Well the other shoe has finally dropped. Two Bear Stearns hedge fund executives, one that was quoted often in Advanced Trading, have been arrested. Ralph Cioffi and Matthew Tannin were arrested today and charged with securities fraud. The two hedge funds they managed: high Grade Structured Credit Strategies Fund,and the High Grade Structured Credit Strategies Enhanced Leverage Fund collapsed in August and were the earliest signs that the greater credit crisis was about to make itself known.

Cioffi had been somewhat protected by Bear Stearns last fall as he had remained employed at the firm, despite the collapse of his two hedge funds and the broader issues that those collapses had caused.
Advanced Trading wrote a cover story looking into What Went Wrong at Bear?in October, and Cioffi at that point remained at the firm. http://www.advancedtrading.com/issues/200710/

At question is the fact that Cioffi moved $2 million of his personal investment out of one of the funds in April, well before the fund collapsed, suggesting that he knew the outlook was dire. Despite this, he allegedly remained optimistic when discussing both funds outlook with investors. Bear officials say he was moving the money to support another new hedge fund that was being created. See story published in the NYTimes today.

It’s hard to know how much blame should be placed on Cioffi and Tannin. I wonder if we are placing unrealistic expectations on fund managers? We all know investing on Wall Street is somewhat of a gamble, especially with highly leveraged hedge funds. We never question the funds that make money or how they make money, until they stop making money. Of course we expect these fund managers to have expert knowledge and to take good care of our money, but with investing comes taking risks.

Few experts knew the credit bubble was about to burst, just as they did not know the tech bubble in 2000 was about to burst. I don’t think that Cioffi and Tannin should be the scapegoats for the entire credit crisis. However, of course, if they indeed knew well ahead of the market that their funds were in major trouble, and they tried to create a perception that things were still on the upswing, then they should indeed get their day in court. I guess we will know soon enough.

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