The indictment of Bear Stearns fund managers Ralph Cioffi and Matthew Tannin makes depressing reading. It seems damning to the defendants. But readers should understand that indictments are supposed to be damning. Prosecutors go as far as they can to cast the facts — which in this kind of case can be highly complex and ambiguous — in the manner most unfavorable to the accused. If the cases go to trial, we’ll get a much more balanced account of events.
Apart from the eventual finding of guilt or innocence, the more I consider the FBI’s and SEC’s conduct in the arrests, the more I see it as a political show calculated not to enforce the law, but rather to satisfy the blood lust of investors and borrowers who should themselves be spanked for thinking they should be entitled to high returns (or sub-prime mortgages) without running high risks.
Ultimately, the prosecution of this case — which seems based almost entirely on e-mail traffic — will harm the markets more than help them by discouraging (a) expressions of optimism when times are tough and (b) candid give and take within firms. These, together, are essential to the functioning of financial markets. What would we think of a bank president who runs around Wall Street yelling at the top of his lungs that his bank’s cash balance is only a fraction of what it owes depositors?
If the indictment offered a balanced portrayal of the facts — given current prosecutorial norms and reigning political agenda, it unquestionably doesn’t — I’d say Cioffi and Tannin ought to spend some time in prison. But we’re a long way from reaching any such conclusion, despite the SEC’s and DOJ’s best efforts to make it appear otherwise.
Speaking of which, as a matter of ethics if not law, the SEC’s Scott Friestad (spokesman in the video below) might be wise to follow his own counsel to “avoid dishonest or deceptive conduct” and “tell the truth, don’t shade the truth, and don’t put your interests ahead of investors interests.” The SEC is in major CYA mode at the moment, if you haven’t noticed.
Making these gentlemen — who are at this moment presumed innocent — appear guilty is itself fundamentally misleading. The same can be said of the SEC pretending that this kind of enforcement will ever really make markets “safer” for investors. But it does serve the political agenda of the SEC and President Bush who is probably mortified by have major market meltdowns as bookends for his eight years in the Oval Office.