October 3, 2008

Credit crisis roundup

• How the "wooden children's arrow" and wool research earmarks made it into bailout bill [NYT DealBook; Mark Steyn, NRO "Corner"]
• Ultra-bear Nouriel Roubini has sobering overnight analysis of crisis severity [RGE Monitor]
• Claim that conservatives have overblamed CRA as contributor to housing bubble [American Prospect this spring] But CRA was one element in wider pattern of politically generated pressures for slack lending standards [Malanga, RCP]
• Bill Clinton is talking sense on rush to blame deregulation and Glass-Steagall repeal [WSJ edit] But SEC's 2004 relaxation of rules for big investment banks isn't looking good in retrospect [NYT]
• Washington Mutual failure has already passed from the headlines, but it was a big deal [LaCroix, D&O Diary]
• Analysis of bailout bill's provisions on "excessive" executive compensation [Hodak Value]
• Will credit default swap litigation be the next big thing? [American Lawyer]
• More: What do economists want? WaMu-style surgical recapitalization of banks? [Tabarrok] Or current bailout bill as better than nothing? [E. Posner]

September 29, 2008

Mortgage cramdowns, cont'd

Regarding Carter's post: David Frum raises a question to which I don't have a very confident answer, namely, is there some substantial public policy reason why creditors who lent on a security of real estate should be protected from cramdown in bankruptcy, while creditors who lent on other security are fully exposed to it?

It also hasn't been explained to me exactly how the now-dropped mortgage cramdown provisions were thought to represent a "bonanza for trial lawyers," as House Republicans contend (though such provisions may well be suspect on other grounds, e.g. because they would retroactively change a set of rules on which lenders had relied). Debtors who would have declared bankruptcy anyway, of course, already have hired lawyers, and it might seem the effect of a cramdown would be not so much to augment those lawyers' fees as to leave more in the estate with which to pay other creditors, such as credit card companies. I suppose the premise must be that lawyers will convince more persons who could have avoided bankruptcy to throw themselves into it so as to avail themselves of the mortgage cramdowns. Maybe that's the theory -- and I welcome explanations from those more knowledgeable than I -- but it still seems to me a stronger argument against the Durbin proposal was that retroactive alterations in lender priority should be avoided as far as possible.

More: Ted tells me the story is more complicated than this, and says he'll try to write something up explaining the issue in wider perspective.

"Bearing down on short sellers"

Todd Sullivan reprints a 1932 article from Collier's magazine that shows how little things have changed. More: Mark Hulbert, NY Times.

September 25, 2008

FASB litigation accounting VII: The prudence of delay

The Financial Accounting Standards Board has announced a delay and another round of reviews for its proposal, Disclosure of Certain Loss Contingencies-an amendment of FASB Statements No. 5 and 141(R)," responding to an outpouring of criticism from businesses, the legal profession, and trade associations. A statement following yesterday's board meeting:

The Board decided on a plan for redeliberations of its Exposure Draft, Disclosure of Certain Loss Contingencies. The Board directed the staff to prepare an alternative model that attempts to address the concerns that certain constituents raised about the Exposure Draft. This alternative model will be field tested along with the model in the Exposure Draft. The staff expects that field testing will take place during November and December 2008, and roundtable meetings will occur in either early January or March 2009. Board redeliberations are expected to begin in late March or April 2009. The Board also decided that any final Statement on this topic will be effective no sooner than for fiscal years ending after December 15, 2009.

In demanding more detailed reporting of the the potential losses resulting from litigation, FASB was going to force companies to show their legal hand to the very people suing them, violate attorney-client privilege, and in the process, require highly speculative commentary that could damage a company's reputation with investors. As the WSJ Law Blog wrote in August, imagine being Merck in past years and trying to report the costs that the Vioxx litigation would impose.

The only groups supporting the proposal -- in fact arguing that it didn't go far enough -- were "socially aware" investors and organized labor, presumably because it would allow them to substitute their priorities for the corporations' current profit motive. So FASB's decision should also be seen as a rebuff to the trial lawyers and class-action crowd who make their living from suing businesses.

FASB undoubtedly has more pressing issues to deal with at the moment, in any case.

More....

• Previous Point of Law posts.


• FASB Comment Letters


• Shopfloor.org post, "FASB Disappoints the Lawsuit Crowd on Contingency Reporting"


• U.S. Chamber of Commerce news release, "FASB Correct to Delay Changes to Accounting Standards."


• CFO Magazine article, "FASB Delays Lawsuit Disclosures"


• American Bar Association letter.

September 23, 2008

Credit crisis: the second-wave litigation

Kevin LaCroix at D&O Diary has been tracking some of the burgeoning litigation to arise from the subprime catastrophe (Word-format document here), and finds that along with lawsuits against some predictable targets (Merrill Lynch, AIG), the "dark new phase" of the crisis "already has produced its own distinctive round of lawsuits", in which "companies lacking any direct exposure to subprime nevertheless experience losses because of exposure to other companies suffering credit crisis-related reversals." (Example: Constellation Energy). LaCroix believes "the ensuing litigation wave could threaten to become a generalized inundation deluging a substantial number of participants in the larger economy."

September 22, 2008

Going after lawyers in mortgage mess?

Anthony Lin at the New York Law Journal recalls the most obvious precedent:

Talk of modeling a new government office to dispose of those securities on the RTC [Resolution Trust Corporation] likely sent a shiver down many lawyers' spines last week. The RTC, along with the Office of Thrift Supervision (OTS) and Federal Deposit Insurance Corporation (FDIC), still inspire a special dread within the legal profession for the way they went after law firms in the early 1990s. Charged with recouping as much as possible of the $124 billion taxpayers paid for the S&L bailout, the agencies aggressively sued those whose negligence allegedly contributed to the S&L failures, with law firms near the top of the list.

Law firms that had represented thrifts, including Jones Day, Kaye Scholer and Paul, Weiss, Rifkind, Wharton & Garrison, paid millions to settle claims brought by thrift regulators. In the case of Kaye Scholer, the 1992 decision to pay $41 million came after the OTS controversially moved to freeze the law firm's assets, a potentially crippling blow.

Origins of mortgage meltdown

Business historian John Steele Gordon, guestposting at Freakonomics, has some thoughts on the distinction between a financial crisis and an economic crisis, the danger signs with Fannie and Freddie, and the prescience of the WSJ editorial board.

Hail of dead cats for mortgage bailout plan

Felix Salmon raises questions about the plan to "give Hank Paulson $700 billion, let him buy up mortgage-related toxic waste, and thereby rescue the banks and save the global financial system" and string-cites a sampling of hostile blogosphere reaction (more); Yves Smith at Naked Capitalism rounds up more hostile reaction (also note this great roundup typo, "Robert Knutter" -- the "K" is presumably silent); Volokh conspirators assail it here, here, and here; Becker (with reply from Posner); Michelle Malkin; NYT Opinionator; Calculated Risk at least thinks the problems might be fixable.

September 19, 2008

Temporary ban on short-selling

So many reasons to think it won't work, and might make things worse (more).

September 17, 2008

Following the credit crisis

Four blogs that were open in my browser all day yesterday, and probably will be again today: DealBreaker, Calculated Risk, Felix Salmon, and Naked Capitalism. (P.S. Also, NYT DealBook).