Investors who put their money in two Bear Stearns hedge funds last spring are finding themselves uncertain, to say the least, about the value of these deteriorating funds. Former Bear Stearns’ hedge fund managers, Ralph R. Cioffi and Matthew M. Tannin, were charged this week with nine counts of securities, mail, and wire fraud.
This case highlights the problems Wall Street is facing regarding how to value investments that have suffered from the subprime mortgage crisis. For example, Cioffi substantially undervalued one of the hedge funds, saying its loss was 6.5% in April, while colleagues at Bear Stearns said the loss was three times higher than what Cioffi valued.
On a worldwide scale, banks and bank executives are writing down the value of their assets by as much as $380 billion. This year, Credit Suisse, Merrill Lynch, Morgan Stanley, and Lehman have had employees caught for overpricing the value of various assets, costing the firms and investors millions of dollars.
Although executives are increasing their supervision over employees to prevent future dishonesty or over-optimism about valuations, the pricing process has become the bigger controversy. For example, rather than using only market prices, the chief financial officer of Citigroup said the company would use collateralized debt obligations as another determinant in pricing. Other investors have complained that Wachovia and Washington Mutual are using an over-optimistic housing index when modeling values.
Write-downs occur usually when banks are selling in the market; although, banks such as Bank of America have refused to mark down the C.D.O.’s of a city in the Southeast because they did not want to be forced to mark down their other holdings, or cause a domino effect.
Some steps have been suggested to remedy these problems, like expanding the evaluation period of traders to possibly prevent future valuation misconduct. But the question for many investors remains: what are my investments worth?