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The End of Ethics and A Way Back: How To Fix A Fundamentally Broken Global Financial System by Jordan D. Mamorsky, Theodore Roosevelt Malloch

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Chapter 5

How Out-of-Control Pride Brought Down Bear Stearns

It was pride that changed angels into devils; it is humility that makes men as angels.

Saint Augustine

On July 17, 2007, Bear Stearns was in crisis. CEO Jimmy Cayne announced the firm was forced to close two of its most profitable hedge funds: the High-Grade Structured Credit Strategies Enhanced Leverage Fund (the Enhanced Fund) and the High-Grade Structured Credit Fund (the High Grade Fund). The two funds were awash with toxic mortgage-backed securities, including substantial amounts of subprime loans. The fund’s liquidity could not shoulder massive amount of institutional investor redemptions and margin calls. The SEC and Justice Department disclosed that they were investigating the fall of the funds, specifically the actions of two Bear fund managers, Ralph Cioffi and Matthew Tanin.

Industry analysts responded with dire outlooks. Brad Hintz, research analyst at Sanford Bernstein, wrote that the mortgage-backed security issue was “more than a Bear Stearns issue . . . it is an industry issue. How many other hedge funds are holding similar, illiquid, esoteric securities?”1 Bill Gross, CEO of PIMCO, predicted defaults on subprime loans would “grow and grow like a weed in your backyard tomato patch.”2 Due to the events, Bear Stearns stock was down 18 percent from its all-time high only five months earlier.

The investment bank was in need of tough, decisive action to reverse Bear’s stock plunge, encourage investor confidence, ...

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