Was Ralph Cioffi Singlehandedly Responsible for Everything Which Went Wrong of Late?

Ralph Cioffi must be feeling pretty beleaguered at the moment. A few months ago, he was just a hedge-fund manager whose bets went horribly wrong. Recently, he learned that he’s being investigated to see whether he committed outright fraud. And today, we learn that Barclays seems to be on the same page as the US Attorney:

As the High-Grade funds faltered, the Barclays complaint alleges, their desperate state was concealed from bank officials, whose calls and emails were dodged as they sought performance information. “It is now clear that the BSAM defendants have long known that the Enhanced Fund and its underlying assets were worth far less than their stated values in the early months of 2007,” asserts the complaint, referring to Messrs. Cioffi and Tannin, “and were at great risk for further losses.” (Emphasis added.)

The early months of 2007, of course, were exactly the period during which Cioffi removed $2 million of his own money from the imploding funds.

On top of that, BusinessWeek reports that the $2 million withdrawal isn’t the only thing being investigated. Also under the microscope are entities called Klios which were invented by Cioffi:

Now investigators are trying to determine whether Cioffi and his team crossed legal lines. The Klios provided the Bear hedge funds with a ready, in-house trading partner. Their financial reports, which were reviewed by BusinessWeek, show many months in which the Cioffi-managed Klios traded only with the Cioffi-managed Bear funds. For example, in April, 2006, one Klio CDO bought $114 million worth of securities from one of the Bear funds. Such trades, says Steven B. Caruso, an attorney who represents several Bear hedge fund investors, may be “indicative of an incestuous, self-serving relationship that appears to have been designed to establish a false marketplace.”

But wait, there’s more! Remember the fabled “liquidity puts” which brought Citigroup to its knees? It turns out that they, too, were a Cioffi invention.

The analysis shows Cioffi and his team developed a novel investment product to attract money-market funds–a new class of investor–to the mortgage market. Their innovation, a particularly aggressive form of collateralized debt obligation, or CDO, became the building blocks of the industry’s push to keep growing for longer than it otherwise would have. After the market turned, it became clear the Cioffi money machine contributed to much of the $10 billion-plus in writedowns that Citigroup (C) and Bank of America (BAC) revealed in November.

This actually reflects much more badly on Citi than it does on Cioffi. One can understand how the investors in Cioffi’s hedge funds were burned when those hedge funds collapsed. But the fact that Citi willingly signed on to Cioffi’s schemes – schemes which were ultimately structured for the benefit of Cioffi, not Citi – looks positively amateurish.

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