The acquittal of former Bear Stearns fund managers Ralph Cioffi and Matthew Tannin on criminal charges means a lot to the two men and their friends and families (and rightfully so).
For years, Bear's CEO - consummate salesman and card-sharp Jimmy Cayne - led a campaign to convince investors, potential investors, customers, counter-parties and everyone else with an interest in Wall Street and business (you know who you are) that Bear Stearns was (among many other things):
(a) Wall Street's premier risk manager.
(b) A company focused on building shareholder value through long-term growth to such a degree that Bear Stearns passed up opportunities for big short-term profits from industry "fads" to stick to its "long-range vision."
(c) A company positioned to succeed regardless of market conditions. As late as October 2007, Bear mortgage chief Tom Marano bragged at the firm's investor day that Bear had a "mortgage franchise for all seasons." (Remember that, mostly due to mortgages, Bear Stearns took a write-down of nearly $2 billion about a month later, and in December 2007, the company announced an $850 million loss for thquarter).
Bear Stearns insisted that its "strong risk management culture" started at the top of the company and was deeply ingrained in all Bear Stearns employees.
Bear's leaders insisted that their company avoided large "directional bets" on asset classes because Bear Stearns considered such gambling far too risky. To our knowledge, Bear Stearns did not any caveat about an exception by which the firm would lay immense, bet the ranch-style bets on housing, mortgages and mortgage related securities.
Under Jimmy Cayne, Bear Stearns constantly reinforced its commitment to excellence in risk management and taking the slow, steady road to shareholder growth.
These kinds of representations were lies; nothing less than a propaganda campaign designed to inspire confidence and win trust from clients, investors, the media and the financial services industry.
In other words, Bear Stearns presented a completely false image to the public. Cayne and his lieutenants deliberately created a "brand" for Bear Stearns with no basis in reality (at least not during this decade).
The true Bear Stearns, we now know, was a high-risk, reckless operation focused on short-term profits and little else.
Put simply, deliberate misrepresentations and omissions by Bear's senior officers induced shareholders to invest in a company that bore little resemblance to The Bear Stearns Companies Inc.
Still unsure whether there was fraud at Bear Stearns? You want something concrete?
OK. We could cite about 100 facts to clinch it for you. We'll save most of those for an upcoming post.
For now, we'll just stick with Bear's lies about top notch risk management. In our opinion, the following few illustrations say everything you need to know about Bear's alleged culture of strong risk management:
- Bear's mortgage businesses were the firm's cash cows. The SEC Inspector General found that the mortgage risk-management infrastructure at Bear Stearns was a virtually useless anachronism.
- Amazingly, Bear's mortgage risk models were roughly ten years old. More amazingly, the models did not even address the risks of mortgage delinquencies or defaults.
- The SEC Inspector General also found that Bear Stearns risk management personnel were not trained or competent to assess risks associated with mortgages and mortgage-backed securities.
- At the risk of beating a dead horse, we are saying that - according to the SEC Inspector General - Bear Stearns did not have even one risk employee in risk management who was capable of managing risks related to Bear's mortgage and mortgage securities operations.
Apparently Jimmy Cayne considered these issues too minor to disclose. Or maybe he was kidding about that whole "best in class" risk management thing.
The essence of fraud is deceit. At Bear Stearns, senior management spent years deceiving investors. The securities laws are meaningless if Bear's officers and directors are not held accountable for massive losses suffered by the former investment bank's many shareholders.
Stay tuned - WSLB will lay out innumerable other reasons why Bear Stearns / JP Morgan are liable for BSC shareholder losses in future posts.