Let the litigation begin!
Thus, It Begins:
I believe Barclays is now the first big plaintiff against the major Wall Street brokerage houses.
The United Kingdom bank was burned this summer when they lent $400 million to the firm's funds, whose collapse wiped out $1.6 billion in capital.
Barclay's is essentially claiming fraud, that Bear misled it about the performance of the highly leveraged funds at the time they were collapsing, and Bear was out raising lines of credit and seeking loans to shore the funds up:
"As the High-Grade funds faltered, the Barclays complaint alleges, their desperate state was concealed from bank officials, whose calls and emails were dodged as they sought performance information. "It is now clear that the BSAM defendants have long known that the Enhanced Fund and its underlying assets were worth far less than their stated values in the early months of 2007," asserts the complaint, referring to Messrs. Cioffi and Tannin, "and were at great risk for further losses."
The fund managers concealed their performance numbers from Barclays and others, says the suit, actions that worsened losses and contributed to the riskier fund's collapse. They also made false promises about savvy risk management and open communication to win loan money from the bank, alleges the suit, treating Barclays as a naïve player that was "an easy liquidity source," according to one email that Mr. Cioffi sent to Mr. Tannin. Months later, at a dinner celebrating Barclays's loan to the newly formed enhanced-leverage fund, Mr. Tannin told the British bank's officials that the fund was performing "great," adds the suit."
Even if the allegations are true, the main question is whether the fraud was perpetrated by Bear itself, or by a separate, independent unit.
One other thing: the complaint was filed in U.S. District Court in Manhattan. We will see if the August ploy of liquidating those two bankrupt hedge funds in the Cayman Islands will have any applicability to this claim.
~~~
And in totally-unrelated-completely-having-nothing-to-do-with-this-whatsoever news, Bear Stearns is expected to report its first ever quarterly loss today. Look for additional writedowns to its previously announced $1.2 billion hit . . .
Sources:
Barclays Sues Bear Over Failed Funds
KATE KELLY
WSJ, December 20, 2007; Page C3
http://online.wsj.com/article/SB119810284016240529.html
Thursday, December 20, 2007 | 06:50 AM | Permalink
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Perhaps the legal system can accomplish what the financial regulators are incapable.
Posted by: blam | Dec 20, 2007 7:28:52 AM
Had Barclay's been so unhappy regarding a lack of transparency and 'dodged calls and e-mails' there must be some evidence to show they wished to liquidate their position in the fund at the first opportunity. Intentionally misrepresenting bad assets as good is one thing but it doesn't take a genius to understand the dodgy nature of some of these MB instruments regardless of what the ratings agencies or fund managers said about them. I can't help thinking that Barclays should have known better.
Posted by: Tom C | Dec 20, 2007 7:34:14 AM
My view - There is no doubt that the commercial- investment banks, in their time-dishonoured way, have self-destructed once again. Hailed as innovative and modern money making masters in good times, the real profits are made by the inventors and promoters of increasingly dubious and highly leveraged schemes.
The game is slightly different each time but there are common themes -- find a new financial product which most people don't understand; entice a gullible public to spend way beyond their means on the basis that they too can make money just like rich people, and sell this debt-related product to naïve money managers. Lastly, and for the banking insiders - make your money and get out before the scheme goes belly up, as it always does.
On average, we see a banking crisis every ten to a dozen years, during which many of these auguste firms become insolvent. However governments no longer allow their banking sectors to go bust, beyond perhaps a token example. Instead, they bail them out via the yield curve, at the taxpayer's expense.
Meanwhile, there are several behavioural themes which I believe provide insights as to the outlook for stock markets.
There is a growing and I believe now widespread perception that Western central banks are behind the curve of events. This is certainly my view, as stated daily in the Audio. Consequently, to mitigate economic damage from the credit crisis of confidence and to underpin stock markets, they need to pump in more liquidity to offset that which has floated off to money heaven, via write-downs and trading losses.
They also need to slash short-term rates and reassure everyone that they will use all policy tools at their disposal to mitigate downside risks for the economy. I believe the Fed and even the BoE is now moving in this direction, albeit grudgingly. We will soon know and I recommend 50 basis point cuts this month, followed by another 25 basis points in January, and more later on if necessary.
Posted by: David Fuller | Dec 20, 2007 7:50:55 AM
What was it that the symbol BSC stands for?
"We have no clear understanding of what bullshit is, why there is so much of it, or what functions it serves. . . . Bullshitters seek to convey a certain impression of themselves without being concerned about whether anything at all is true. They quietly change the rules governing their end of the conversation so that claims about truth and falsity are irrelevant."
-Prof. Harry Frankfurt (1986)
Oh, yeah, now I remember....
Posted by: Winston Munn | Dec 20, 2007 8:02:39 AM
Understanding Barclay’s legal argument is it called « breach of confidence » or « concealing the truth »?
Sorry I would wish to be serious but is it a sin or a legal fault in the financial world?
Anyone wishing to replay the financial events since 2006 inclusive of Goldman Sacks financials of today may find that Wall street farces are quiet lengthy.
PS May be Bloomberg TV could replay the interviews of the Barclay's and Bear's executive when in Davos in 2006 and answering the reporter's question "Are you at ease with the derivatives in your books"?
Posted by: Philippe | Dec 20, 2007 8:40:13 AM
This spam blocker crap really stinks. I wrote a great post that couldn't get past the idiotic blocker.
Posted by: cinefoz | Dec 20, 2007 9:28:48 AM
Bye bye, Jimmy Cayne. I guess you'll have to smoke the cheap stuff now.
Posted by: A. Melmotte | Dec 20, 2007 9:55:39 AM
Email me the comment and I will cut & paste it in
Posted by: Barry Ritholtz | Dec 20, 2007 10:00:42 AM
Mr Ritholtz said:
Email me the comment and I will cut & paste it in
Reply: Sorry, but it went to electrons after I left the page. The spam notice said it went to the owner of the blog for review. Maybe you have it in a junk file somewhere.
Posted by: cinefoz | Dec 20, 2007 10:26:38 AM
lawsuits wil be set aside: none of the banks can afford to go thru the discovery and interrogatory process
Posted by: Hal | Dec 20, 2007 10:38:21 AM
Perhaps the legal system can accomplish what the financial regulators are incapable.
I think that should read what the financial regulators refuse to
Posted by: DavidB | Dec 20, 2007 11:41:12 AM
Greetings,
I dont know about lawsuits being " set aside ", as that has a certain meaning in the legal world, but they most likely will be settled privately between the parties prior to any trial. BTW; when a suit is settled pre-trial
( of which approx. 96 % of civil suits are ), the discovery related information/documentation is virtually always not permitted to be disclosed publicly.
Thank You.
SpyBoy
Posted by: SpyBoy | Dec 20, 2007 1:17:34 PM
