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Bear Stearns and Boy Scouts


Arrests damage industry's already beleaguered reputation.


A Scout is trustworthy, loyal, helpful, friendly, courteous, kind, obedient, cheerful, thrifty, brave, clean and reverent.
-Scout Law

On June 12, 2008, four Boy Scouts were killed when a tornado ripped apart western Iowa. It was such a sad story I think a lot of people put it out of their minds.

The news took me back to my brief period as a Cub Scout. I know for many Scouting may seem corny these days, but living by their standards would make us all better people. Of course, these days it's almost a badge of honor to say: "I'm no Boy Scout."

Of course you're not. That said, I'm no Boy Scout, either, but I say that with a tinge of sadness.

I was also reminded of that tragedy yesterday when the headlines were dominated by reports of mass arrest among would be professionals in the investment and real estate industries. At a time when the masses have lost faith in the financial system, this wave of news comes along. The reality is people haven't forgotten about the headline-grabbing malfeasance that sent Bernie Ebbers and so many other high-profile folks to the slammer.

Two Bear Stearns Hedge Fund Managers Arrested

Matthew Tannin and Ralph Cioffi, former managers of Enhanced Leverage Fund (a Bear Stearns hedge fund) were arrested at their respective homes and charged with a litany of crimes including:

  • Expressing false confidence.
  • Encouraging investors to add money to the fund while they knew it was failing (Cioffi redeemed $2.0 million of his own personal funds).
  • Dissuading investors from redeeming their funds.

The bottom line is the government is charging the pair deliberately misled their own investors and institutional counterparties. The alleged crimes don't directly involve mortgage borrowers but instead other professionals or seasoned investors that typically qualify for investing in hedge funds.

Although there have been rumblings about the shenanigans at the fund and possible illegal activity, I'm not sure any one expected the Feds to go to the homes of the fund managers and arrest them for all to see.

300 Arrested in $1.0 Billion Real Estate Sting

The big news story of yesterday was the revelation that hundreds have been arrested since March with more than four dozen coming in the last two days in connection to real estate fraud by industry borrowers, loan originators and real estate agents.

The net was large and wide scooping up people from Chicago to Maryland, to Miami to Atlanta. Apparently, victims of these schemes lost more than $1.0 billion.

If those arrested are guilty they should pay. There's no doubt about that and the reality is there were a lot of guilty folks in the industry.

The sad thing is 300 is a large number but it's a fraction is a fraction of those that work in the industry whose name was already mud. I don't think newspapers should shy away from their typical sensationalism with this news because it's warranted. The much bigger story of honest folks that did their jobs and maybe made mistakes (in trying to help another person achieve the American dream of home ownership) will probably never be published, however.

Is there another Bear Stearns out there?
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No positions in stocks mentioned.
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