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‘Complexity’ to blame for credit crunch

Directors and lawyers working for financial services firms have been dishing
out plenty of blame for the credit crunch crisis engulfing their industry.
Research by law firm
Eversheds
found that the single biggest reason why such problems have beset collateralised
debt obligations (CDOs), asset-backed securities and sub-prime mortgages is
over-complexity and a lack of transparency. More than 40% blame mis-selling,
while more than one-fifth say they were simply overvalued.

These comments seem all the more remarkable given that almost two-thirds of
the survey respondents were involved in some way in CDO/sub-primes. Fault lies
with the ratings agencies, according to two-thirds of respondents, but the
investment banks must take their share of the blame too, according to 56%. And
for good measure, more than 40% blame the auditors for not checking fair value
accounting. Harsh but fair, perhaps, almost one-third simply say that uneducated
buyers had no one to blame but themselves: caveat emptor.

So what now? “There are a lot of claims over a limited pot of collateral,”
says Matthew Allen, insurance and financial services litigation partner at
Eversheds. “Many investors are in loss-mitigation mode, which is a natural
precursor to disputes about value and transparency.”

Indeed, around two-thirds now expect legal action against investment banks
and sizeable minorities expect the auditors, collateral managers and lawyers to
be sued, too. One-quarter expect criminal proceedings to be brought by the
Serious Fraud Office and others.

More than 60% think one consequence is that regulators will take the ratings
agencies into their remit. Allen isn’t sure that’s the right response, but he
does say that ratings agencies have “a very cosy relationship with certain banks
and there is a perceived need to address this.”

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