Financial news and housing Web sites are aggressively covering the arrest Thursday of Ralph Cioffi and Matthew Tannin. They ran two hedge funds for Bear Stearns that collapsed last year. (Many media reports characterized that collapse as precipitating the subprime meltdown and related credit contraction.)

They are both charged with fraud (misleading investors). Cioffi is also charged with insider trading — he allegedly took money out of one of the funds when he knew it was in trouble but before telling investors the extent of its liquidity issues.

The funds imploded in June 2007, costing investors $1.6 billion.

Did the collapse ignite the credit crisis, or was it Angelo Mozilo’s description of the housing market as the worst since the Great Depression? Or was it the bankruptcy of New Century Financial in Irvine, once the largest publicly traded subprime lender?

The Wall Street Journal online quoted Susan Brune, a lawyer for Tannin, as saying he is innocent and he looks forward “to the day they will be vindicated” in court.

Brune added, “He is being made a scapegoat for a widespread market crisis.”

The Journal also quoted Edward J.M. Little, Cioffi’s lawyer, as saying, “We are shocked and disappointed” the government decided to bring charges against the men. Little told the Journal their was a widespread credit collapse and that Bear’s funds lost money like many others. That “doesn’t mean (Cioffi) did anything wrong. Indeed, Mr. Cioffi had no motive to do anything wrong.”

National Mortgage News has an interesting item on the case (Hmm. Is that me in there?):

According to a new book, “Chain of Blame, How Wall Street Created the Mortgage and Credit Crisis,” Mr. Cioffi’s bets on subprime began to lose money in 2006. Mr. Cioffi launched the hedge funds with the blessing of Bear’s executive management team, including James Cayne and Warren Spector. The book reports that Mr. Cioffi personally invested in the hedge funds, as did other Bear executives. It says that, “In April 2006 Tannin shot off an e-mail to two Barclays executives, Ram Rao and Edward Ware, assuring them that things were well: ‘I don’t want to sound like a broken record but the value of this transaction lies in the transparency of credit information on high underlying credit quality assets’.” … [Editor's note: "Chain of Blame" was written by Paul Muolo, an editor at National Mortgage News, and Mathew Padilla, a reporter for The Orange County Register.]

You can read the indictment here: bear-stearns-indictment.pdf

Related News:

• Charges at Bear Stearns linked to subprime debacle
• Bear Stearns halts lending in Irvine, cuts 150 jobs
• ECC Capital sues Bear Stearns for $20 million over loans

The Wall Street Journal online reports that Bear Stearns agreed to be acquired by J.P. Morgan Chase & Co. for just $2 per share, or roughly $236 million.

That’s an incredible end to a leading Wall Street broker and a company that still has loan servicing operations in Irvine.

The Journal writes:

Bear Stearns had a stock-market value of about $3.5 billion as of Friday — and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm — at any price — to a big bank willing to assume its trading obligations or file for bankruptcy.

The Journal also reports the deal is being facilitated by the Federal Reserve which is providing as much as $30 billion in financing for Bear’s “less-liquid” assets, including mortgage-backed securities.

If you’re a paid subscriber to the Journal’s Web site, I strongly recommend the story, just CLICK HERE.

A falling stock market today is being blamed on Bear Stearns, which said that its cash position had “significantly deteriorated” in the past 24 hours and that the New York Federal Reserve and JPMorgan Chase & Co. are extending it a lifeline, according to numerous press reports including Bloomberg.

First let’s recall that Bear was a big player in subprime, including in Orange County. In December it said it stopped making subprime loans in Irvine but kept servicing loans there. That followed news that two of its hedge funds collapsed after borrowing money to invest in subprime-related bonds.

Here’s more from Bloomberg:

The New York Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today.

The regulator stepped in to prevent the collapse of the second-biggest underwriter of U.S. mortgage bonds and forestall a potential market panic as losses by banks and brokers reached $195 billion and stocks plunged for a third day this week. JPMorgan, which has suffered fewer losses than rivals during the credit crisis, may end up owning all or part of Bear Stearns, analysts speculated.

“I don’t think they can afford to let Bear go,” said Charles Geisst, the author of “100 Years on Wall Street,” referring to the New York Fed bailout. “At this particular moment in time, it would be a devastating blow to the markets.”

Bear’s stock is down 36% as I write this to about $36.50, but trading is highly volatile. The Dow is down 172 points, or 1.42%.

To read the full story CLICK HERE.

Bear Stearns, which recently halted loan making in Irvine, reported today a quarterly loss of $854 million, much bigger than analysts expected, reports Reuters. Here’s more…

It was the first loss in the company’s history, and the bank decided top executives would not receive bonuses.

Bear Stearns said it took a $1.9 billion write-down in the quarter ended November 30, reflecting the reduced value of subprime mortgage-related securities. That was bigger than the $1.2 billion the company estimated in early November.

Hit by the collapse of two hedge funds last summer and poor financial results, Bear Stearns said there would be no bonuses for those at the top. Chairman and Chief Executive Jimmy Cayne, the subject of unflattering articles about his time playing golf and bridge, called the results “unacceptable.”

To read the full story CLICK HERE.

And CLICK HERE for more on its 150 layoffs in Irvine, or just scroll down a few blog posts.

Bear Stearns is closing its loan making operations in Irvine, letting the remaining 150 workers go today, the company said.

Today’s layoffs are in addition to 650 nationwide job cuts announced at the end of November, the company said. Those cuts included an undisclosed number in Irvine. CLICK HERE to read more on that news.

However, Bear continues to expand operations of loan servicer EMC Mortgage in Irvine. The company opened an EMC office about nine months ago and has hired 300 workers. It continues to hire about 40 a month, mostly in loss mitigation, the company said.

It also will continue to make loans from its office in Scottsdale, Ariz.

And back in October, the company said it was merging Irvine-based Encore Credit with Bear Stearns Residential Mortgage, eliminating 310 jobs. Read more by CLICKING HERE.

Today’s news marks an end to local loan making by folks of Encore Credit, which was founded by Steven Holder and Shabi Asghar. Holder, who also co-founded New Century Financial, stayed with ECC, Encore’s parent, when Encore was sold to Bear in a complicated deal that had ECC paying more to Bear than it paid to ECC. Asghar joined Bear at the time of the sale. He was not immediately available for comment. ECC later sued Bear over the deal. Read more on the suit by CLICKING HERE.

Here’s a statement from Bear on today’s job cuts:

“As we indicated at the end of October, we are continuing to rationalize our business, monitor staffing needs and align our infrastructure with current market conditions. We are deploying resources in areas where growth opportunities are greatest and to reduce cost in areas that can no longer justify the current level of infrastructure. We continue to hire strategically across the firm, including areas such as loss mitigation to further grow our business both domestically and internationally.”

And to see a list of mortgage casualties CLICK HERE.