Commentaries

Bernanke’s Hester Street home

The Federal Reserve may not want to crow about the half-empty giant shopping mall it now owns in Oklahoma City by virture of its hastily-arranged rescue of Bear Stearns. But at least one other commercial real estate deal that the Fed picked up from Bear appears to be in better shape.

One loan now in the Fed’s portfolio is a mortgage Bear made to the developer of an upscale condominium building in lower Manhattan called The Machinery Exchange. The 14-unit complex at the corner of Hester and Baxter streets is located on the edge of Chinatown and got a favorable write-up from The New York Times in 2007 because of its architectural style.

The developers bought the 94-year-old seven-story former machine warehouse in 2005 for $10 million. Real estate records indicate that Bear provided the financing for that deal. The developers also raised an additional $25 million in construction financing from other investors–although it’s not clear if Bear was part of that transaction.

Either way, it appears the project, where some units were priced at between $1 million and $5 million, is in fairly good shape. The website for renovated building says no units are availalble–usually a sign that all of the apartments were sold.

The hunt continues for the rest of Bear’s commercial real estate projects that landed in the Fed’s lap.

Fed knows transparency when it sees it

From the start of the financial crisis, the Federal Reserve has fought to keep secret the many measures it has taken to prop-up the banking system.

The Fed has opposed releasing information about the trillions of dollars in loans it made during the crisis or the tens of billions of dollars in troubled assets it has taken on its balance sheet. For instance, the Fed still won’t say just what it acquired, when it took on some $29 billion in troubled assets from Bear Stearns last year.

Yet the Fed has no trouble demanding transparency from others. In the bankruptcy case for Extended Stay Hotels, in which the Fed is a big creditor after assuming some of Bear’s assets, the central bank came out for the appointment of an examiner.

Why? Well, according to court papers filed in the bankrupty case, the Fed says:

Given the likelihood that the New York Fed will be called upong to publicly explain any loss, the New York Fed would be remiss if it did not acknowledge to the Court its own independent interest in obtaining transparency into the collapse of the Debtors.

Isn’t that rich? Now I have no problem with the Fed throwing its support behind the appointment of a bankruptcy examiner–something the judge in the Extended Stay case did recently approve. Examiners often bring a pair of fresh and untained eyes to the process.

But for the Fed to argue the merits of transparency, while it prevents the public from looking into its own affairs, is simply hypocritical.

Time to junk AIG

The federal government’s $180 billion effort to prop up American International Group has worked, averting an even bigger financial catastrophe. Now it’s time for the Obama administration to oversee the dismantling of the failed insurance giant with all due speed.

A report this week from the Government Accountability Office makes clear that AIG would crumble and likely reignite financial fears around the world without the government’s massive support.

And the report says it’s “unclear” whether AIG will ever pay back the $121 billion in government assistance that’s still coursing through its balance sheet.

The GAO report should provide the administration will all the ammunition it needs to get tough with AIG. The report’s conclusions should stiffen the spine of regulators in their dealings with Robert Benmosche, AIG’s new $9 million chief executive.

The former MetLife chief executive seems to act as if he has taken over a financial company that’s simply made one or two bad decisions — not one that nearly brought the global economy to its knees.

Benmosche’s plan to take his sweet time in selling off AIG’s assets might make sense if the insurer could someday stand on its own without the government’s help.

But the GAO report raises serious doubt about whether AIG will ever be self-sufficient again, noting that “the company continues to rely heavily on the federal government as its source of liquidity and capital.”

UBS’ days of wine and CDOs

Expensive wines and toxic assets are rarely mentioned in the same breath.

But that was the talk at UBS during the summer of 2007, when the Swiss banking giant sold some $35 million in soon-to-be rotten collateralized debt obligations to Pursuit Partners, a Connecticut hedge fund, which is now suing the bank.

Last week, a Connecticut judge ruled that Pursuit had presented sufficient evidence that UBS sold the CDOs even though the bank had confidential information that Moody’s Investors Service was planning to slash its credit ratings on those subprime-backed securities.

The judge, in issuing a preliminary ruling against UBS, cited an internal UBS email that has received a fair amount of attention because a trader boasted: “Sold some more crap to Pursuit.”

But it’s the email exchange leading up to that trader’s comment, which wasn’t included in the judge’s decision but was obtained by Reuters, that may be just as revealing.

Much of the discussion between trader Evan Malik and a colleague concerns the amount of money they’d each spent on a 2000 vintage bottle of wine. The sale of the “crap” CDOs almost seems an afterthought in the email thread titled: “95pts Wine Spec. Best Tignanello since 1997.”

On the anniversary of the implosion of Lehman Brothers, it’s important to remember that the financial crisis really began a full year earlier — in July 2007 — with the collapse of two Bear Stearns hedge funds that had loaded up on CDOs.

Cioffi: My investors? What investors?

Ralph Cioffi, the indicted former Bear Stearns hedge fund manager, is trying again to get an insider trading charge dismissed in advance of his upcoming criminal trial. 

And this time his lawyer’s have come up with an interesting legal argument, which essentially is that a “hedge fund manager owes no fiduciary duty to its investors.” Rather, a hedge fund manager’s “fiduciary duty runs only to the hedge fund itself.”

Using this bit of twisted logic, Cioffi’s lawyers contend their client didn’t commit insider trading by secretly pulling some of his money out of the Bear funds before they collapsed because he had no duty to tell the investors he was making the withdrawl.

I’ve never been convinced that the insider trading charge against Cioffi is a strong one. But that’s because Cioffi didn’t pull all of his money out of the fund–only some of it.

But this argument that a hedge fund manager owes no fiduciary duty to his investors really stands things on its head. If the judge were to accept this argument and dismiss the insider trading charge, no investor could ever trust a hedge fund manager ever again.

Oh, in the court papers, Cioffi’s lawyers also say:

Never before has the government attempted to prosecute a hedge fund manager for insider trading for a redemption of his investment in the hedge fund he manages.

Ralph Cioffi faces the music

We’re just three months away from the criminal trial of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin and federal prosecutors have just produced a witness list.

Sadly, there are no big marquee names on the list of 32 people, who are scheduled to take the stand and raise their right hands in a Brooklyn, NY federal courtroom. If you were expecting to hear from former Bear CEO James Cayne, don’t adjust your work schedule to take time off.  Warren Spector, Bear’s former president, who Cayne fired a few weeks after the Bear funds collapsed in the summer of 2007, also doesn’t make the grade.

The most notable government witness is Rich Marin, the former head of Bear Stearns Asset Management, the division that nominally oversaw the giant hedge funds that bet big on subprime-backed CDOs. Marin, you may recall, got a bit of unflattering attention after The New York Times reported about all his movie reviews on his personal blog, “Whim of Iron.

Other witness include a number of former hedge funds employees, former top Bear broker Shelley Bergman and investors. Cioffi and Tannin are charged with lying to investors about the trouble at the fund, which began in early 2007–just as the subprime housing market was blowing up. The collapse of the Bear funds in June 2007 is widely seen as the start to the now two yearlong credit crunch/worst financial crisis since the Great Depression.

A number of hedge fund managers, whose funds presumably lost money in the collapse of the $1.6 billion Bear funds, are slated to testify. Two such managers are Victor Cain of Treflie Capital Management and Benjamin Schliemann of Accumulus Capital Management.

It’s hard to believe that two years into the financial crisis, Cioffi and Tannin are the only prominent Wall Street types to face criminal charges.

Leaving a house of cards with a good hand

Wall Street’s gatekeepers often make their displeasure known when reporters and columnists refer to investment decisions as “bets” or taking on risk as a “gamble,” and God forbid should you liken the entire business to a “casino.”

And yet are the skills really so different?

A case in point is Steve Begleiter, who is currently having a better run of luck at the World Series of Poker in Las Vegas than he did more than a year ago as head of corporate strategy at Bear Stearns. He is one of 27 remaining players on the final three tables, in third place with $11.9 million in chips.  Play resumes today to winnow the field down to 9.

At Bear Stearns, of course, bridge, not poker, was the preferred card game.  As Bear Stearns was melting down, James Cayne was in Detroit, playing in the spring 2008 North American Bridge Championships.