Thursday, April 29, 2010

Failborger, Failborger, Chit,Chit, No bailout? Choke.



'You're out of order! You're out of order! The whole trial is out of order! They're out of order! It's just a show! It's a show! It's "Let's Make A Deal"! "Let's Make A Deal"!'
-Arthur Kirkland

Since the players are looking to beat the casino, the dealers are watching the players. The box men are watching the dealers. The floor men are watching the box men. The pit bosses are watching the floor men. The shift bosses are watching the pit bosses. The casino manager is watching the shift bosses. I'm watching the casino manager. And the eye-in-the-sky is watching us all. Back home, they would have put me in jail for what I'm doing. Here, they're giving me awards.
-Ace Rothstein

'Well I am certainly wiser than this man. It is only too likely that neither of us has any knowledge to boast of; but he thinks that he knows something which he does not know, whereas I am quite conscious of my ignorance. At any rate it seems that I am wiser than he is to this small extent, that I do not think that I know what I do not know.'
-Socrates

'Instead of rating the man by his performances, we rate too frequently the performances by the man.'
-Samuel Johnson

New York Post via The King Report
By Paul Tharp

'A 90-percent tax on all bonuses in banking and financial services to a quadrupling of dividend taxes on portfolios, to 40 percent...a bedroom in the country's fabled seaside villas will get hit with a 20 percent surcharge -- on top of property taxes that will triple...The new laws forbid cash transactions above $2,000 at businesses, requiring they be paid with checks or credit cards under the threat of seizing shops for violations. Athens also will start paying whistle-blowers a 10-percent bounty on all cash recovered from tax cheats and clawbacks from secret banks abroad...tax breaks are being abolished...the self- employed who'll have to forfeit their long-held income tax rates of as low as 5 percent. They'll now have to pay 40 percent on incomes above about $52,000. ...Any household making more than $82,500 will pay a 40-percent tax, and those with income over $130,000 will pay a new top rate of 45 percent, each amounting to a 5-percent jump. Only those making $15,600 and under will escape the tax ax.'

The above is a description of the reasonable austerity measures that Greece will be expected to implement.

Good luck with that. What is Greek for 'Bazooka meet doom-cycle?'.

Dance recital for a young-un this morning so watching the baby until the sitter arrives...this disclosure for purposes of explaining why your humble blogger had Hee-Haw on without the sound muted.

Anywho caught some kommentator clutching a venti and asking a union leader that was organizing a demonstration outside Wall Street why he was being so... gosh golly... negative?

Can't we all just get along?

I mean, golly gee, the aphorism 'Failure to liquidate the insolvent banksters has led to the liquidation of a large part of the productive economy. A taxpayer financed bailout of rich folks' bad speculative bets has resulted in zombie banks and zombie customers... a fiscal tide that lifts no boats' is well...so...2009! The banks need our support brother cause the demand restoration project ain't workin' yet!

On March 30th your humble blogger posted: 'Soon the debate will fall on the continuum of a double-dip caused by the counterproductive populism of bankster bashing versus the political palliative of misdirection through scapegoating.'

Cue Goldie Scoldie Show Trial puh-lease.

Heard about Ritholz's commentary on Goldie through Honest Abe in Barron's...

He makes 1 point, 'The claim Paulson & Co. were long $200 million dollars when they were actually short is a material misrepresentation — that’s Rule 10b-5, and its a no brainer. The rest is gravy.'

My understanding was that the equity tranche was not part of the final deal, so not sure what the point is. The reference to Paulson being long was conditional, in some initial memo. Yes? Was it in the final structure? Don't think so. That's damn weak stuff. Folks didn't read the final deal? Seriously?

The late great Mark Pittman once wryly noted that almost no one in the media knew what yield was. What do you think the odds are that these same folks have any clue as to how a structured offering is circled?

What other point does Ritholz make?

'What you don’t see are all the emails, depositions, interrogations, phone taps, etc. that the prosecutors know about and GS does not'. Uh.. well neither does Ritholz, so again, what is the point?

For folks that have never participated in a structured bond offering, who never saw the gurus whip up iterations on the back of napkins, who never witnessed slivers of equity being presented as burnt offerings to the rating agency Gods, the current pablum narrative would appear to be unassailable.

Now I wasn't privy to this deal getting circled but will hazard a guess as to what the equity tranche (Paulson going long in the intial) was all about...

Paulson was more than willing to put down a sliver of equity in order to secure the AAA, but once it was confirmed that the rating agencies would give the pixie dust lipstick without it, it went buh-bye...

The ratings agencies are the enemies of the people, the rest was 'enabled' noise.

The 'selection' process on almost any comparable structured product was a reverse engineering of the rating agencies 'models' that had been tinkered over time in collusion with their fee-paying clients for the end goal of getting the AAA on the selected pig.

Will Goldie be found greedy before guilty by an impartial jury? That first assumes you can get an impartial jury, but yeh sure why not? The whole system was guilty of this. This was the game.

However if every other bankster is not brought up on similar charges than this episode is nothing more than a political diversion, the political palliative of misdirection through scapegoating in order to quell the 'counterproductive' populism of bankster bashing.

'Nuff said
.

Isn't it curious though that the MSM is highlighting emails of 'French to English' translated puns while giving short shrift to the rating agencies' billowing inferno of melting, not smoking, guns?

S&P employee (2006): “Rating agencies continue to create an even bigger monster — the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”

S&P employee(2006): “We rate every deal. It could be structured by cows and we would rate it.”

Moody employee(2006): “I am getting serious pushback from Goldman on a deal that they want to go to market with today."

Moody employee(2006): "They’ve become so beholden to their top issuers for revenue they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation."

Oh and get this, as the FT reports today: 'The terms of the CDO contracts highlight how lucrative these instruments were for the agencies, with annual pay-outs of up to $50,000 made to track deals. Ratings surveillance fees are still being paid on CDOs that have suffered "an event of default" ...even toxic CDOs can continue to exist for many years.'

Seriously you can't make this stuff up! These folks are like arsonists who push for the bomb-making material and then, after planting the bombs and lighting the fuses, extort the firemen and get a tax on the water.

Isn't it curious that the accepted 'political' dimension of the SEC's motivations on Goldie was to strengthen financial reform and not obfuscate the hand-slapping being enacted upon the rating agencies on the Hill? A financial reform bill that says nothing, sees nothing, and does nothing about the rating agencies? Yes, I know you're shocked by that.

Isn't it curious that the Grecian, Spanish and Portuguese downgrades were coincident with the purported cessation of our debt monetization? Now that's a real strong dollar policy folks.

As once posted way back when in December 2008 : 'If we can accomplish the Houidini-esque stunt of funding this debt at manageable levels it will only be by literally defining AAA as anything American (i.e. if America becomes AA then literally AA is the new AAA, with the assumption that the reasons for our 'downgrade' would serve as deleterious to all others, except maybe Mr. Gold.)

I believe this vision is playing out. We are the last canary, and the biggest domino. But given the magic of our reserve currency, our 'downgrade' will only occur within the context of the world being downgraded first.'

That is the magic of our reserve currency and the elixir of the rating agencies, ensconced safely on our shores, a fact that is truly in the national security interest of the United States.

At no time do their hands leave their arms.

31 comments:

neurofiber said...

The zeitgeist of our time is "bloggers crying in the wilderness".
We have bred a nation of sheep who do not have the collective confidence to defend their rights and we have a MSM that has empowered administrations who are eager to exploit them. As long as people have no voice governments will do as they please. Defending your rights is no longer politically correct.

Anonymous Monetarist said...

Neurofiber,

'Until they became conscious they will never rebel, and until after they have rebelled they cannot become conscious.'
-George Orwell

Free your mind!

And the rest will follow.

Thanks for taking the time to leave a comment.

joe said...

anon M. You say, "The 'selection' process on almost any comparable structured product was a reverse engineering of the rating agencies 'models' that had been tinkered over time in collusion with their fee-paying clients for the end goal of getting the AAA on the selected pig."

The "everyone else is doing it" defense is no defense. The famous US judge Learned Hand dismantled it, and courts have followed him. Hand said something like this: A whole calling may have unduly lagged in adopting standards. It may never set its own tests. Courts must in the end say what is required; there are precautions so imperative that even their universal disregard will not excuse their omission.

It also is no defense to fraud to say ACA knew about it. If a referee or a sports commentator at a game knows the game is fixed, you don't impute that knowledge to a gambler betting on the outcome. The investors didn't hire ACA.

If Goldie misrepresented the "selection" process, it is no defense to say everyone else was doing it. It is a defense to say the "selection" process was obvious to the investors. Or to say that the information wasn't material because investors wouldn't have cared, even if they knew.

But what do I know. Velo babe talks about hanging in Aspen with fancy pants hotshots. You talk about similar stuff.

Dave Narby said...

I am now certain they will never allow a correction in the equity markets. The junior subordination of the IMF loan to Greece was the tell.

They will gun this until the buck breaks, and then perhaps equities will break as well (the charade will be over, so why keep it up? Besides, they'll need to keep that appointment with a plastic surgeon in Brazil and then hop the world digging up caches of Krugerrands).

I'm sure they intend on paying pensioners and public unions in nominal terms (much easier than trying to 'splain the math to them), too bad they never learned how to calculate exponents themselves...

The good thing is that it will have to get much worse before it gets better (much more is needed to wake America from its torpor), and we are assured it will.

On a humorous note, the captcha for this comment was "pootaing".

Mark McHugh said...

I saw the thoughts you posted at ZH. You make very good points. I am still trying to figure out if Khuzami is the real deal or not. While he was responsible for "the largest simultaneous arrest in Justice Department history," (more than 120 people) I can't find specific info. on convictions etc. from the US vs Lino case. And he brought charges against Countrywide's Mozilo.....almost a year ago. I'm no legal expert, but I thought more stuff was supposed to happen after you file charges against someone (Mozilo is 72).

Ritholtz was a hero of mine, but he has become an apologist for the present administration. There is certainly populist pressure to make it look like the government isn't beholden to Goldman going into mid-terms. But looking like you're trying to get someone and actually getting them aren't the same thing....I'm not feeling it.

You write very well (thought someone besides Mom should say so).

Anonymous Monetarist said...

'The "everyone else is doing it" defense is no defense.'

Agreed so either charge them all if illegal, change the law if legal, but DON'T single out one firm for political reasons a la Russia vs. Yukos.

'It also is no defense to fraud to say ACA knew about it.'

If there was fraud and ACA knew about it they would be a co-conspirator.

'If Goldie misrepresented the "selection" process'

Well that will be very interesting re: equity tranche in initial but not in final as part of the normal process when providing iterations to the rating agencies for AAA.

'Or to say that the information wasn't material because investors wouldn't have cared, even if they knew.'

Agree that is not the standard for being considered material, but again a sophisticated investor should do their diligence, this trade would not have existed without another sophisticated party going short.

Difference 'tween wouldn't and shouldn't, on every winning trade there is a greater fool who thought that appellation was going to be applied to their trading partner.

'You talk about similar stuff.'

Yeah it's been an interesting journey so far, have seen things beyond my kinfolks' station, but I'm a simple fellow, its' about quality not quantity my friend, power is like the wind, ideology is the devil, and ego is the enabler.

Your arguments are well presented.

Anonymous Monetarist said...

Mark,

Thanks.

Nothing against Riholtz just don't think he has the perspective gleaned from participating in structured offerings.

Tell you what though, the lawyers should make out like bandits on this one. You have two aggrieved parties with the stakes jacked due to reputation risk, Goldies' is obvious but a bad-ass prosecutor can quickly become a girly man if the Feds 'lose'.

The leak on the 'criminal probe' and by the way no financial firm has survived criminal charges I believe,'cept those that agree to deferred prosecutions, is a message job right out of the Sopranos. The Federales are comin' heavy. Threatening Goldie with predicates that might make them guests of the state for eating alone...

Of them an example must be made.

Mozillo? Agreed.

And by the way, where the hell is Franklin Raines?

Anonymous Monetarist said...

Dave,

Smartypants on an island once told me that THEY would keep the bulls and bears at each other while THEY went from room to room putting out fires.

That seems to be the storyline so far.

Re: equity values going up forever...

Don't underestimate the need to keep interest rates low, the power of the rating agencies to downgrade the world first, and the knock-on effects to the reserve currency and its' inverse correlation ... the sovereign scrip.

My fear is that deflation is the midwife of hyperinflation and unemployment levels are empirically WORSE than the WORSE levels of GD2.

Agree with you that something's going to break...you can't extend and pretend into perpetuity.

Anonymous Monetarist said...

'the WORSE levels of GD2'

??

Meant GD1 ;)

Mark McHugh said...

Franklin's happiply retired, by my calculations.

From Wikipedia:

Civil charges were filed against Raines and two other former executives by the OFHEO in which the OFHEO sought $110 million in penalties and $115 million in returned bonuses from the three accused.[8] On April 18, 2008, the government announced a settlement with Raines together with J. Timothy Howard, Fannie's former chief financial officer, and Leanne G. Spencer, Fannie's former controller. The three executives agreed to pay fines totaling about $3 million, which will be paid by Fannie's insurance policies. Raines also agreed to donate the proceeds from the sale of $1.8 million of his Fannie stock and to give up stock options. The stock options however have no value. Raines also gave up an estimated $5.3 million of "other benefits" said to be related to his pension and forgone bonuses.

Yeah, some example they made outta him....

velobabe said...

Yves,

Reposting this from a couple posts back.
saw your post this morning.
i had to get mad at some of the poster's comments under links for 04/30/2010.
they were talking sh#t about my friend
hunter s thompson and his gonzo style writing. plus some other douche dog was dissin jesse's blog. well i am speaking up, sorry. i know i won't be able to go back to NC, but so what. i stick up for people i personally know and loved.

Anonymous Monetarist said...

Mark,

They did make an example of him although not the example they should have made.

Anonymous Monetarist said...

Velobabe,

'Tis interesting... Yves admits ' My first jobs were on Wall Street, I was running a profit center before the age of 30, and have consulting to Treasury units, derivatives businesses, and emerging markets desk, as well as working for hedge funds, PE funds, and several Forbes 400 members. I am well aware of the difference between market making and placement of new issues, whether on an underwritten or a private placement basis.'

But she hasn't as of yet answered the query from your anonymous raconteur:

'Perhaps you might contact someone from the ‘old days’ and ask them how an equity tranche would be in the initial but not in the final and how that would not be a material misrepresentation, these structures went through iterations when going for the AAA prior to the final i.e, when the bonds were circled.

Not a soul is covering that…

You might be surprised by the answer.'

velobabe said...

joe said
velobabe talks about hanging in Aspen with fancy pants hotshots.
i more than hung out with them i was their fancy pants. left woodstock 1969, drove straight to the rockies and never looked back.
i was hunter s thompson neighbor for 30 yrs.
GOD it was fun. now everybody is dead, too bad, party is over. had a lot of kodak moments to smile about today. god bless america†

joe said...

anon M,

You say, "'Perhaps you might contact someone from the ‘old days’ and ask them how an equity tranche would be in the initial but not in the final and how that would not be a material misrepresentation, these structures went through iterations when going for the AAA prior to the final i.e, when the bonds were circled."

I don't understand what is being misrepresented. If the disclosure says the instrument offered is rated XXX, that's true. If the disclosure misrepresents the process by which the rating was obtained that's something else. Presumably, the disclosure says nothing about the rating process. It is no secret that the rating of structured products is an iterative process.

The materiality standard for an ommission or misstatement is kind of like whether there's a substantial likelihood that the reasonable investor would have regarded the information as having significantly altered the total mix of available information.

If you are saying that leaving out the blow-by-blow process of structuring to get a credit rating is a material omission, that seems like an uphill fight, given how many people know getting a rating is an iterative process.

I don't understand what information you think was omitted or misrepresented from investors.

Velo B:

Why bother reading Yves? She does link lists you can find anywhere. She lets her lefty-politics interfere with her doing objective analysis. And when she does post something good, it gets mentioned by mish, jesse, or zero hedge.

But what do I know, I'm a nobody that likes to ramble.

Dave Narby said...

Thanks AM,

Dave,

"Smartypants on an island once told me that THEY would keep the bulls and bears at each other while THEY went from room to room putting out fires."

I think I understand you, but could you elaborate?

"Re: equity values going up forever...

Don't underestimate the need to keep interest rates low, the power of the rating agencies to downgrade the world first, and the knock-on effects to the reserve currency and its' inverse correlation ... the sovereign scrip."

Here I don't understand you. AFAIKT it looks like there are two camps: Those involved in the "reflate or die" attempt, and those who aren't. Those that are in are almost certainly the FED and the big US banks. Those that are not areasically everyone else (independent fund managers, sovreign funds, etc).

"My fear is that deflation is the midwife of hyperinflation and unemployment levels are empirically WORSE than the WORSE levels of GD2."

Agreed. The only reason we haven't had bread lines is that food stamps take care of it, and the only reason there aren't (more) tent cities is that the banks realized it's better to have a former homeowner defaulting and living in a structure than squatters moving in.

Modern agriculture will help insure the food supply stays adequate.

Beyond that, I fully expect a dollar devaluation of 5-20x before the dust settles. I know what that means for PMs (and to a lesser extent commodities. Residential RE is a function of wages, AFAIKT commercial RE is a function of the economy)... But what does that mean for equities?

"Agree with you that something's going to break...you can't extend and pretend into perpetuity."

I think it has to be a repudiation of the dollar. The only reason it's the reserve currency is we "agreed" to keep it at 2-3% inflation and that deal is clearly done.

Would appreciate your $0.02 on these ideas.

Anonymous Monetarist said...

Velobabe,

You are too cool :)

Anonymous Monetarist said...

Dave,

"Smartypants on an island once told me that THEY would keep the bulls and bears at each other while THEY went from room to room putting out fires."

Basically confirming the government 'rig' of the markets that we've all watched with stunned expressions.

'it looks like there are two camps'...there may be a couple of voices in the wilderness, including me, that belong to a third camp, i.e., deflation causing a hyper inflationary episode. John Williams recently coined the term hyper inflationary depression...the term alone is enough to send chills up your spine. During GD1 we did not have deflation we had disinflation.

Here are some old posts that expand upon this:

From SF Fed (August 2009)
http://anonymousmonetarist.blogspot.com/2009/08/anchors-aweigh-my-friend.html

(September 2009)
http://anonymousmonetarist.blogspot.com/2009/09/those-who-ignore-lessons-of-history-are.html

(March2010)
http://anonymousmonetarist.blogspot.com/2010/02/what-has-been-will-be-again-what-has.html

Since everything currently happening is liquidity driven (either its abundance or deprivation) the inverse correlation between equities and the dollar should remain the macro call for the short term. A lot less likely IMHO is that they (dollar&equities)would both rise prior to both falling. It could happen, but this fella thinks its a Potemkin recovery.

Organic income growth from red-blooded employment is the key and it ain't happening yet.

As Marc Faber just said in his May newsletter .. the problem with socialism is that you run out of other people's money.

Best,
AM

Anonymous Monetarist said...

Joe

'I don't understand what is being misrepresented.'

My point exactly good sir.

'If the disclosure says the instrument offered is rated XXX'

If we would have had prudent regulation that probably would have been the rating :)

'If you are saying that leaving out the blow-by-blow process of structuring to get a credit rating is a material omission, that seems like an uphill fight, given how many people know getting a rating is an iterative process.'

Exactly! My point is that there wasn't a material omission, which seems to be the linchpin of the SEC case ,by the representation that Paulson was long in the initial, prior to the iterative process.

By George, methinks you've got 'it' :)

velobabe said...

obviously too cool for any school.
party time over at AM's picnic table.
HOW do i get my new velobabe picture of my chest on your website?
i love floating around these male dominated financial blogs and take your attention away, from thinking so much, for a moment.
i got some game left in me, though.
they are starting the ladies of ZH calendar 2011. i keep asking if i can be in it. but no ones answers me back. do you think that is a hint?

joe said...

anon M says, "Exactly! My point is that there wasn't a material omission, which seems to be the linchpin of the SEC case ,by the representation that Paulson was long in the initial, prior to the iterative process. By George, methinks you've got 'it' :)"

Very funny, dude. My point was that the credit rating creation process doesn't seem material. You are confusing 2 separate factual issues: 1. The RMBS selection process. 2. The credit rating process.

Just because everyone knows the credit rating process is iterative in no way implies that everyone knows the RMBS selection process is iterative and involves a party with adverse interests.

That is a very weak analogy.

Evening sir.

Anonymous Monetarist said...

'You are confusing 2 separate factual issues: 1. The RMBS selection process. 2. The credit rating process.'

Good sir you are confusing that they are 2 separate factual issues.

They are the same issue. Institutionalized adverse selection. And it worked in a glorious and lucrative fashion for those going long... until it didn't.

Legalized insanity ... truth is stranger than fiction. Don't believe 99.9% of the nonsense you
are reading on this subject... pablum narrative extraordinaire!

Anonymous Monetarist said...

Velobabe,

Ha! My links at Robotrader are only in jest.

Dye-in-the-wool feminist with a progressive/liberal missus am I.

Or to paraphrase Kesey, 'I was too young to be a beatnik and too young to be a hippie so I guess I'll just be an anonymous monetarist.'

'The person who doesn't scatter the morning dew will not comb gray hairs.' -Hunter S. Thompson

Keep scattering velobabe!

joe said...

anon M says, "Well that will be very interesting re: equity tranche in initial but not in final as part of the normal process when providing iterations to the rating agencies for AAA."

If Paulson was involved in gaming the credit rating process or the RMBS selection process with ACA, I think it's fair for the SEC to claim non-disclosure of that was a material misrepresentation or omission.

The selection process for structured products, especially synthetics is iterative; however, the key distinction is whether the long-side gets disclosure that the short side is involved in structuring, as opposed to quasi-neutral people like the underwriters and other facilitators.

The fund manager and ex-lawyer Michael Lewitt's newsletter last Friday also said the SEC has alleged facts that state a claim against Goldie for violating the anti-fraud provisions of the 1933 and 34 Acts, and it remains to be seen whether the SEC can prove the facts to establish the facts the SEC alleges.

Jim Grant joked that he didn't take comfort in the NYT agreeing with him that Treasuries had no where to go but up. I wonder how much comfort you take in Steve Liesman joining you in pooh poohing the SEC's case against Goldie.

velobabe said...

by AnonymousMonetarist
on Fri, 12/18/2009 - 17:38
#169365

Mark Pittman

We haven’t got to the bottom of this whole thing yet. Somebody’s going to do this big forensic—and it might be me!—somebody’s going to do the deep dive into how everything happened...

did we ever find out anything?

Anonymous Monetarist said...

Joe,

The credit rating process was a game.

Upon reflection and some communications, my current feeling on this is that Goldie may very well be 'taken out', and relative to the legal grounds for same? Well let's just say that the lawyers will claim uncharted territory as license to get, shall we say, creative?

Concerning Liesman? Folks can come to the same conclusion for different reasons. Mine is from personal experience, his?... well, need I say it?

Anonymous Monetarist said...

Velobabe,

The truths you hold to be most dear are lies told to you by liars?

joe said...

anon M says, "Upon reflection and some communications, my current feeling on this is that Goldie may very well be 'taken out', and relative to the legal grounds for same? Well let's just say that the lawyers will claim uncharted territory as license to get, shall we say, creative?"

My man. You are confused on who chose to be creative and claim uncharted territory. The bankers tried to claim uncharted territory on disclosure, presumably based on a couple theories. First, if they get legal advice that their disclosure to investors was likely legal, they have a defense against criminal conduct since it usually requires willfull misbehavior. Second, if "enough" deals get done a particular way in uncharted territory, the government won't have the backbone to upset the deals by prosecuting. Third, the SEC's failure to enforce the anti-fraud rules on Rule 144A and other unregistered offerings has given investors and promoters a justifiable expectation of continued non-enforcement.

The first sounds like a reasonable defense to criminal charges, assuming people actuallly got legal advice and the facts actually occurred as assumed by the lawyer. The other two are no defense to anything. Mike Milken got in trouble for "parking" violations, when tons of people were doing that. Was actual enforcement of the rules, a change in law? I don't think so.

This is why some hedgies always try to be conservative with the securities rules. They know that playing in uncharted territory or over the line territory leaves you with a business model that depends on the tender mercies of the policians and prosecutors, which is a highly risky proposition.

Anonymous Monetarist said...

Joe,

'You are confused on who chose to be creative and claim uncharted territory.'

Well my $700 an hour, or thereabouts, mercenary lawyer with a sweet British accent, and the skills to kill a plantiff with a paper clip, would argue differently :)

joe said...

anony M says, "Well my $700 an hour, or thereabouts, mercenary lawyer with a sweet British accent, and the skills to kill a plantiff with a paper clip, would argue differently :)"

Hah.

First, when promoters plan transactions in a regulated area, they pick the form of the transaction and the context of the transaction, including the law relevant to the area where they choose to play.

Second, when a law firm gives advice on securities rules, they're supposed to look at the broad language the SEC refuses to define, and guess what a court will do. They aren't supposed to say, well no court has done X, so it's OK to do it. That is the kind of logic that led The Children's Investment Fund to getting its hands slapped in its litigation with CSX, where it tried to use total return equity swaps to avoid 13D disclosure rules.

People like Frank Partnoy complained about how the court was upsetting investors expectations. The trouble with that theory is that investors had no basis for any expectations that a court would find against them, exept lawyers who had said, we'll it oughta work because no court's said otherwise yet. Notwithstanding the broad language of the securities rules, which the court used to find against TCIF.

Anonymous Monetarist said...

Joe,

The more one becomes acquainted with the 'legal' process the more disenchanted one gets.

No doubt.