The Other Offshore Disaster

By WILLIAM D. COHAN
NYT

Canaries are small. Coal mines are big. Finding one in the other is never easy.

There is little debate these days, though, that the implosion in the summer of 2007 of two Bear Stearns hedge funds — run by two bankers, Ralph Cioffi and Matthew Tannin — was the first sign that significant trouble was brewing in the market for subprime-mortgage-related securities and for the Wall Street firms that manufactured and sold them. Cioffi and Tannin invested heavily in these complex and squirrelly securities — despite suggesting repeatedly to investors they had not — and for 40 months rewarded those investors with positive returns. But these securities were losing value rapidly by 2007 as homeowners nationwide began defaulting on the underlying mortgages — many of which should never have been issued in the first place — that made up the securities that the fund bought.

In February 2007, when one of the Bear Stearns hedge funds experienced a monthly loss for the first time, the good times looked like they were ending. From there, it was downhill very quickly. By July, the funds were shuttered and investors lost around $1.6 billion. The collapse of the hedge funds sent the message worldwide that hundreds of billions of mortgage-related securities were equally doomed. The rest of the story is well known by now.

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