Fools and Their Money (Bear Stearns Hedge Funds Edition)

My favorite section of the indictment against Ralph Cioffi and Miatthew Tannin (which is good reading):

As described to investors by the defendants and others, the High Grade Fund’s objective was to provide a modest, safe and steady source of returns to its investors. CIOFFI, TANNIN and others told investors that they could expect annual returns of approximately 10 to 12%, and that the High Grade Fund was not designed to hit “home runs.” The defendants and others led investors to believe that the High Grade was only slightly riskier than a money market fund.

For a considerable period, the High Grade Fund’s performance was generally consistent with these representations. By 2006, however, the fund’s performance had begun to decline. In part as a response to this performance decline, and as a consequence of threatened investor withdrawals of money (“redemptions”) from the High Grade Fund, CIOFFI, TANNIN and others opened the Enhanced Fund in August 2006.

The Enhanced Fund invested primarily in CDOs. It employed substantially more leverage than the High Grade Fund. CIOFFI, TANNIN and others told investors that the Enhanced Fund would generate greater profits than the High Grade Fund, but that
the Enhanced Fund would carry only limited additional risk, in part because it would invest in an even higher proportion of the
least risky securities. The increased profits would result from increased leverage.

Anything that promises money market risk and 8-10% real returns is not an investment. It’s a scam.

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  1. Allen Smithee

    That was a very definitive concluding statement.

    Couldn’t agree more with it.

  2. Richard Kline

    “Anything that promises money market risk and 8-10% real returns is not an investment. It’s a scam.” And the ‘investors’ should really, really have known this from moment one. Those that didn’t accept the obvious and get out long agao, including the one whose $57M [reported in NYT, I think] went down with the ship, have had an education in parabolic speculation.

  3. scott

    Actually, of the folks I know in the hedge fund industry (and it really is only a handful), they all peddle this line or better: one told me the returns on his fund were 15% “guaranteed”, another was targeting 12% or more with little risk. I think they believed what they were selling, too.

  4. Anonymous

    As guilty as they may be, they are scapegoats for the fat cats that will never be indicted. It is really and indictment of the entire industry. Remember that Elliot Spitzer uncovered the Merril practice of emailing their largest clients that certain stocks were dogs while simultaneously emailing their small investors that those same stocks were a great buy. The fat cats retaliated by following his every move until they had something on him, which turned not to be difficult.

  5. Anonymous

    When someone assures me that there is no risk of a loss,I assume that they mean it is a certainty.

  6. tz

    No, they just said 12% returns, not REAL returns. If Housing just kept up with inflation in other things like oil it would not be an issue.

    The difficulty is saying something will never go down in value (then there’s liquidity…).

    It was a systemic ponzi scheme. Adding more buyers, liquidity, or capital will make prices go up even if nothing else changes. So by securitizing mortgages, and with the various products that could make hairdressers afford mansions (or earlier, simply get more house for a good income) they both caused and benefited. Those with the early MBS probably aren’t underwater quite yet. But the successive ones were based on the phantom (ponzi) margnial value added to the houses, and it kept going until it collapsed.

  7. Yves Smith


    Please read the indictment language versus my comment. Headline inflation was under 2% when the first fund was formed.

  8. Anonymous

    So what’s the big deal here….? Is this some kind of earth shaking event…..?

    Investors and speculators make and lose money every day….. Look at LEH…. Two years ago they were the smartest kids on the street and look at them now…. MER, MS, C, CFC, BOA, WCI, look at them all, hugging the root, scrambling around like a bunch of cockroaches.

    The name of the game right now is, SAVE YOUR OWN SKIN.

    Best regards,


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