First sub-prime arrests at Bear Stearns

From the AP this morning, via The New York Times: "Two former Bear Stearns managers have surrendered to face criminal charges in the wake of the collapse of the sub-prime mortgage market, the federal authorities said Thursday.  One former manager, Matthew Tannin, was taken into custody outside his New Jersey home, while the other, Ralph R. Cioffi, was arrested at his New York City home, the FBI said.

The AP reports that federal authorities are expected to outline the charges against the two men later today.

Analysis: By my reckoning these are the first big arrests in the sub-prime mortgage collapse. For those of you who weren't paying close attention late last spring, the collapse of two Bear Stearns hedge funds roughly a year ago hit Wall Street like a thunderbolt, revealing the dirty little secret of mortgage-backed securities: they were not secure.

Here's how L.A. Land first reported the story on June 14, 2007, after Business Week broke it: "Business Week: 'The situation is so bleak that Bear Stearns' asset management group is suspending redemptions at the onetime $642 million fund—meaning investors have no choice but to sit on their losses. And that's got some hopping mad.'

We now know the collapse of the Bear Stearns hedge funds was a classic tipping point, providing evidence to for all to see that investments built on sub-prime mortgages were beyond risky, they were doomed. When it broke, though, the story did not initially receive wide play; it was seen as a problem unique to Bear Stearns and these hedge funds. Companies that would later be battered by the crisis were still seen as decent investments. In mid-June of 2007, Countrywide Financial stock was trading at $38.81; today it opened at $4.74. Washington Mutual Inc. shares were trading at $43.48; today they opened at $6.26.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.

Comments

[Ideal 4 Investors]

I'm sure this is the first of many arrests.

[tew]

Perp walk dog and pony show. This is media gloss to distract people from how completely corrupt the whole real estate business is and how Congress and the rest of federal and state government failed to enforce laws and in fact enabled the worst behavior. Dodd must be working overtime to get more private sector media events like this staged.

[Nelcisco]

a shadow of things to come!
watch how dominos

[mbob]

search for the guilty
punishment of the innocent
rewards and honors for the uninvolved
reinstatement with back pay for the accused
headlines about cat rescued from tree
invade Iran

[Michael Snyder]

I caught this story on www.bloomberg.com this morning but what really caught my attention was the story a bit further down the page,"Regulators Lay Plans for Investment Banks' Fed Access (Update1) in which Craig Torres and Jesse Westbrook report:

" June 19 (Bloomberg) -- U.S. regulators are planning how to let investment banks retain access to Federal Reserve loans if the central bank shuts an emergency program in September, two government officials said.

Federal Reserve Chairman Ben S. Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox and their staffs are in almost daily discussions about the future of the so-called Primary Dealer Credit Facility, said one of the officials on condition of anonymity.

The Treasury and SEC want the program, designed to be in place until at least September, to be temporary. The discussions with the Fed center in part on what precautions might need to be in place in case a large securities company with hundreds of trading counterparties faces failure, as was the case with Bear Stearns Cos.

At the same time, any new rules would need to deter firms from becoming too dependent on Fed loans, addressing concerns that such aid might lead to more reckless lending and future financial crises.

``The question is: What is the appropriate quid-pro-quo for allowing access'' to the Fed, said Robert Eisenbeis, former head of research at the Atlanta Fed and now chief monetary economist at Cumberland Advisors Inc., a Vineland, New Jersey, investment firm. ``If the Fed is on the hook, they should have the responsibility'' to dictate capital and leverage ratios, he said."

Did anyone here really think the Fed would be able to "pull the needle out" once they had fed the Wall Street junkies a fresh infusion of cash. This will be "temporary" just like our presence in Iraq and tax breaks on capital gains.

Investment banks have taken the capital lent by the Fed and used it to build an oil bubble so outrageous Arab members of OPEC are speaking out against it. With the world's largest oil producers arguing against pricing inflated by the Wall St. rumor mill Henry & Ben are working on ways to boost Lehman's stock on the tax payer's shoulders. Again.

What worries me is it seems as if these guys actually believe their own numbers. Anyone who's pumped their own gas or shopped for groceries knows inflation is completely out of control. Simple things, 10 oz Wheat thins, $4.49 0r sweet corn, 4 ears for $3.00. That's double and ten times the price for the same items last year and those were "sale" prices.

This suffering on the consumer level is the direct result of the Fed's $200 billion plus "rescue" of Bear Stearns & the financial sector of Wall St. Interestingly enough it seems like the "market" isn't buying off on this either with the DJIA hovering; actually bouncing around 12,000.

What's this all got to do with real estate? Watch what happens to income ratio standards as consumers began to default on credit cards the maxed out paying for gas.

[victor knopp]

i trust that the smart people of our country understand that these same people like dodd capitalized and took just as much if not more risk in this so-called market,makes you wonder just how far the trail of greed has gone,and who is protecting what intrest

[Smiling Big]

Are these guys on the "Friends of Angelo" List?

... Do you hear that, it's AirForce 1 (Without Harrison Ford)... I think President Bush is arriving to pardon these two. But the trial hasn't started yet you say... "He's President 'I Do what I want' Bush, who's going to stop him the American People". Cue laughter.

Funny how the rest of the world saw this coming, yet the executives that specializes in banking, RE, and housing market all seem to say... "who saw this coming". It's time to give our money to monkeys.

Naro

[Laker]

Michael Snyder, what do you mean by :income ratio standards as consumers began to default on credit cards the maxed out paying for gas...."

If someone is maxed out on his credit cards, it will show on his credit report and harm him both as high debt, and low FICO is sense that a maxed out credit card is lowing FICO a lot. If you refer to Income ratio standard as in mortgage qualification, it will not change, as for these strapped wana be borrowers of new mortgages, their debt to income will increase and front end ratio will get worse as a result.
However, for a responsible qualified borrower, his cards will not be maxes out, his debt is zero, his FICO is high, all that happens is that he spends more of his take home money to buy gas and food, and obviously will have less "available" income to pay the mortgage...

[Michael Snyder]

Laker,
Just a badly worded reference to the laws of conservation of energy; translation, (you can't spend what you don't have) and what I see as the next economic tsunami on the horizon. (Always allow time to complete your post)
Some on the "Money Blog" next door consider me naive, and with regards to certain investment vehicles they're right. But my Grandpa said, "If you can't make sense of it, it probably doesn't make sense." I'd bet that goes for the "derivative" that hedge fund manager wants you to sink money into, but he really can't explain how you're going to make money doing it. But he has this chart...