Lessons from Bear Stearns indictments? Don’t trust anybody or anything.

by Kurt Schulzke on June 21, 2008

I have to disagree with WSJ Lawblogger Dan Slater’s takeaway from the Bear Stearns indictments. Dan wrote, late Friday afternoon:

Yesterday, as we broke down the Bear Stearns fund-manager indictment, one thing stood out to us as clear, and poignant (presuming for the sake of this post that the allegations in the indictment are true): It seemed Matthew Tannin was vexed inside by competing voices. . .

The NYT reported today that Tannin was known within his group as a worrier. Again, presuming the government’s allegations to be true, perhaps Tannin should have trusted, and acted upon, his worries, his instincts. Instead, the indictment alleges, he didn’t.

These two paragraphs don’t seem to go together. I agree that the material in the indictment suggests Tannin was “vexed inside by competing voices” or some such thing. But this, to me, does not translate to “Tannin didn’t trust his instincts.” In fact, I read just the opposite in the indictment: Tannin did trust his instincts and he trusted the people he worked with, especially Ralph Cioffi. And that trust was what got him into trouble.

If anything, Tannin was too instinct-driven and insufficiently analytical. He trusted his instincts in joining Cioffi in starting the funds. He trusted his instincts in riding the fund ’til the bitter end. He trusted his instincts in agreeing with Cioffi, late in the game, to keep the funds open. He trusted his instincts in thinking out loud in e-mails with Cioffi about pros and cons of the funds.

We’ll likely learn much more over the next several months. But at this point, my takeaways from this new chapter in SEC overkill are these:

1. don’t ever manage or invest in a hedge fund;

2. if you do decide to manage a hedge fund, don’t ever express doubts about the fund to anyone but your own attorney; and

3. always act on your worries and pessimism, not optimism and hope.

And that, ladies and gentlemen of the jury, is how America went from a great, proud, strong nation to a gaggle of wimps and whiners, huddled jealously over their shrinking bank accounts, spooked by shadows into abandoning hope for the future.