[OPE] What losses can you blame on the market, and what losses can you blame on market actors?

From: Jurriaan Bendien (adsl675281@telfort.nl)
Date: Tue May 13 2008 - 15:48:10 EDT

I mentioned before about the legal wrangles arising out of the credit crisis - here's a clip:

Wave of Lawsuits Over Losses Could Hit a Wall 
Published: NYT May 8, 2008

(...) Shareholders in big financial firms have accused UBS, Merrill Lynch, MBIA and Morgan Stanley, among others, of trying to hide their home loan problems, which later led to declines in their stock prices. Institutional investors have sued investment firms, including UBS, saying that they were misled into buying risky securities that later fell sharply in value. And there are more possible defendants, like the rating agencies that were supposed to evaluate these mortgage securities and the accounting firms that audited these companies. "The wave of litigation that we've seen, and certainly the current momentum, is going to eclipse what we saw out of the savings and loan crisis" of the early 1990s, said Jeff Nielsen, managing director at Navigant Consulting. "Some of those cases are still ongoing." A recent study by Navigant found that 170 lawsuits - 44 of which were securities suits - had been filed because of subprime mortgage losses in the first three months of this year, up from 89 in the last quarter of 2007. (...)

In a complaint filed in state court in New York in February, HSH Nordbank, a German bank, charged that "UBS knowingly and deliberately created a compromised structure based upon less desirable collateral" - that is, that the investment sold by UBS relied on much lower-quality assets than the company had described. HSH said the value of its investment had fallen more than $275 million. The case raises the question of what level of disclosure and due diligence is required in complex transactions between financial institutions when one side has access to more information about the assets underlying the transaction, said Philippe Z. Selendy, a lawyer at Quinn Emanuel who represents HSH. "This type of litigation is novel." Even if a plaintiff can show that a seller gave misleading information about the value of mortgage-backed securities, it must also prove that the misstatements caused the plaintiff's losses. Defendants will probably argue that "it wasn't that we misrepresented the risk, it's that these instruments were affected "by a broader market downturn, Professor Fisch said. "It's not clear how the court would analyze that."

Complete story http://www.nytimes.com/2008/05/08/business/08legal.html?_r=1&sq=Thursday,%20May%208,%202008&st=nyt&adxnnl=1&oref=slogin&scp=92&adxnnlx=1210342700-Ki7oPuYtJKO1/i0y7B6Zqg
Karl Marx was much more blunt in his mode of expression. He referred simply to financial "swindles". 

That is OK of course, especially if you don't have any money invested yourself - but for those with great assets and yield curves at stake, the precise legal definition is very important - you gain or lose money depending on how it is drawn. If there is a law against it, or it is against the law, it's criminal. If there is no law against it or it is not against the law, it is not criminal, but it might still be morally reprehensible and consequently give legitimate cause for litigation. The term "swindle" covers both the criminal and the non-criminal aspects, i.e. a swindle can be a legal swindle, or an illegal one. It is still a swindle, in the same sense that something which is not against the law might nevertheless be totally corrupt.

In the Walrasian economic universe, the theory is that market actors have perfect market knowledge. This is evidently not true, and the very fact it is not true, is itself a powerful motivator for market action. But nevertheless official economics insists on the theory of the Walrasian universe. Now who is totally stupid here?

The most interesting thing about this whole controversy, is that it provides a glimpse of how markets really work - i.e. how they work in reality, and the real morality followed, as contrasted with textbook theory and silly "game theory" where actors A, B and C trade their coloured beans to prove an economic textbook principle.


PS - "Swindles" obviously occurred thru the whole history of trade - Jan Toporowski (The end of finance, p. 93) cites the case of how in 1719 John Law's Mississippi Company aimed to organise the repayment of the French National Debt by means of a futures contract that would cause investors to abandon British securities, a gambit which failed spectacularly, and caused the collapse of the Company. 

Where the Mississippi rolls down to the sea 
And lovers found the place they'd like to be 
How many times before the song was ending 
Love and understanding 
Everywhere around 
Mississippi, I'll remember you 
Whenever I should go away 
I'll be longing for the day

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