The search for a sub-prime villain

By John Mervin
BBC News, New York

A jury took about seven hours to clear Matthew Tannin (l) and Ralph Cioffi

The acquittal of Ralph Cioffi and Matthew Tannin, on all counts of fraud relating to the collapse of their hedge funds, doesn't just dash the hopes of prosecution lawyers.

It's also a bit of a blow to anyone who hoped the sub-prime disaster and its aftermath would quickly throw up some genuine crooks, criminals caught bang to rights and sent to prison.

Because that would fit a pattern, an almost comforting routine of the US financial cycle - first the boom, then the bust, then the villains get caught.

Looking for the 'bad guys'

Remember the last generation of them?

The tech boom of the 1990s saw a lot of money poured into telecom firms that would build the information superhighway - and dotcom outfits that would create all sorts of wonderful services on it.

Former Enron chief Jeffrey Skilling was convicted of fraud in 2006

That all ended rather messily, with huge losses for millions, but also with a strong cast of "bad guys" for people to blame.

Bad guys such as Bernie Ebbers, the chief executive of WorldCom who was once one of the brightest lights of the shiny 1990s telecom sector, currently serving a 25-year prison sentence for fraud.

Or Enron boss Jeffrey Skilling, who oversaw another of the tech era's spectacular bankruptcies and was also thrown in prison for fraud.

Or Henry Blodget, the ace internet analyst whose recommendations led many investors to inflate the dotcom bubble.

He was charged with securities fraud, but reached an out-of-court settlement without admitting or denying the allegations. However, he is banned for life from working on Wall Street.

Before them, stretching all the way back to the Great Depression and beyond, are many cycles of bubble and collapse, and many generations of villains.

Seeing justice

As well as punishing wrongdoers, such rulings evidently do something to salve the public anxiety arising from financial crisis, from seeing the financial system rocked and the economy imperilled.

Seeing justice done certainly doesn't reverse anyone's losses,. But maybe it persuades people that not just the legal, but also the financial system works.

Ex-WorldCom chief Bernie Ebbers is currently serving a 25-year sentence.

If a ridiculous boom and painful bust are the result of criminal or unethical activity, then faith in the system itself can hold.

Well, just as the scale of the recession which has followed the sub-prime collapse is largely without precedent, so it may be different in this respect too.

Ralph Cioffi and Matthew Tannin were never quite going to be the high-profile bad guys a la Bernie Ebbers.

For a start, they were never important enough. They didn't create the sub-prime mortgage market. They just lost eye-watering amounts of other people's money in it.

But as managers of a hedge fund owned by Bear Stearns, the first of the big US finance houses blown to bits by the sub-prime storm, they were reasonably well placed to be early, formally identified villains of the whole fiasco.

If the financial cycle was to repeat itself, bigger bad guys would have followed, but Mr Cioffi and Mr Tannin would be a good start.

Except that the prosecution could not make its case stick.

'Record breaking'

Actually, that's understating it. The attempt to cast Mr Cioffi and Mr Tannin as criminals was rejected by a jury with astonishing speed.

So far no "bona-fide" villains have been found for the sub-prime crisis

Lawyers will tell you that in cases involving so called white-collar crime, a jury usually takes at least four or five days just to sort out all the evidence it has heard.

Fraud cases such as that of Mr Cioffi and Mr Tannin can be mind-bogglingly complex - and the world of hedge funds and securitised mortgages is not, perhaps, easily comprehensible to the average juror.

Yet this jury, having been sent out on Monday, trooped back on Tuesday and cleared the men of all nine charges.

One eminent law professor calls that "record-breaking".

The problem, very simply, was that while prosecutors had no problem demonstrating that Mr Cioffi and Mr Tannin lost a lot of money, the jury was not in the least bit persuaded that this was fraud, as opposed to simple incompetence, or a delusional faith in the US housing market and economy.

It suggests that villains for the sub-prime crisis may be harder to come by than they were in the crises of earlier eras.

Fundamental re-think

A lot of people, more powerful than Mr Cioffi or Mr Tannin in their heydays, bear responsibility for much bigger losses in the housing and sub-prime markets.

No doubt some of them could still face charges and prosecutors may conduct those cases more successfully.

But so far, the sub-prime crisis and its punishing economic fallout are singularly lacking some bona-fide villains.

While that may deny people the satisfaction that comes from seeing bad guys carted off to the pokey, maybe it reflects the bigger, more fundamental nature of the latest crisis to beset US capitalism.

Maybe Mr Cioffi and Mr Tannin's jury actually decided that it wasn't just some high-fliers in finance who were responsible for inflating and then shattering the housing market, but millions of other people too.

Maybe Americans really think their financial system and economy need a fundamental rethink.