Thanks Eliot

Larry Ribstein has a great post on the failure of SOX. Weren’t all those controls there to protect us?

Remember when SOX was supposed to, at enormous cost, expose the weaknesses and risks lurking in companies so they could be addressed to avoid another Enron? As Tom Kirkendall and I have been observing for awhile: fat lot of good SOX did. Could we please think about that when we try to regulate in the wake of this catastrophe?
And while we’re at it, let’s think about yesterday afternoon’s market plummet. That happened (and it’s likely to continue this morning) because AIG, facing catastrophic downgrades of its securities, needs 70 billion by tomorrow to avoid bankruptcy.
Should we worry about that? Here’s what the WSJ has to say:
The company, whose stock fell 61% yesterday, is such a big player in insuring risk for institutions around the world that its failure could shake the global financial system. much of its exposure is related to credit default swaps, insurancelike contracts tied to corporate defaults. * * * The market for credit default swaps is immense, trading against about $62 trillion of debt. Some participants in the largely unregulated market worry that the default of a major player such as AIG could trigger chaos. * * *
[T]he firm is used by many companies world-wide to manage a range of risks, including exposure to investments in subprime mortgages. Its demise would potentially make it harder or more expensive for businesses to control their risks.
How did this happen? Well it’s worth speculating that it had something to do with AIG being left without its long-time leader, Hank Greenberg, for which we can thank Eliot Spitzer. As I’ve noted, per the WSJ (last May):
A careful and lengthy look at the evidence available so far . . . suggests that the AIG case, like so many others that Mr. Spitzer brought, was an example of prosecutorial excess. Instead of uncovering some great fraud by a titan of industry, its main result has been to damage the company, and harm innocent managers and shareholders. * * *Trading above $72 in February 2005 before it was Spitzerized, AIG shares closed yesterday at $39.57. The company’s directors defend themselves by saying Mr. Spitzer gave them little choice but to dismiss Mr. Greenberg. Whether that was true at the time, they – and Mr. Spitzer – owe an apology to AIG shareholders.

Posted by on September 16th, 2008 at 10:29 am


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