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

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What's been said:

Discussions found on the web:
  1. blam commented on Dec 20

    Perhaps the legal system can accomplish what the financial regulators are incapable.

  2. Tom C commented on Dec 20

    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.

  3. David Fuller commented on Dec 20

    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.

  4. Winston Munn commented on Dec 20

    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….

  5. Philippe commented on Dec 20

    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”?

  6. cinefoz commented on Dec 20

    This spam blocker crap really stinks. I wrote a great post that couldn’t get past the idiotic blocker.

  7. A. Melmotte commented on Dec 20

    Bye bye, Jimmy Cayne. I guess you’ll have to smoke the cheap stuff now.

  8. Barry Ritholtz commented on Dec 20

    Email me the comment and I will cut & paste it in

  9. cinefoz commented on Dec 20

    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.

  10. Hal commented on Dec 20

    lawsuits wil be set aside: none of the banks can afford to go thru the discovery and interrogatory process

  11. DavidB commented on Dec 20

    Perhaps the legal system can accomplish what the financial regulators are incapable.

    I think that should read what the financial regulators refuse to

  12. SpyBoy commented on Dec 20

    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

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