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.

The Bear Stearns deal: Buying a "house on fire"

Today's Senate hearing on the Fed-backed rescue of Bear Stearns provided a few interesting insights and quotes. Both the New York Times and the Wall Street Journal have new information on how the deal came about.

Call it a bailout: " 'If you want to say we bailed out the market in general, I guess that's true,' Fed Chairman Ben Bernanke testified. 'But we felt that was necessary in the interest of the American economy.' "

A House on Fire: " 'Buying a house is not the same as buying a house on fire,' JPMorgan Chase CEO James Dimon (pictured) said, explaining his low-ball offer for Bear Stearns."

Hammerin' Hank: If Bear Stearns shareholders who were nearly wiped out choose to blame a single person for the rock-bottom price, after today they will blame Treasury Secretary Henry M. Paulson Jr. The New York Times: "Treasury Undersecretary Robert Steel said that his boss, Mr. Paulson, had said during the negotiations that the price should be low because the deal was being supported by a $30 billion taxpayer loan."

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

Volcker questions Fed's Bear Stearns bailout

A bit off topic, but worth noting: Former Fed Chairman Paul Volcker (pictured) is raising questions about the Fed's rescue of Bear Stearns.

Volcker's chief questions: Why is the Fed rescuing a non-bank that it does not regulate? Isn't that a job for Congress? Why is the Fed guaranteeing bad loans? The Fed regulates --  and lends to -- banks, not investment houses.

Volcker calls the Bear bailout "... a new departure. And at some point, the government ought to — in my view, the government ought to be taking responsibility for that kind of action, not the Federal Reserve, which is an independent agency designed to provide an ample supply of liquidity to the economy but not too much, protect against inflation, not to protect particular sectors of the economy from bad loans.

In other words, rescuing companies other than banks, and guaranteeing bad loans, is a job for Congress and the White House. You want to bail out Carlyle Capital, or Chrysler or K-Mart? Go ahead, knock yourself out. Just don't ask the Fed to do it, because it's not their job.

Of course, potentially catastrophic failure was imminent and the Fed evidently felt it couldn't wait.  Volcker: "… They stepped into a vacuum, and I think quite appropriately, it’s a judgment they had to make. But is this what you want for the longstanding regulatory support system? My answer is no."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo credit: Associated Press

Beckham vs. Bear Stearns: Who's worth more?

A quickie: an e-mailer points out the fire-sale price for Bear Stearns -- just $236 million on Sunday night -- wouldn't even be enough to buy out soccer star David Beckham, whose five-year contract with the Los Angeles Galaxy, plus endorsement opportunities, has been valued at $250 million.

Click here for other "value judgments" -- Bear Stearns vs. the Dodgers, Bear Stearns vs. the most expensive high school ever built in Los Angeles, and Bear Stearns vs. Howard Stern.

Nor would the Bear bounty be enough to pay Yankee slugger Alex Rodriguez, whose most recent contract is reportedly worth $275 million.

Of course, the last time I checked, neither Beckham nor Rodriguez had exposure to billions of dollars worth of toxic mortgage-backed securities.

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