The Government Loses its’ Case
Nov 12, 2009
Posted by Jody Eisenman | Filed under Uncategorized
In a stunning defeat for the US Justice Department, two Bear Stearns Hedge Fund Managers were acquitted earlier this week. These two traders, Ralph Cioffi and Mathew Tannin, had been several hedge funds under the auspices of Bear. Although their strategy was somewhat complex, essentially their strategy was to borrow money at relatively low rates and buy mortgage backed securities. When the housing market collapsed last year, their funds went with it. The case was primarily based on personal emails, where the government claimed that while the managers expressed optimism and continued to recommend investors keep money in the fund; their emails supposedly stated just the opposite. Although I don’t have any opinion on their guilt or innocence (the jury has already decided that), the managers were put into a tough position. If they told investors their fears, they would have a run of the funds, under which the subsequent liquidation would hurt everyone. On the other hand, how could they express optimism when they believed otherwise?
In fact, this was a similar choice facing the large banks last year. In the case of Lehman Brothers, the government is still considering whether to file criminal charges against former CEO Dick Fuld. Should he have stated his worst fears publicly, which could have led to a panic? Or was he correct in maintaining a public persona of confidence in order to maintain stability while the walls were collapsing around him? These are very difficult legal issues. In the Bear Stearns case, the jury just didn’t feel that the emails were conclusive enough. The two still face SEC charges, which require a lower level of proof as compared to a criminal case. Had they been found guilty of that latter, they could each have faced as much as twenty years in prison.
In the meantime, the stock market continues to move higher and higher. The Standard and Poor’s’ 500 Index closed yesterday at 1098, which is about 10% higher than it was at the beginning of September, and over 60% higher than the March lows. Despite this, equity inflows into mutual funds are actually still negative this year. What that means is that more people have taken money out of mutual funds than put money in. Thus, most investors still view this rally with skepticism. I believe that this attitude could allow the rally to continue throughout the remainder of 2009. Should inflows start to rise, we could be heading even higher.
