Wanted: sub-prime scapegoats

Looks like some of the shysters responsible for the US mortgage mess could be about to get their comeuppance...

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Last Updated: 31 Aug 2010

Almost a year after the collapse of the US sub-prime mortgage market propelled the rest of us into economic meltdown, the official hunt for scapegoats is underway. Two former high-fliers at ex-investment bank Bear Stearns have been charged with fraud over the collapse of two hedge funds last year; elsewhere, a shareholder group is suing Lehman Brothers, claiming that it misled investors over the extent of its losses; while the FBI has apparently arrested no fewer than 406 people over $1bn in mortgage fraud, including brokers, housing developers and estate agents (not the world’s most sympathetic line-up). Let the blood-letting begin…

The first two high-profile casualties of the fiasco could be Ralph Cioffi and Matthew Tannin, the two Bear hedge fund managers who were arrested in New York yesterday. The collapse of their huge sub-prime bets lost investors about $1.4bn and sparked a loss of confidence throughout the market – so you can see why they’re not very popular. According to prosecutors, Tannin and Cioffi realised that their funds were going down the tubes (they’ve apparently found an email between the pair suggesting that ‘the entire sub-prime market is toast’) – but instead of coming clean, they tried to hide their huge losses in the hope the market would recover. Good plan.

It’s a similar story over at Lehman. Annuity fund Operative Plasterers is accusing the bank of understating its losses, leading to a rise in its share price – and thus massive losses for investors when recent revelations wiped 60% off said share price (after a whopping $2.8bn loss last quarter, it’s now raising $6bn to shore up its balance sheet). And then we have the people all the bankers are likely to blame: the dodgy dealers who flogged all these loans in the first place. 406 of these ruffians are now sweating in an FBI pen somewhere, charged with various counts of mortgage fraud, following an investigation called Operation Malicious Mortgage (not much of codename, that, is it?)

Of course all the accused have immediately cried foul, suggesting that they’re just easy targets for a world that wants someone to pay the price - as Tannin’s lawyer put it, they’re ‘being made a scapegoat for a widespread market crisis’. The question is: losing $1.4bn by betting incorrectly on a risky market might be regrettable for hedge fund investors – but is it criminally fraudulent, or just spectacularly incompetent?

Either way, it’s unlikely to improve the popularity of bankers, estate agents and mortgage brokers...

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