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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

of considering making significant downward adjustments to the marks on their
mortgage portfolio [especially] CDOs and CDO squared. This will potentially have a
big [profit and loss] impact on us, but also to our clients due to the marks and associ-
ated margin calls on repos, derivatives, and other products. We need to survey our
clients and take a shot at determining the most vulnerable clients, knock on implica-
tions, etc. This is getting lots of th floor attention right now.” 
Broderick was right about the impact of Goldman’s marks on clients and counter-
parties. The first significant dispute about these marks began in May : it con-
cerned the two high-flying, mortgage-focused hedge funds run by Bear Stearns Asset
Management (BSAM).

BEAR STEARNS’S HEDGE FUNDS:
“LOOKS PRETTY DAMN UGLY”
In , Ralph Cioffi and Matthew Tannin, who had structured CDOs at Bear
Stearns, were busy managing BSAM’s High-Grade Structured Credit Strategies Fund.
When they added the higher-leveraged, higher-risk Enhanced Fund in  they be-
came even busier.
By April , internal BSAM risk exposure reports showed about  of the
High-Grade fund’s collateral to be subprime mortgage–backed CDOs, assets that

were beginning to lose market value. In a diary kept in his personal email account
because he “didn’t want to use [his] work email anymore,” Tannin recounted that in
 “a wave of fear set over [him]” when he realized that the Enhanced Fund “was
going to subject investors to ‘blow up risk’” and “we could not run the leverage as
high as I had thought we could.” 
This “blow up risk,” coupled with bad timing, proved fatal for the Enhanced Fund.
Shortly after the fund opened, the ABX BBB- index started to falter, falling  in the
last three months of ; then another  in January and  in February. The
market’s confidence fell with the ABX. Investors began to bail out of both Enhanced
and High-Grade. Cioffi and Tannin stepped up their marketing. On March , ,
Tannin said in an email to investors, “we see an opportunity here—not crazy oppor-
tunity—but prudent opportunity—I am putting in additional capital—I think you
should as well.” On a March  conference call, Tannin and Cioffi assured investors

that both funds “have plenty of liquidity,” and they continued to use the investment

of their own money as evidence of their confidence. Tannin even said he was in-
creasing his personal investment, although, according to the SEC, he never did. 
Despite their avowals of confidence, Cioffi and Tannin were in full red-alert
mode. In April, Cioffi redeemed  million of his own . million investment in En-

hanced Leverage and transferred the funds to a third hedge fund he managed. They
tried to sell the toxic CDO securities held by the hedge funds. They had little success
selling them directly on the market, but there was another way.

In late May, BSAM put together a CDO-squared deal that would take  billion of
CDO assets off the hedge funds’ books. The senior-most tranches, worth . billion,