Bear Stearns And The Criminalization of Failure

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Federal prosecutors are preparing to file criminal charges against managers of two Bear Stearns hedge funds that collapsed at the dawn of the credit crisis last year. Although it's being described as the conclusion of a year long investigation, it seems very likely that Ralph Cioffi and Matthew Tannin there wouldn't be facing criminal charges if Bear Stearns hadn't collapsed.
"Of course what's really happening here is that the hedge fund managers are taking the fall for the collapse of Bear, and the even broader reverberations from that, including the controversial merger, the bailout and the credit markets' woe," law professor Larry Ribstein writes. "As with Enron, the public is screaming for action. When in doubt, throw somebody in jail. The public will eventually calm down, by which time the now impoverished defendants will be in jail or being exonerated on appeal."
We wonder if the urge to prosecute doesn't arise from an unrealistic confidence in markets. Regulators and prosecutors believe that preserving investor confidence is their mandate. Massive losses due to innocent if colossal errors about market directions undermine market confidence but there's little a government official can do about that. If your goal is restoring investor confidence, you're extra-motivated to find criminal wrong-doing and fraud because you can reassure investors that their losses are do to bad apples rather than risk inherent in the markets.
The Enronization of Bear [Ideoblog]

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