances.