After 7 million job losses and approaching 2 million home foreclosures in the US alone, with businesses and consumers around the world still struggling to get finance after the long credit crunch, a little piece of Wall Street is finally on trial.
In the first major case against bankers at the heart of the financial meltdown, a jury of 12 mainly working-class New Yorkers will decide the fate of the two Bear Stearns managers whose hedge funds imploded in 2007, signaling the start of the crisis. Ralph Cioffi, 53, and Matt Tannin, 48, pocketed millions of dollars in pay during the boom years, but the events of 2007 left their investors nursing losses of $1.6bn and ruined forever the reputation of Bear Stearns, one of the oldest investment banks on Wall Street.
US attorney Patrick Sinclair recounted what he said was a litany of lies Cioffi & Tannin told to investors. The two men were desperate to stop investors deserting their funds when the sub-prime mortgage market began to plunge, Mr Sinclair said. Mr Cioffi alone was paid $32m in the two years before the funds collapsed.
They “violated a special relationship of trust” between fund managers and investors, he added. “They lied to investors to save their multimillion dollar bonuses. In the US, that is a crime, a serious crime. It’s called securities fraud.”
First, Mr Tannin said he was putting more of his own money into the funds, when in fact he did not invest a single cent of the $1m that was available in his bank account. Mr Cioffi, meanwhile, secretly withdrew $2m of his money. Second, Mr Cioffi denied any major investor was planning to pull out, when he had already received a major redemption request.
Mr Cioffi and Mr Tannin were curators of two hedge funds that invested in debt which is now known to have been toxic but which had seemed to promise great riches. They worked at the long end of the chain that stretched from overheated housing markets in the south and west of the US, where millions of buyers were tempted into taking on mortgages they could not afford. Those mortgages were sliced and diced by Wall Street and turned into securities which could be bought and sold as if they were shares. Credit rating agencies had certified the Bear Stearns funds’ mortgage derivative portfolio as super-safe; the defendants’ superiors at Bear Stearns and the funds’ outside investors believed they were taking little risk.
The question is when did the two managers realized this? The pair are charged with behaving dishonestly when the crisis began to break.