Symbolic Indictments?

By Jonathan Higuera
June 20, 2008 01:43 PM

It’s unlikely the indictments of two former Bear Stearns hedge fund managers represent a final saga in the ongoing subprime lending crisis. The pain is sure to continue for besieged homeowners, neighborhoods and local economies for quite some time.

The arrests, however, are part of the cycle of the boom to bust housing crisis that we’ve been covering and writing about for several years now. So I’m hopeful the first Wall Street executives to be arrested in a federal investigation into deceptive lending and investing practices are a sign that things are starting to come full circle. At least we can hope.

It’s usually not much of a consolation to consumers and victims when indictments come down on Wall Street execs. By then, so many investments have gone bad that the indictments are almost an afterthought. The damage has been done. Ask the shareholders of Enron stock and countless others left in the wake of manipulative financial managers.

As media, we should be asking ourselves if we could have done more to prevent this train crash known as the housing crisis. Many of us have enough experience to know that the bigger the run-up, the steeper the drop.

But the housing scandal was so broad that even those voices that tried to warn of the downside were drowned out. Homeowners were absolutely giddy about the equity gains in their homes, new homeowners were ecstatic that they could finally become owners, not renters, homebuilders beamed about their profits as did mortgage lenders and other ancillary real estate workers. Even local economies benefitted from the tax revenues generated by new subdivisions. It was a win-win situation we were told. Home ownership is the American Dream and makes owners more vested and invested in our country. So what if lending standards were lax? The upside was worth it.

The Feds were able to track down the deceptive practices of the two Bear Stearns managers, aided largely by emails and instant messages they had sent out. The messages showed that while they encouraged investors to pour even more money into deteriorating funds with little chance of returns, they themselves were pulling their own money out of those very same funds. One fund manager, Ralph Cioffi, pulled $2 million of his money from the same fund he was telling investors was solid.

Reading the indictments in these cases was fascinating and illuminating. I applaud The New York Times for including a link to the actual indictment.

The facts of the case will still need to be sorted out in court, but the prosecution’s case appears to be strong, especially given the written evidence and despite an attorney’s assertion that his client is innocent, merely “a scapegoat for a widespread market crisis.” Though, the lawyer may be onto something with that last point.

No one or two hedge fund managers can be blamed for the entire breadth of this particular crisis. But they are emblematic of a pattern of deception that stretched from the bottom to the top.

I’m not saying the media was complicit. After all, we’re not regulators. But we should always be ready to sound the alarm when things appear too good to be true.

Please enter your friend's e-mail address

Please enter your e-mail address

If you would like to include a message, please add it here:

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism