With Bear Stearns’ Ralph Cioffi and Matthew Tannin in the news, Janet Tavakoli passes along an excerpt from her new book we thought might be interesting to Audit readers—not only because it relates to Bear hedge funds’ doings, but also because it shows a good business journalist at work.

In this case it’s Matthew Goldstein, then of BusinessWeek and now of Reuters, who’s seen digging persistently into things people didn’t want him to be digging into—namely why Bear Stearns was trying to offload the toxic assets in the Cioffi funds into a public offering of stock (something else nobody reminded us of in this morning’s stories), which he wrote “appears to be an unprecedented attempt by a Wall Street house to dump its mortgage bets.”

Note that Goldstein is snooping around on this in May of 2007, well before the funds blew up and two weeks after Cioffi said all was well on a conference call. It’s also worth noting that he was well ahead of just about everyone on eyeballing Bear and the CDO market, writing “Bear Stearns Shakes the CDO Honey Pot” in August 2005 for TheStreet.com (“The estimated $700 billion CDO market could be a fertile one for Spitzer. It’s developed almost overnight with little outside oversight… Critics fear the explosive growth in CDOs could spell trouble for Wall Street, since many of the institutional investors buying them are not fully aware of what they’re biting into.”).

This Tavakoli excerpt also shows what sources go through when they sticks their necks out on the record, and, I’d bet, why you find so few like Tavakoli who are consistently willing to do so. It also, in showing how BusinessWeek changed a headline after Bear Stearns complained, shows the pushback the press gets when upsets the apple cart a bit:

On May 9, 2007, Matt Goldstein called and asked me if I had a chance to look at the registration statement for a new initial public stock offering (IPO) called Everquest Financial, Ltd (Everquest). Everquest is a private company formed in September 2006, and the registration statement was a required filing in preparation for its going public. The shares were held by private equity investors, but the IPO would make shares available to the general public.

Everquest was jointly managed by Bear Stearns Asset Management Inc, and Stone Tower Debt Advisors LLC, an affiliate of Stone Tower Capital LLC. I was curious, but I was swamped. I told him no, I was very busy and had not even had a chance to glance at it. He called again asking if I had seen it, and again I said no, “Go away.” The next morning I ignored Matt’s voice mails, but finally took his call the afternoon of Thursday May 10 telling him that I still had not looked at the registration statement and had no plans to do so that day. My first call on the morning of Friday, May 11, 2007, was again from Matt Goldstein. He thought the IPO might be important.

I went to the SEC’s website, and as I scanned the document I thought to myself: Has Bear Stearns Asset Management completely lost its mind? There is a difference between being clever and being intelligent. As I printed out the document to read it more thoroughly, I put aside the rest of my work and said: “Matt, you are right; this is important.” I was surprised to read that funds managed by BSAM invested in the unrated first loss risk (equity) of CDOs. In my view, the underlying assets were neither suitable nor appropriate investments for the retail market. I did not have time for a thorough review, so I picked a CDO investment underwritten by Citigroup in March 2007 bearing in mind that if the Everquest IPO came to market, some of the proceeds would pay down Citigroup’s $200 million credit line. Everquest held the “first loss” risk, usually the riskiest of all of the CDO tranches (unless you do a “constellation” type deal with CDO hawala), and it was obvious to me that even the investors in the supposedly safe AAA tranches were in trouble. Time proved my concerns warranted, since the CDO triggered an event of default in February 2008, at which time Standard & Poor’s downgraded even the original safest AAA tranche to junk.

The equity is the investment with the most leverage, the highest nominal return, and is the most difficult to accurately price. The CDO equity investments were from CDOs underwritten by UBS, Citigroup, Merrill, and other investment banks.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.