Federal prosecutors are preparing to indict two Bear Stearns executives who ran hedge funds there that collapsed last summer in one of the earliest signs of the unraveling of the financial industry, The Wall Street Journal scoops on A1. It’s a sign of a new phase in the story: the uncovering of crimes committed in the panic of billions of dollars of losses.

The two, Ralph Cioffi and Matthew Tannin, will likely be charged with securities fraud, the Journal says, for lying to their investors that their funds, which had large investments in subprime mortgages, were in good shape when they were privately telling co-workers how worried they were about them. Cioffi even removed $2 million of his own money from his fund after the subprime bubble had popped.

There has been no indication that broader charges are being contemplated against Bear Stearns, now part of J.P. Morgan Chase & Co., or its executives. But any indictments over the two hedge funds could set a chilling precedent for other companies and executives now under investigation for alleged criminal missteps related to the mortgage-market meltdown.

The Journal says Cioffi’s and Tannin’s lies, just weeks before their hedge funds collapsed, helped erode the firm’s credibility, the complete loss of which ultimately led to the disastrous run on the bank that ended in its embarrassing fire sale to JPMorgan Chase in March (As a side note, the Journal reports on C1 that a JPMorgan executive is being held as part of a fraud investigation at a bank in Dubai).

Our feeling is there will be much more news like this in the months and years ahead. The subprime collapse hit so quickly and with such magnitude that it’s extremely likely that shenanigans took place—and are still taking place—in the panic. Indeed, the paper notes that several other major companies already are being investigated for financial crimes, including UBS, Countrywide Financial, and the bankrupt American Home Mortgage Investment.

Sales talk at troubled AIG

Left off that ignominious Journal short list is American International Group, which the paper reported earlier this month is under investigation for underestimating for months the losses on its derivatives contracts known as credit-default swaps.

Yesterday, the insurance giant, which has been racked by tens of billions in write-downs in the last two quarters, forced out its CEO Martin Sullivan and replaced him with its chairman Robert Willumstad, who implied that he may sell off some of the company’s businesses. The Journal and the Financial Times put the news on their front pages, though the Journal oddly doesn’t mention its own scoop on the AIG investigation in its story—you’ve got to look in the info box for that. Surely, this is a germane piece of information that helped deliver the board’s foot to Sullivan’s behind (which will be worth up to $50 million more with his severance package).

The FT knows that and mentions it in its page-one story and posts another full story on the angle, adding important context for its readers.

With the US real estate market still reeling, AIG has little hope of quickly bouncing back from its financial troubles. Meanwhile, regulatory probes are likely to drag on, ratcheting up the pressure on AIG to get its governance and accounting in order.

But the Journal notes that the company is actually taking a big step backward in corporate governance by leaving Willumstad as chairman, too. It separated the CEO and chairman posts three years ago at the insistence of Eliot Spitzer, who’s clearly not now in a position to beef about the lapse.

A board member notes that a new chairman would be AIG’s fourth in as many years.

Casino magnate: Delay smoothed way for China contract

The Los Angeles Times reports that billionaire casino magnate Sheldon Adelson won a Chinese gambling contract in 2001 after getting then House Majority Whip (and Jack Abramoff crony) Tom DeLay’s assurances that a move to oppose China’s bid for the Olympics wouldn’t be allowed to come up, according to court testimony in a Las Vegas civil suit. DeLay was one of the fifty-two co-sponsors of the bill.

Adelson is a big-time GOP donor and had given about $700,000 to Republicans “over the 12-year span before he pulled DeLay out of a Fourth of July barbecue in 2001 with a cellphone call from Beijing.“ His company, Las Vegas Sands, bragged to the Chinese that it got the resolution killed. In return, the officials “went out of their way to rescue the Sands bid from near certain failure,” something that’s reaped billions of dollars in revenue for Adelson.

This interesting tidbit has been reported elsewhere, including the Las Vegas Review-Journal and the National Journal, but this could bring a little more (deserved) exposure to the story.

Meanwhile, the Countrywide “Friends of Angelo” scandal in Congress continued to unwind, as a Democratic senator from North Dakota said he will give more than $10,000 to charity because of a discount he got from the lender.

Write-downs wipe out half of Wall Street profit since ’04

The NYT reports on C1 that half of Wall Street’s reported profits from 2004 to the middle of last year have been erased by write-downs. It says seven of the biggest financial companies had $254 billion in earnings during that time but have since taken $107 billion in write-downs.

It says that number is sure to grow this week, as Wall Street earnings season kicks into high gear. And it notes, as have others, that the profit outlook for the firms is bleak—their days of raking in fees from securitizing junk mortgages are over and their goosing of returns with layered-on debt isn’t feasible anymore, especially under the eye of the Federal Reserve, which is directly lending them money for the first time since the Great Depression.

“They are going to have to build a new business model,” Richard X. Bove, a financial services analyst at Punk Ziegel, said of investment banks. “I do not believe those businesses have the ability to generate the kind of profit they did in recent years without all the leverage.”

If you can bet on one thing, your odds are about the same on the sun will rise in the east and Wall Street will figure out new ways to dress up a turd and sell it for huge profits. (See, for instance, the Journal’s C1 report on Wall Street hawking extreme-developing market investments to retail investors).

The Journal says on C1 that analysts expect profit at Goldman Sachs to be down 31 percent in the second quarter from a year ago. They predict a 59 percent drop at Morgan Stanley. The paper wins the Gee, Ya Think? Quote of the Day award for two rather obvious toss-offs:

“Business conditions appear to be among the worst in several years” (from one analyst)…

and

“When there’s not a lot of activity to generate revenue and you’re absorbing large losses, it can get awfully painful” (from another).

An FT analysis shows that investors who’ve come to the rescue of the U.S. financial industry with new capital have seen their positions eroded by $10 billion, something it says will make it harder and more costly to raise the billions more it surely needs. That represents a 15 percent loss on the total $65 billion investment.

A Journal’s C1 story says the markets are trading near estimates of their fair value, meaning a stock rally probably isn’t in the cards. Increasing inflation and continued negative earnings in the second half could further decrease the market’s value, though.

EU to regulate credit-ratings firms

The European Union is planning to regulate credit-ratings firms, something the Journal on C1 says “adds heft to similar efforts by U.S. officials.” The FT doesn’t mention the U.S. proposal. The Journal:

Among other measures, Mr. McCreevy wants to enforce so-called fire walls between operations of the ratings companies that raise fees from clients issuing bonds and operations that rate the bonds. He wants ratings companies to register in a way similar to that in the U.S.

Policy makers have criticized ratings companies because their ratings of structured products failed to reflect their true risks, particularly under stress. Critics say there is an inherent conflict of interest in the business: an issuer of debt pays the agencies to rate its product and sometimes, in the case of structured credit, to help design the product, too.

“Critics” might say that, but it’s just a fact. Maybe the Journal can just write it as thus without attribution from now on and attribute any opposing view to “fools and lackeys.”

Saudis bend on oil output

The Journal and FT follow the NYT’s weekend report that Saudi Arabia is planning to pump more oil to reduce prices and ease the heat from its trading partners like the U.S. The Journal says on A8 that the kingdom may sell its oil at a discount, as well, to get refiners to take it because it says “the market isn’t hankering for additional oil.”

The fear within Saudi Arabia is that sky-high prices will both rattle the world economy and spur efficiencies and new technologies that could undercut demand for oil in the future. Some other members of the Organization of Petroleum Exporting Countries share that concern, but only Saudi Arabia has played the role as a buffer against excess price jolts. The kingdom remains the only country with sizable excess capacity, though that has shrunk in recent years to slightly less than two million barrels a day.

Bloomberg says the 200,000 barrel boost (others have reported it will be up to 500,000 barrels) will lift global oil supplies by 0.2 percent. That oughta do it.

Russert wore many hats at NBC

The Times on its Business Day front looks at the huge hole the shocking death of Tim Russert leaves in NBC News’ operations.

Mr. Russert was not only the moderator of “Meet the Press,” television’s most successful political talk show, he was also the chief of NBC’s Washington bureau, responsible for the hiring of staff members and directing its operations. More significantly, he was NBC’s public face on politics, appearing regularly on the network’s full range of programs, including the “Today” show, NBC’s “Nightly News,” and on its cable news channel MSNBC.

How did one man do all that and still manage to be perhaps the best-researched interviewer on television?

“Meet the Press” made tens of millions of dollars annually for NBC. There isn’t a clear candidate to replace Russert, though the paper mentions Tom Brokaw, David Gregory, and Andrea Mitchell as possibilities.

The Times on C7 reports that The Associated Press is preparing new guidelines for Internet fair use of its content. A crackdown last week on a liberal site led to a fairly predictable backlash that caused the AP to back down.

WaPo’s credit debacle series looks a People’s Choice

The Washington Post continues its three-part series on the credit meltdown with part two on A1. The series is weirdly broken into “chapters” that are about 700 words or so.

In this edition, the paper gets inside a now-bankrupt subprime lender called People’s Choice, which saw the bust coming but couldn’t get off the fees treadmill.

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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.