US: First Finance Execs arrested over sub-prime fiasco

Two hedge fund managers today became the first financial executives to be arrested over the US sub-prime mortgage scandal.

The men, both ex-employees of Bear Stearns, were held at their homes in New York and New Jersey by the FBI.

Matthew Tannin and Ralph Cioffi both worked for Bear Stearns hedge funds that collapsed last year.

They are suspected of misleading investors about the risky sub-prime mortgage market, an FBI official said.

Tannin’s lawyer Susan Brune said he was innocent. “He is being made a scapegoat for a widespread market crisis. He looks forward to his acquittal.”

The fall-out from defaults on US mortgages rattled the global economy and the American housing market.

Sub-prime mortgages, those issued to people with shaky credit, were repackaged as securities and sold across the globe.

The implosion of the hedge funds foreshadowed Bear Stearns’ own demise, with the Federal Reserve having to intervene earlier this year to bail out the beleaguered bank. Their collapse revealed how much damage had been done to the companies that bought, repackaged and sold the loans.

Despite positive assessments by Cioffi and Tannin, the Bear Stearns hedge funds failed in June 2007. The funds had more than USD$20bn (€12.9bn) in assets before crashing.

Cioffi, aged 52, and Tannin, aged 46, already have been named in lawsuits brought last year by hedge fund investors, including Barclays Bank, who allege they were purposely misled.

Barclays accused Bear Stearns of knowing for months that certain assets in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund were worth “far less” than their stated values.

The bank alleged Bear Stearns managers “hatched a plan to make more money for themselves and further to use the Enhanced Fund as a repository for risky, poor-quality investments.”

The complaint said Bear Stearns told Barclays that the enhanced fund was up almost six percent through June 2007 – when “in reality, the portfolio’s asset values were plummeting.”