RENEE MONTAGNE, host:
The subprime mortgage crisis has shaken financial markets around the world. It's rattled the American housing market, and now it appears the first criminal charges against Wall Street executives are imminent. Two former managers at Bear Stearns are expected to be charged later today. Both were already arrested earlier this morning. Prosecutors say the men misled investors by painting a rosy picture of their funds' prospects while privately worrying about a downturn in the subprime mortgage market.
NPR's Dina Temple-Raston is covering this story, and she joins us from our New York bureau. Good morning.
DINA TEMPLE-RASTON: Good morning.
MONTAGNE: Tell us who these men are and what the charges against them might be.
TEMPLE-RASTON: Well, Ralph Cioffi and Matthew Tannin ran these two hedge funds for Bear Stearns and had a lot of exposure to mortgage-backed securities. Prosecutors are looking at emails the two men wrote, particularly in the spring of 2007. That's when Tannin expressed concern about the credit markets and how a downturn might affect investors in this fund he was running. Then a short time after Tannin expressed his reservations, he and Cioffi told investors that they were cautiously optimistic about being able to prevent the widespread losses in the portfolio. And that's where the problem is.
MONTAGNE: And how big is this, having them actually charged with criminal acts?
TEMPLE-RASTON: Well, there's been a steady drumbeat coming out the FBI for months about the subprime mortgage debacle and how they were going to hold people accountable. In January, they announced that they were investigating more than a dozen Wall Street firms on everything from suspicion of fraud to improper bundling of loans and even insider trading.
Now until now, there was just a lot of speculation about who they intended to go after. I think most people assumed they were going to go after mortgage lenders, you know, those guys who were putting fake information on mortgage applications or using straw buyers. But these indictments raise the ante.
Ralph Cioffi and Matthew Tannin were long-time Bear Stearns employees. They had good reputations. They had a lot of experience in the mortgage market. So suddenly having them brought up on charges has sent this shiver through Wall Street, and everyone's a little worried about who's going to be next.
MONTAGNE: Now Enron comes to mind in hearing about this, where executives were telling employees not to worry while they were dumping their own stocks. Were these two men selling their own stakes in the funds?
TEMPLE-RASTON: Well, the FBI is looking at one transaction in particular. Last February, apparently, Cioffi asked for permission from Bear Stearns compliance officials to move $2 million of the $6 million he had invested in this hedge fund into a separate account. And it's unclear whether investigators are alleging this meant Cioffi was liquidating his position in the fund while assuring investors that there was no need to worry, or whether it was something else all together. I mean, Cioffi's told prosecutors that he was just shoring up another hedge fund with his own money, and there was nothing nefarious in it.
MONTAGNE: And do you know what happens next?
TEMPLE-RASTON: Well, as you mentioned earlier, Cioffi and Tannin were both arrested this morning. Apparently, they were permitted to walk out of their separate residences, and then they were placed under arrest by the FBI. Basically, what's going to happen now is they're going to be processed at FBI headquarters and transferred to the courthouse. And you remember those perp walks from a couple of years ago when we had CEOs who were being accused of using corporate money for their own purposes, like Tyco's former CEO Dennis Kozlowski? They were doing perp walks. We're going to see the same sort of thing, I suspect, today. There'll be reporters there to capture their transfer from the FBI headquarters to the courthouse.
MONTAGNE: Thank you.
TEMPLE-RASTON: You're welcome.
MONTAGNE: NPR's Dina Temple-Raston, speaking to us from New York. Transcript provided by NPR, Copyright NPR.
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