Prosecuting the Wrong People


When I heard that federal authorities had arrested the people that the government tells us were responsible for much of the subprime meltdown, I anxiously awaited the perp walk that would befall some notorious characters. Would we see Ben Bernanke wearing handcuffs, still dressed in his cams after having thrown even more money from the helicopter?

Would the person shuffling before the media be Alan Greenspan, the architect of 18 years of legal counterfeiting? Had the federal authorities finally come to their senses and arrested the people most responsible for the chicanery and outright theft of the savings and investments of millions of people?

Alas, no. Instead, I was to find that the Great Villains of Wall Street are Ralph Cioffi and Matthew Tannin, two former Bear Stearns hedge fund managers who apparently did not jump out of their building when it became obvious a year ago that perhaps these mortgage securities flooding the market were worthless.

Federal prosecutors, following in the steps of Rudy Giuliani, who made his career out of prosecuting Michael Milken for the "crime" of financing much of the high-technology and telecommunications industry through "junk bonds," have charged Cioffi and Tannin with the usual "securities fraud" and "conspiracy" charges, as well as charging Cioffi with "insider trading," which is based upon a reading of the law that no one really claims to understand. Moreover, we can be sure that this is going to be the beginning of a busy prosecutorial season in which government officials will attempt to criminalize the actions of people who, in the end, were far less responsible for the meltdown than officials from the Federal Reserve System and the U.S. Department of the Treasury.

Indeed, the latest criminal charges are based on the fact that Cioffi and Tannin privately had doubts about the quality and future of their hedge fund, but did not tell investors about their doubts. Lest anyone believe that such a state of affairs is "criminal," perhaps we should then wonder why Greenspan and Bernanke are let off the hook. After all, both men — and especially Bernanke — have made optimistic statements before Congress, only to be proven wrong.

For example, let us look at what Bernanke told Congress last March:

Core inflation, which is a better measure of the underlying inflation trend than overall inflation, seems likely to moderate gradually over time. Despite recent increases in the price of crude oil, energy prices are below last year’s peak. If energy prices remain near current levels, greater stability in the costs of producing non-energy goods and services will reduce pressure on core inflation over time. Of course, the prices of oil and other commodities are very difficult to predict, and they remain a source of considerable uncertainty in the inflation outlook.

Actually, the latest figures show that inflation is increasing at double-digit rates and gasoline prices are going up and up in large part because Bernanke’s Fed continues to destroy the dollar. As for other statements, let us look at how Bernanke viewed the recent "stimulus" in which the government sent checks to our homes:

WASHINGTON — United for urgent action, the White House and Congress raced toward emergency steps Thursday to rescue the national economy from a possible recession, including tax rebates of $300 or more for many Americans.

Federal Reserve Chairman Ben Bernanke endorsed the idea of putting money into the hands of those who would spend it quickly and boost the flagging economy.

Now, I have no problem with someone sending me money in the mail, except that in this case, the government borrowed even more money, which means that I did not receive "free" money, but rather saw my family’s real debt increased by a couple thousand dollars. This was no "stimulus;" it was a fraud, but Bernanke made public statements that he knew were not true.

For that matter, why stop at finances? It seems that a number of people in the Midwest listened to FEMA authorities, who insisted in 1999 that the levees holding back the Mississippi River were in great shape:

Juli Parks didn’t worry when water began creeping up the levee that shields this town of about 750 from the Mississippi River — not even when volunteers began piling on sandbags.

After all, FEMA and local officials had assured townspeople in 1999 that the levee was sturdy enough to withstand a historic flood. In fact, some relieved homeowners dropped their flood insurance, and others applied for permits to build new houses and businesses.

Then on Tuesday, the worst happened: The levee burst and Gulfport was submerged in 10 feet of water. Only 28 property owners were insured against the damage.

“They all told us, ‘The levees are good. You can go ahead and build,'” said Parks, who did not buy flood coverage because her bank no longer required it. “We had so much confidence in those levees.”

Around the country, thousands of residents who relied on the assurances of the Federal Emergency Management Agency may unknowingly face similar risks.

“People put all their hopes in those levees, and when they do fail, the damage is catastrophic,” said Paul Osman, the National Flood Insurance Program coordinator for Illinois. “New Orleans is the epitome; a lot of those people didn’t even realize they were in a floodplain until the water was up to their roofs.”

One cannot help but wonder why these officials are not wearing handcuffs and orange jumpsuits right now, as their false statements lured people to risk millions of dollars of property. Yet, like all other government employees, the FEMA officials who told politically-motivated falsehoods won’t face a minute of legal trouble.

In the case of Cioffi and Tannin, they could have called me or anyone else associated with the Mises Institute to find a pretty accurate assessment. In fact, I wrote this piece last year right after having a conversation with an economist from the Federal Reserve who assured me that the Fed had been following a most wise and prudent set of policies. I wrote:

It is hard to know just how far the current meltdown in the stock market and housing market will go, but we can say unequivocally that it will not be business as usual, or business that has been usual for the last many years. We can forget about a 14,000-point Dow for a long while, as economic law — something that politicians have assured us exists only in the minds of “kooks” — reasserts itself, and the results are not pretty.

(One thinks that perhaps hedge fund members should be reading the pages of and if they wish to gain a sense of what is happening in the economy, as opposed to listening to the falsehoods told by Bernanke and his merry tricksters.)

I cannot say that Cioffi and Tannin "misled" investors so much as investors were hoping that somewhere, somehow, the Great White Father in Washington would bail out everyone. Perhaps they were hoping against hope, or perhaps they were hoping that Countrywide would give them the same treatment it had given prominent lawmakers and cabinet officials, or perhaps that the government itself would bail out the lenders, as is what seems to be happening.

The larger point is that Cioffi and Tannin are scapegoats, pure and simple. As the great criminal defense attorney Harvey Silverglate has told me more than once, federal prosecutors are able to take any action by anyone and turn it into a federal crime.

I wish I had better news for these two men. Federal prosecutors are a vicious lot and they are going to be able to play on the anger and resentments of people who have lost money, just as federal prosecutors were able to destroy the late Ken Lay and others who worked for Enron. Someone has to pay, it seems, and who better to destroy than hedge fund managers from Wall Street, as opposed to the monetary villains who inhabit the various Fed offices around the country.

Indeed, it seems that the real crime of Cioffi and Tannin is that their hedge fund went bust because they were following the government’s line. Since the government always is blameless no matter how great the disasters it creates, someone has to pay.

As more indictments come down the pipe, don’t expect the media to ask the hard questions. One does not forget that the Wall Street Journal and the New York Times were the big cheerleaders behind Rudy Giuliani’s predations on Wall Street two decades ago, and that the Times played the role of Official Shill for Eliot Spitzer when he was shaking down Wall Street firms as New York’s attorney general.

No doubt, the press will fall in line as it declares private fund managers to be the true Enemies of the People. In the meantime, the counterfeiters at the Fed will churn out more false predictions, lead people into a false sense of security, and be praised lavishly by the political classes.


In this article, I mistakenly said that K.C. Johnson and Stuart Taylor had included the Darryl Hunt case in their book in response to the charge that Robert Perkinson had made against them. Indeed, there was no mention of the Hunt case in that book.

However, I must add that this omission was not due to Perkinson’s charge that they had left out the Hunt case because they did not wish to disturb their own "narrative," but rather because the chapter (Chapter 23) of the book was dealing specifically with cases of prosecutorial misconduct. Furthermore, the authors highlighted cases involving both blacks and white defendants who were convicted wrongfully because of misconduct by North Carolina prosecutors.

Darryl Hunt ultimately was exonerated because of DNA testing, something that was not available when he first was convicted in the mid-1980s. It is ironic that many of Nifong’s supporters were willing to accept the results that freed Hunt but were not willing to accept the fact that no DNA by any lacrosse player on Crystal Mangum meant anything at all, except to mean the players were guilty. (One North Carolina Central University student declared that the players "left nothing behind.")