Grasping Reality on TypePad, by Brad DeLong

47 up months in a row for any fund indicates either (a) they have a hell of a lot of alpha which they are not leveraging sufficiently to make the most money for themselves and their investors, or (b) they are being paid to take on a lot of large and correlated risks for which the bill has just not come due yet.

Patricia Hurtado and David Scheer of Bloomberg report:

Bloomberg: June 19 (Bloomberg) -- Former Bear Stearns Cos. hedge fund managers Ralph Cioffi and Matthew Tannin, arrested early this morning at their homes in New Jersey and Manhattan, were indicted for mail fraud and conspiracy to commit securities fraud, the first prosecution in a U.S. crackdown on subprime fraud. The two men were charged with misleading investors about the health of two Bear Stearns hedge funds whose collapse last year ignited the subprime mortgage crisis.... Federal prosecutors and regulators have been investigating possible fraud by banks and mortgage firms whose investments in subprime loans and securities plunged in value, causing losses that now total $396.6 billion....

The collapse of the hedge funds began a credit squeeze that led to lawsuits against Countrywide Financial Corp., American Home Mortgage Investment Corp., Citigroup Inc. and JPMorgan Chase & Co. After demands by clients and lenders for payment threatened Bear Stearns with bankruptcy, the 85-year-old firm agreed to sell itself to New York-based JPMorgan in March....

Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer. The hedge funds invested almost all of their assets in subprime-mortgage-related securities. Their investment bets failed last June when prices for collateralized-debt obligations, called CDOs, linked to loans plummeted amid rising late payments by borrowers with poor credit histories or heavy debt. U.S. prosecutors are focusing on an e-mail allegedly sent by the two suggesting that their funds were headed for trouble, four days before they told investors they were comfortable with their holdings, the Wall Street Journal reported today, citing people familiar with the situation.

Tannin allegedly e-mailed Cioffi saying he was afraid that the market for bond securities they had invested in was ``toast,'' and suggested shutting the funds, the Journal said. The two have told colleagues that they quickly were convinced that Tannin's concerns were misplaced....

Investors in the two Bear funds, which filed for bankruptcy in July, lost $1.6 billion. Barclay's Bank PLC said in a lawsuit that the funds once held a total of about $20 billion in assets. Cioffi allegedly pulled the $2 million of his own money, one third of the amount he'd invested in one of the funds, before March 2007, so he could commit it to another fund he set up, said a person familiar with the investigation. The withdrawal occurred before the funds ran into trouble, the person said.... The two Bear Stearns funds... were the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. and the Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd....

Barclays PLC... claimed... that it was misled about the health of Bear's so-called enhanced fund. Bear Stearns, Cioffi and Tannin are named as defendants in London-based Barclays suit.... The suit cites a February e-mail to Barclays in which Tannin allegedly said the fund is having our best month ever'' and that ourhedges are working beautifully.'' By then, the fund was having severe'' liquidity problems, said Barclays, which said it losthundreds of millions of dollars,'' as a result. Internally, Cioffi and Tannin discussed the ``wipe out'' of the fund, according to the complaint...