Jury Acquits Bear Stearns Hedge Fund Managers

In a stunning blow to the prosecution, jurors took only nine hours to acquit two former Wall Street fund managers in the only major criminal case to emerge from the mortgage meltdown and financial crisis. According to the Los Angeles Times (November 11, 2009) Ralph Cioffi and Matthew Tannin, former mortgage-bond hedge fund managers at Bearn Stearns, were found not guilty of securities fraud. Federal prosecutors who had hoped to pin Cioffi and Tannin as the perpetrators in the downfall of Bear Stearns (now owned by JP Morgan Chase) and set a precedent against other Wall Street bankers were left shaking their heads at both the jurors’ decision and the pace in which it came.

At the heart of the case were the defendants' e-mails, including one in which Tannin said the subprime market "looks pretty damn ugly." Tannin went further to say, "There is simply no way for us to make money -- ever." The prosecution, which hung their case on incriminating emails like these, also showed the jurors emails written days after where both men informed their management that the hedge fund, in fact, could survive. Nevertheless, jurors said the evidence wasn't strong enough and that Cioffi and Tannin were doing everything they could to keep the hedge fund above water. Juror Aram Hong noted, "Just because you're the captain of a ship and it gets hit doesn't mean you should be blamed."

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With the acquittal of Cioffi and Tannin, federal prosecutors must now determine what if anything they can do to salvage the remainder of their Wall Street cases. Without corroborating data or witnesses to support e-mail evidence, similar cases if tried would likely be found without merit. The fact is America’s investment banking firms were built on strict discipline, sound judgment and prudent risk management. It is these principles that enabled institutions like Bear Stearns and Lehman Brothers to grow and be profitable for more than eighty years. There is no evidence to suggest that fund managers en mass began ignoring their firms’ established trading guidelines or purposefully strayed beyond the boundaries of proper funds management. The truth is that no one could predict the 2008 implosion in the financial markets, nor is any one person responsible for its occurrence. Often times events that occur cannot be foreseen or remedied with our current set of tools or knowledge. When I flew for the US Navy, we used to say that our flight procedures were written in blood. This was because people often died from aircraft malfunctions before proper emergency procedures could be written. I learned one harrowing night after I nearly lost my airplane and crew from an engine fire that I could not extinguish – after properly implementing the existing emergency procedures – exactly what "written in blood" meant. It turns out one of my aircraft’s four engines suffered a catastrophic oil loss which ignited a fire in its turbine section. Fortunately, my crew and I survived the emergency and a new procedure was written for this particular malfunction.

As we consider the financial crisis of 2008, the bigger story emerging might be just how damaging this acquittal could be to the Obama administration. With attempts to pin the blame for the financial crisis on failed Bush policies and scores of "rogue" Wall Street traders, the jurors’ decision that selective e-mail evidence not only was inconclusive, but arguably supportive to the defense, makes the Obama case against Bush’s policies hollow and without merit. With Democratic Party loses for governor in Virginia and New Jersey, the Obama administration can hardly absorb another political setback as it enters the 2010 mid-term elections.

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With this acquittal of Cioffi and Tannin, perhaps we should stop placing blame for the financial meltdown and subsequent recession on the prior administration or on Wall Street and begin to focus our limited resources on finding ways to emerge from this crisis smarter and stronger. Having proper safety procedures in place to preclude banks and insurance companies from taking on too much risky debt is a great place to start.

Maurice Greenberg, the former CEO of American Insurance Group...

Former AIG head begins anew with C.V. Starr:

According to the NY Times (October 27, 2009), Maurice Greenberg, the former CEO of American Insurance Group (AIG) has been quietly hiring employees from AIG to fill posts at his new insurance company, C.V. Starr. Greenberg, who built AIG over the past four decades into the world's largest insurance company with $1 trillion in assets, was ousted in 2005 over an accounting scandal brought about by a complaint issued by Eliot Spitzer, former NY Attorney General. Greenberg maintained his innocence throughout the investigation and all criminal charges were subsequently dropped. Since then Greenberg has been battling AIG over stock in which they both laid claim. AIG in the meantime suffered staggering losses from the trading of complex derivatives by its financial products unit and was on the verge of insolvency last year when the federal government decided to step in and save it. With the demise of AIG Greenberg lost nearly all of his life's savings.

This past summer Greenberg finally won his suit against AIG and reclaimed the rights to $4.3 billion in retirement funds. Instead of using his money to live out his golden years, Greenberg who is 84 has been redirecting the funds to recreate another AIG. With the Treasury recently setting employee compensation limits on companies which have received bailout money, Greenberg is now in an even stronger position to lure away AIG's best talent to help run C.V. Starr. As the largest investor in AIG, the government (and taxpayers) stand to lose billions if AIG fails to recover. Greenberg, who is AIG's second largest shareholder, is similarly exposed. For this reason, it doesn't make sense for Greenberg to want to hurt his former employer.

One can't help but admire the resiliency of Greenberg to start over at such a late age. What motivates an eighty-four-year-old billionaire to do such a thing? Clearly it is not the money. There are arguably other driving factors. Perhaps Greenberg feels like he has something to prove to those who claimed he was responsible for the demise of AIG. No longer at the helm, Greenberg cannot direct AIG back to profitability. Moreover with the government calling the shots on how AIG should be run, Greenberg would likely feel suffocated by the oversight if given the opportunity. With C.V. Starr, Greenberg can demonstrate to those who doubted and accused him that he still has what it takes and had he been at the helm last year, AIG would have weathered the storm. And why shouldn't we expect Greenberg to hire his former employees? Who in the business world doesn't invoke this strategy whenever they are able? Going with loyal proven performers just makes good business sense, especially when they can be picked up at bargain prices.

Greenberg may be building C.V. Starr to silence his critics, but I don't think so. I believe Greenberg is building C.V. Starr because that is what he was born to do. Greenberg knows insurance undoubtedly better than anyone else on the planet. Nothing energizes him more than to discover new ways to unlock value by mitigating the risk of others. Had he not been ousted from AIG, he arguably would be there today fulfilling his life's calling. Recreating AIG through C.V. Starr is not an option for Greenberg. Rather, it is simply part of his life's work. Incidentally, C.V. Starr is named after AIG's founder, Cornelius Vander Starr who hand-picked Greenberg in 1968 as his successor.

Pete Canalichio