Glimpse behind the scenes of the subprime fiasco

When I looked puzzled, he said: "Just talking to you could be enough to lose my job. It's in our contracts - we must not talk to the Press."

He operates in a closed world. Anyone on the outside who convinces you they know what it must be like in one of these firms is talking rubbish. They are places of great secrecy and paranoia but just occasionally, a glimpse of light is afforded.

In the US, the litigation over the subprime meltdown has already started.

We might get our own cases in due course. For now, though, it's the Americans who are seeking blame and compensation.

In Massachusetts, regulators are accusing Bear Stearns of improper trading. The charges, filed by the Massachusetts Secretary of StateWilliam Galvin, relate to two hedge funds that collapsed this summer, wiping out $1.6 billion (£773 million) of investors' money. The investors say the funds held worthless subprime securities.

The Massachusetts case (Galvin says he has jurisdiction because investors based in his state lost out) centres on the bank's conflicts of interest with the two funds. Under law and according to Bear Stearns's in-house rules, investors - in the form of two independent directors - were supposed to be informed when the bank traded with the funds.

Galvin queries the pair's objectivity, as they worked for a firm in the Cayman Islands that was doing other business with Bear Stearns. He also alleges the bank deliberately chose directors outside the US who were not accountable to investors in the US - the duo have not responded to his subpoena requesting information about conflicted trades.

Their approval was required to ensure the deals between the bank and the funds were based on the fairest prices.

According to Galvin, on one of the funds - the High-Grade Structured Credit fund - 79% of transactions last year that required the independents' say-so did not get it.

Galvin's point is profound. Bear Stearns was telling its investors the proper controls were in place. But, says Galvin, these checks "did not survive the daily ordeals of trading and managing and leveraging". The lack of any brakes, "begin to explain, in a broader way, how the subprime crisis was fuelled. It was fuelled by large brokerage houses such as this, violating their own procedures".

In the exhibits accompanying his accusations, Galvin produces internal bank emails. On 26 May, as mortgage defaults were unfolding across America, panic was setting in.

Matthew Tannin, chief operating officer of the two funds and a senior executive of Bear Stearns Asset Management, wrote to a senior colleague Ralph Cioffi with the observation: "When involved with a trade - look around the room and determine who the chump is - and if the chump is not clear to you - assume it is YOU."

Well, wrote Tannin, "it is easy for me to see that I am the chump". Stressing "time is of the essence" he said, "we have two hedge funds ($1.5 billion on capital) that are in danger of a wipe-out because of a lack of liquidity". The question is: "What exactly can be monetized - and how quickly?"

He set out the options. On the mortgage-backed debts, he said: "There is simply no market. Too many variables. So you can't sell because the only bid would be below someone's educated low-ball guess - and this goes for both the longs and the shorts."

In July, an undated, unsigned letter addressed to "Client of Bear Stearns & Co, Inc" was sent to investors in the two funds.

It said: "A team at [Bear Stearns Asset Management] has been working diligently to calculate the 2007 month-end performance for both May and June for the funds.

"The preliminary estimates show there is effectively no value left for the investors in the [funds] as of June 30, 2007. In light of these returns, we will seek an orderly wind-down of the funds over time."