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Anyone surprised by last week’s arrest of two former Bear Stearns hedge fund managers must have slept through the Enron era. If Enron, WorldCom, Tyco – and the list goes on – taught us anything, it is that whenever the investing public suffers staggering losses on Wall Street, we can expect to see someone hauled off in handcuffs. The real question is not why it happened, but where it will end.Despite the complex nature of the subprime meltdown, the government has presented an indictment that reads very much like a garden-variety fraud. In essence, the case turns on the simple proposition that Ralph Cioffi and Matthew Tannin lied to their investors about their funds’ true status and prospects. That is, the government has alleged that they were telling the outside investing public one thing, while secretly harboring a far gloomier scenario.

There is no question that at some point permissible spin crosses the line and becomes willful misrepresentation. That is really what this prosecution is all about. In making its case, the government weaves together a series of emails that paint a portrait of once high-flying fund managers scrambling to save their careers, and trying to keep their funds afloat, by knowingly misleading their investors.

I am on the government’s side here, because under the current corporate structure, there is no other way for wrong-doers to face the appropriate consequences for their bad actions. Simply going out of business, in my opinion, is not harsh enough.

 There are two major problems with US corporations as they are presently constituted (which ties into the modern corporatist system we live under). First, they have perpetual charters. While I would prefer a system where charters ran out after a specified number of years, or when a specified task was completed, I would at the very least hope to see charters that aer required to be renewed. Second, it is insane that anyone can hide behind the guise of a non-human corporate entity to insulate themselves from any and all risk. Yes, I understand Coase’s insights on firm formation, but people that make bad decisions ought to suffer the consequences of those decisions – there seems to be an asymmetry in the risk/reward structure as it stands today.

It is important to remember that the earliest corporate forms were perpetual monopolies granted by the Crown for the exploitation and exploration of new lands. In the US, the earliest corporate forms actually resembled something that makes sense – for example the Niagara Canal Company was organized for the sole purpose of completing the Erie Canal, and went away upon the completion of the project.

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