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Trading securities and Ferraris

By William D. Cohan
March 3, 2009: 6:51 AM ET

Cioffi lived very well. In 2000, he and his wife, Phyllis, purchased a home for $815,000 in Tenafly, New Jersey, that in 2007 was assessed for $2.6 million. He owned a home in Naples, Florida, valued at $933,000, and a home in Ludlow, Vermont, valued at $2.2 million. He owned an apartment at the Stanhope, on Fifth Avenue in Manhattan, and a $10.7 million, 6,500-square-foot home in Southampton, Long Island, which had six bedrooms, seven baths, a pool, a tennis court, and a separate guesthouse on two and a half acres.

He was the executive producer of the 2006 independent film "Just Like My Son," starring Rosie Perez. But Cioffi's real passion was for Ferraris. At one point, he owned two of them: a $250,000 F430 convertible Spider and a $300,000 front-engine V-12 Superamerica. One day, his Ferrari dealer in Spring Valley, New York - in Rockland County - called him up and told him he had one low-mileage Ferrari Enzo for sale. Was Cioffi interested in a trade of his two Ferraris plus some cash for the Enzo? Only 399 of the Enzos were built from 2002 to 2004, and they originally cost $650,000 each. Nowadays, if you can find one, it will cost around $1.2 million. After getting the call from the dealer, Cioffi called up Doug Sharon, a longtime Bear broker and car aficionado who ran the firm's Boston office.

"Do you think I should do the trade?" Cioffi asked Sharon. "The dealer wants me to do this trade."

"Ralph, as far as I'm concerned, it's a no-brainer," Sharon told him. "You gotta do it. Your two cars and some cash for an Enzo? Enzos are hard to find."

"It's not exactly the kind of car I'm gonna drive down to the golf club with," Cioffi responded. For Sharon, the conversation with Cioffi about the Enzo "was probably the beginning of the end, when Ralph's thinking about buying million-dollar Ferraris."

Cioffi pulls his money out

By the time Bear Stearns released its 2006 annual report in mid February 2007, Cioffi had more on his mind than trading Ferraris. Bear Stearns had a banner 2006: $9.2 billion in revenue, and it had made $2.05 billion of net income, the first time that milestone had been reached. Profit had increased 40% from 2005. Standard & Poor's upgraded Bear Stearns to A+ with a stable outlook. Unbeknownst to shareholders, though, problems in the housing market were starting to effect Cioffi's funds' performance.

February 2007 had been a very difficult month for Cioffi's two hedge funds. The High-Grade Fund had reported a gross return of 1.5% - respectable, to be sure - but the Enhanced Leverage Fund had lost 0.08%, the first time either fund had lost money since Cioffi started in 2003. But that was not the message that Tannin sent to Barclays about the February performance of the Enhanced Leverage Fund. "You will be happy to know that we are having our best month ever this February," he e-mailed the bank on February 19.

On March 1, Cioffi told an economist who worked for the hedge funds, "Don't talk about [the funds' February results] to anyone or I'll shoot you." He also went on to say that he thought the funds might have their first down month ever and that he was disappointed by that fact. The next day, Cioffi met informally with Tannin and two other members of the funds' management team and spoke "about the extremely difficult month" February had been for the funds, though he claimed that the funds "had averted disaster." With his team around him, Cioffi "led a vodka toast to celebrate surviving the month," according to the June 2008 federal grand jury indictment of both Cioffi and Tannin. Both Cioffi and Tannin declined to comment for this account.

Cioffi was becoming increasingly concerned about the funds' exposure to the subprime market, even though the monthly statements sent to investors stated that only 6% of the funds' money was invested in subprime. Cioffi was concerned because he knew that actually the funds had closer to 60% of their money invested in subprime mortgages.

March was not going to be a good month, either. On March 15, Cioffi wrote a colleague by e-mail, "I'm fearful of these markets. Matt [Tannin] said it's either a meltdown or the greatest buying opportunity ever. I'm leaning more towards the former."

On the very same day, Tannin portrayed the funds in a different light, telling an investor, "We are seeing opportunities now and are excited about what is possible. I am adding capital to the Fund. If you guys are in a position to do the same I think this is a good opportunity," and he added that "it was a very bad time to redeem." Tannin never did invest more of his own money in the funds.

Finally on March 23, Cioffi initiated the process of removing $2 million of the $6 million that he personally had invested in the Enhanced Leverage Fund. He moved the money to another Bear hedge fund, Structured Risk Partners, of which Cioffi had oversight responsibility beginning April 1 and which had still been performing well. For appearance purposes, hedge fund managers were expected to invest in the hedge funds they managed, and Cioffi's defenders suggest that this alone was the reason he moved the cash. The High-Grade Fund lost 3.71% for the month. The Enhanced Leverage Fund lost 5.41%.

Next: "The subprime market is toast"

Excerpted from House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan, to be published in March, 2009 by Doubleday Books, a division of Random House, Inc. Copyright 2009 by William D. Cohan. To top of page

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