A trial in New York that seemed like a sideshow may hold pivotal lessons for lawmakers reshaping the regulatory system for U.S. financial firms.
Two Bear Stearns hedge fund managers, Mathew Tannin and Ralph Cioffi were found not guilty of conspiring to defraud investors, despite e-mails in which Tannin said he was so worried about the fund he had begun taking anti-depressants.
Prosecutors charged the pair knew the fund was in trouble, yet sold its merits with confidence to investors. The defendants lawyers contested that claim, saying prosecutors had used e-mails to provide “misleading sound bites” about the nature of working in finance.
But Bear Stearns was no sideshow. Often described as the fifth largest Wall Street investment bank before its near collapse in the spring of 2008, its fire sale to JPMorgan Chase & Co. for $10 per share told the world the financial crisis was for real.
Now a jury in Brooklyn has said the two managers running the Bear Stearns fund that failed are not guilty of fraud.
On the face of it, the decision could say, fundamentally, that even worried, reasonably bright financial managers with no evil conspiracy afoot can make mistakes or perhaps fail to stop a fund from collapse once it got to a certain point.
That goes beyond saying financial managers are allowed to express worry privately about the projects or financial instruments they handle without breaking the law.
In Washington, such lessons may be critical as efforts to reform the regulatory system build.
On Tuesday, Sen. Christopher Dodd, D-Conn, unveiled a 1,136 page reform bill that strips supervisory power from the U.S. Federal Reserve, which he said was “abysmal” at preventing the current financial crisis.
The bill has plenty of similarities to the reform bill in the House that proposes to create a new consumer protection agency on financial matters, punish firms for taking careless risks and force banks to increase their capital cushion against a downturn, The Washington Post reported Wednesday.
The plan backed by the Treasury, however, allows the Fed to keep its role as bank supervisor although it proposes to turn oversight of systemic risk over to an interagency council led by the Treasury.
Fed Chairman Ben Bernanke, meanwhile, has been adamant about two issues: Keeping the Fed’s jurisdiction over systemic risk and maintaining the central bank’s independence on setting monetary policy.
But a separate bill in the House introduced by Rep. Ron Paul, R-Texas, could critically dilute the Fed’s power in monetary policy, The New York Times said.
The bill, with nearly 300 congressmen and 30 senators behind it, would require the Government Accountability Office to audit the Fed’s operations, including its bailout of various firms and its $1.25 trillion effort to purchase mortgage-backed securities.
Bernanke called the audit bill “highly destructive,” but political pressure is building at both ends of the political spectrum against the Fed, in part due to its failure to prevent the crisis and in part due to its reaction to it, which is often portrayed as an expensive bailout for banks that created the crisis in the first place.
International markets were mostly higher Wednesday. The Nikkei 225 index rose 0.01 percent, while the Shanghai Composite index in China dropped 0.11 percent. The Hang Seng index in Hong Kong rose 1.61 percent, while the Sensex in India rose 2.49 percent.
The S&P/ASX index in Australia rose 0.49 percent.
In midday trading in Europe, the FTSE 100 in Britain rose 1.1 percent. The DAX 30 in Germany gained 1.31 percent, while the CAC 40 in France added 1.08 percent. The pan-European DJ Stoxx 50 rose 0.68 percent.
By Anthony Hall – upi.com
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