Comments on: CDOs: Murky Deal Documents Compound Woes http://www.nakedcapitalism.com/2008/03/cdos-murky-deal-documents-compound-woes.html Sun, 22 Nov 2009 03:36:02 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Ginger Yellow http://www.nakedcapitalism.com/2008/03/cdos-murky-deal-documents-compound-woes.html#comment-5013 Ginger Yellow Tue, 11 Mar 2008 21:25:00 +0000 http://www.nakedcapitalism.com/2008/03/cdos-murky-deal-documents-compound-woes/#comment-5013 I wouldn't be surprised if there were a few shoddily worded deals, but I suspect that if there's any significant number they're going to be older ones. From what my contacts tell me CDO docs were tightened up considerably after the first CDO blowup post-WorldCom et al. I wouldn’t be surprised if there were a few shoddily worded deals, but I suspect that if there’s any significant number they’re going to be older ones. From what my contacts tell me CDO docs were tightened up considerably after the first CDO blowup post-WorldCom et al.

]]> By: Steve Waldman http://www.nakedcapitalism.com/2008/03/cdos-murky-deal-documents-compound-woes.html#comment-5006 Steve Waldman Tue, 11 Mar 2008 18:31:00 +0000 http://www.nakedcapitalism.com/2008/03/cdos-murky-deal-documents-compound-woes/#comment-5006 Hopefully ginger yellow is right, and the issue is different parties angling for the most favorable interpretation, not outright shoddiness in the contracts. Model risk, when it bites, is not usually litigable. But legal risk can be. You can't sue the modelers, because they did tell you somewhere they were working off a model, whose assumptions could fail. But you could sue a deal sponsor or lawyer for not adequately covering a circumstance so foreseeable, a probability was attached even in the event the model held. We may have yet another negative-sum loss-shifting game to watch and cluck over. <br/><br/>You would think the CYA instinct would have assured that bad scenarios be attended to with great care in these contracts, since everybody knows everybody sues whenever something goes wrong. But then, I guess there's lots of things you would think. Hopefully ginger yellow is right, and the issue is different parties angling for the most favorable interpretation, not outright shoddiness in the contracts. Model risk, when it bites, is not usually litigable. But legal risk can be. You can’t sue the modelers, because they did tell you somewhere they were working off a model, whose assumptions could fail. But you could sue a deal sponsor or lawyer for not adequately covering a circumstance so foreseeable, a probability was attached even in the event the model held. We may have yet another negative-sum loss-shifting game to watch and cluck over.

You would think the CYA instinct would have assured that bad scenarios be attended to with great care in these contracts, since everybody knows everybody sues whenever something goes wrong. But then, I guess there’s lots of things you would think.

]]> By: Ginger Yellow http://www.nakedcapitalism.com/2008/03/cdos-murky-deal-documents-compound-woes.html#comment-4993 Ginger Yellow Tue, 11 Mar 2008 11:58:00 +0000 http://www.nakedcapitalism.com/2008/03/cdos-murky-deal-documents-compound-woes/#comment-4993 It would be helpful if he provided some concrete examples. Certainly I'm aware of poorly written docs from 2000-2002, and there is some degree of ambiguity in CDS definitions, especially before the ISDA standards were published. But I'd be surprised if the wording for something as basic as post-EOD distribution was really ambiguous in a significant number of recent transactions. <br/><br/>Also, usually the question of liquidation or acceleration is left to the discretion of the controlling creditor. You can call that "unclear" if you want, but it's not legal uncertainty.<br/><br/>I strongly suspect there's an element of non-controlling creditors using any angle they can to try to get more money here. Of course, I can't know that for sure because there are no details. One to look into. It would be helpful if he provided some concrete examples. Certainly I’m aware of poorly written docs from 2000-2002, and there is some degree of ambiguity in CDS definitions, especially before the ISDA standards were published. But I’d be surprised if the wording for something as basic as post-EOD distribution was really ambiguous in a significant number of recent transactions.

Also, usually the question of liquidation or acceleration is left to the discretion of the controlling creditor. You can call that “unclear” if you want, but it’s not legal uncertainty.

I strongly suspect there’s an element of non-controlling creditors using any angle they can to try to get more money here. Of course, I can’t know that for sure because there are no details. One to look into.

]]> By: Observer http://www.nakedcapitalism.com/2008/03/cdos-murky-deal-documents-compound-woes.html#comment-4991 Observer Tue, 11 Mar 2008 09:38:00 +0000 http://www.nakedcapitalism.com/2008/03/cdos-murky-deal-documents-compound-woes/#comment-4991 "stunning revelation"<br/><br/>I hope you're being ironic. Martin Mayer wrote about the defects of CDOs in the late 1990s. Satyajit Das has an entire chapter in his book about even worse problems (with recourse, even the definition of the covered entity) on CDS in his book. CDS not the same thing as CDO, of course, but the metaproblem with the metadata is metamega. “stunning revelation”

I hope you’re being ironic. Martin Mayer wrote about the defects of CDOs in the late 1990s. Satyajit Das has an entire chapter in his book about even worse problems (with recourse, even the definition of the covered entity) on CDS in his book. CDS not the same thing as CDO, of course, but the metaproblem with the metadata is metamega.

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