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Thursday, October 22, 2009

Wall Street Journal-When Bad Luck is a Crime

I never read the op-ed page of the WSJ. It's a reasonably good paper, definitely one of the papers of record, but even my nine-year old niece knows it's editorial page is wildly conservative. The insult of the day was penned by Holman Jenkins.

So the Bear Stearns Hedgfund criminal trial against Ralph Cioffi, and Mathew Tannin has been going on since the beginning of the week, and of course, the WSJ has to weigh in, their title: "When Bad Luck is a Crime."

In it Jenkins exonerates Ken Lay, Ken Lewis, Cioffi and Tannin with the pitiable lamentation, of "bad luck." This happens in every financial crime and is a crucial arrow in a defense lawyers quiver. It goes: "Plaintiff's say that there was wrong-doing here, that the defendants wanted to defraud their company and their investors. This is just plain silly. There was a system wide crash--an act of God--all the evidence the plaintiffs have provided actually proves that the defendants did everything in their power to prevent the demise of their company. And really--Defendant A got a 3 million dollar bonus in 2007, was it in his best interest to screw the company?"

I've seen this argument in dozens of securities cases now. It's hackneyed and played out. The problem is that a global economy is so intricately involved that, when the avarice reaches a certain point, one falls, and then the rest of the dominoes get knocked over. Cioffi and Tannin are perfect examples of this. Their hedgefund was at the very top of the stack of dominoes which became the Great Recession. It was one of the earliest signs of the obliteration of the investment bank.

This is one of my favorite sentences, "The Bear Stearns execs, Matthew Tannin and Ralph Cioffi, ran two subprime funds that depended heavily on leverage (i.e., borrowing) to make the rate of return expected by their high-rolling investors. " What a lark! Suddenly "leverage" is just the same as "borrowing," nevermind that the hedge funds here were levraged 30-35 to 1. This is good too: "to make the rate of return expected" those investors really held a gun to Cioffi's head. These sorts of excuses are really shameful coming from the Wall Street Journal.

It makes you realize, that the Paper of Record for the US Economy, really doesn't understand much about law, economics, or plan old business. The investment banking/real estate bubble was extremely reckless. And had not Bernanke, Paulsen and Geithner saved the banking system, we could have had a real problem. And we still do have a huge problem. With all these racial slurs spewing from the polluted mouths of Glen Beck and others, the continued job losses, and the fourth time this year that unemployment benefits have been extended, we could see riots like we saw in the 1960s and 70s all over again.

But I digress.

Jenkin lobs another at the prosecutors by calling their best evidence "The prosecution's pièce de résistance is a Tannin missive that wondered aloud whether they should liquidate the funds or, alternatively, double down on the subprime market. That is, Mr. Tannin was unsure whether he was looking at the mother of all meltdowns or the mother of all buying opportunities." Well, if he was properly hedged to begin with--he wouldn't have been so exposed in the first place.

So what? You can't stand the heat, you say? Well--consider this: Cioffi's hedgefund had the backing of a major investment bank, a bank that had been around for 80 years. Bear in fact, bailed them out, when the size of their losses became unavoidable. Bear Stearns didn't have to do this--they could have left the fund out in the wind. They chose not to. Why? Because their reputation as a successful firm that makes sound investments was on the line. A firm with a reputation for hard dealings doesn't bail out a fund for a half a billion dollars because it was unlucky. Which is why Jenkins begins rhapsodizing about luck and throws in a new paper presented at the Academy of Management, that says: "hard to tell who is competent and who is lucky." Please. The documents support the fact that the fund was hedged poorly, and that it's investment strategy was poor and based almost entirely on the false premise that the housing market would continue to rise, even as every other economic standard for the country continued to drop.

Most disappointing about the WSJ piece is that the writing is pretty crappy. I admit. I don't spend too much time editing my own work on this blog--but I don't get paid for this. They do. Look at these sentences: "How much more fun, when dealing with circumstances like these, to play the after-the-fact-know-it-all, naming heroes and villains with the confidence afforded by the rear-view mirror. Bad enough is when journalists give unreflective vent to this urge, but unhealthy for society is when prosecutors do it." huh?

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