naked capitalism

Yves Smith says:

Generally, there is a ritual of getting rid of the person who is immediately responsible for a big problem (in Japan, the top guy resigns, here the supervising grownup is shown the door). Consider all the other heads that have rolled at Bear, all the way up to Warren Spector. So it would have been logical for Bear to get Cioffi to resign. Keeping him on is unusual.

Now admittedly, in the case of LTCM, all the partners were retained during the wind-down at diminished pay. But the fund had complex and large positions in many markets.

It doesn’t seem plausible to me that Cioffi was so indispensable that he had to be retained. There were clearly other staff involved in running the fund. One would think they’d be up to the task of liquidating it.

Yves Smith says:

I certainly can’t say for sure. However, for the matter of suits against the fund, it’s unlikely that Cioffi would be sued separately (he was acting as an employee of the fund management company). In the Federal investigation, his interests are different from those of the firm. He should have his own legal representation. Under these circumstances, I doubt the firm would pick up his tab unless he had negotiated that as part of an employment agreement. Even in that case, they might be able to void it if he were eventually found guilty of fraud.

Again, let me stress this is all speculation.

Yves Smith says:

No, that it was odd that Bear kept Cioffi on as an advisor after the funds were seriously in trouble. One was allowed to fail (I am going by memory, I think that decision was made mid-late July if not sooner) and Bear had put up a credit facility while it managed the wind-down of the remaining fund.

Bear supposedly has lots of expertise in the kind of paper the fund traded; that was part of their pitch in selling the fund. So it wasn’t as if Cioffi had unique or irreplaceable expertise. So that’s why keeping him on didn’t seem to be warranted.

Yves Smith says:

Steve,

Very good observations. It may be that Bears’ reading of the offering document was that Cioffis’ withdrawal was permitted (although if that was the case, you’d think they would have said so to the press).

The real issue may be the ambiguity of the funds’ relationship to Bear. Recall early on, Bear wanted to let them fail; it was only when the firms that had credit exposures had fits that Bear relented. So Bear may not have felt it had oversight responsibility.

Technically, I don’t think they were Bear entities. But they operated on Bear premises (I think), used personnel that came from Bear, said they were using Bear risk models, and had Bear employees among the investors.