On Nov. 9, 2007, IMS ExpertServices hosted a panel discussion focusing on the legal and litigation issues arising out of the subprime mortgage meltdown.
Daniel T. Brown is a partner in the Washington, D.C., office of Mayer Brown. An accomplished securities attorney and litigator, he concentrates his practice on securities enforcement defense and litigation, white-collar criminal defense and regulatory counseling. He is a member of Mayer Brown's Subprime Lending Response Team, which the firm launched in October to help clients address the issues resulting from continuing distress in the subprime lending market. Prior to joining Mayer Brown, Mr. Brown worked with several other leading law firms and worked in the Midwest Regional Office of the U.S. Securities and Exchange Commission, where he achieved the position of Branch Chief. He is a graduate of Chicago-Kent College of Law and the University of Delaware.
Brian F. Olasov is managing director at McKenna Long & Aldridge in Atlanta. With an MBA from Emory University and his undergraduate degree from Yale, he provides business and capital markets consultation services to the firm's financial restructurings group, as well as analytical support for the litigation department and independent expert witness work in disputes involving structured finance and credit risk. While on assignment in London, Mr. Olasov researched the feasibility of developing commercial mortgage-backed securities markets in Europe. He also organized the European chapter of the Commercial Mortgage Securitization Association, a trade group that promotes the development of increased liquidity in commercial real estate markets. Before attending business school, Mr. Olasov worked in the fixed income securities department of a major Wall Street investment banking firm, focusing primarily upon the development and implementation of investment and structured finance strategies for financial institution clients involving mortgage-backed securities. Prior to Wall Street, he served as a commercial loan portfolio manager and commercial mortgage lending officer with a regional southeastern bank.
Mark K. Thomas is a partner with Winston & Strawn in its Chicago office and a member of its restructuring and insolvency group. He concentrates his practice in bankruptcies, workouts and restructurings involving all manner of industries and complex corporate issues. Mr. Thomas represents lenders, debtors and borrowers in Chapter 11 bankruptcy cases and in out-of-court workouts and restructurings around the country. He has handled workouts and bankruptcies involving both public and private companies. Mr. Thomas represents secured lenders and syndicated loan agents in loan workouts, restructurings, and bankruptcies, and has assisted bank groups in providing debtor-in-possession financing facilities and bankruptcy exit financing. He also has represented sellers and buyers of distressed businesses and assets in transactions both in and outside of bankruptcy. A frequent author and speaker on bankruptcy topics, he is a graduate of the University of San Diego School of Law and Northwestern University.
Robert J. Ambrogi, moderator, is a Massachusetts lawyer and journalist. Bob is the only person ever to hold the top editorial positions at both national U.S. legal newspapers, the National Law Journal, and Lawyers Weekly USA. An experienced attorney, ADR professional, writer and legal technologist, Bob formerly served as director of the Litigation Services division at American Lawyer Media.
ROBERT AMBROGI: Welcome to today's panel on the subprime mortgage meltdown and the legal issues resulting from that. Roughly a year ago, the U.S. subprime mortgage industry entered into what has been regularly referred to as a meltdown. Home buyers with risky credit histories began defaulting on their mortgages in large numbers, causing more than a hundred subprime lenders to file for bankruptcy or shut their doors. That, in turn, led to a collapse in the market for mortgage-backed securities, and all of this has led to a tangle of complex legal issues involving everyone from humble homeowners to Wall Street mega firms.
Today we're going to talk about that crisis and the legal issues resulting from it with three professionals who are well-versed in this field. Let me introduce each of them and then we'll begin our discussion.
First, joining us from Washington, D.C., is Daniel Brown, who is a partner in the office of Mayer Brown there. He is an accomplished securities attorney and litigator who concentrates his practice on securities enforcement and defense, white-collar criminal defense and regulatory counseling. He is a member of Mayer Brown's subprime lending response team, which the firm launched in October to help clients address the issues resulting from continuing distress in the subprime lending market. Prior to joining his current firm, Dan worked with several other law firms and also worked in the regional office of the U.S. Securities and Exchange Commission, where he achieved the position of Branch Chief. He is a graduate of the Chicago-Kent College of Law and the University of Delaware.
Next joining us from Chicago is Mark Thomas, who is a partner there with Winston & Strawn and a member of its restructuring and insolvency group. He concentrates his practice in bankruptcies, workouts and restructurings involving all manner of industries and complex corporate issues. Mr. Thomas represents lenders, debtors and borrowers in Chapter 11 bankruptcy cases, and in out-of-court workouts and restructurings around the country. He's handled workouts and bankruptcies involving both public and private companies. Mr. Thomas represents secured lenders and syndicated loan agents in loan workouts, restructurings and bankruptcies and has assisted bank groups in providing debtor in possession, financing facilities and bankruptcy exit financing. He's also represented sellers and buyers of distressed businesses in assets and transactions both in and out of bankruptcy. A frequent author and speaker on bankruptcy topics, he's a graduate of the San Diego School of Law and Northwestern University.
And, finally, joining us from Atlanta is Brian Olasov, who is managing director of McKenna, Long & Aldridge there. Brian is a graduate with an MBA from the business school at Emory University and has his undergraduate degree from Yale. He provides business and capital market consultation services to the firm's financial restructurings group as well as analytical support for the litigation department and expert-witness work in disputes involving structured finance and credit risk. While on assignment in London, Brian researched the feasibility of developing commercial mortgage-backed securities markets in Europe. He has also organized the European chapter of the commercial mortgage securitization association, a trade group that promotes the development of increased liquidity in commercial real estate markets. Before attending business school, Brian worked in the fixed income securities department of a major Wall Street investment banking firm, focusing primarily on the development and implementation of investment and structured finance strategies for financial institution clients involving mortgage-backed securities. Prior to Wall Street, he served as a commercial loan portfolio manager and a commercial mortgage-lending officer with a regional Southwestern bank.
And so, let me begin by just – maybe we can go around the table, the virtual table so to speak, and ask each of you from your unique perspectives and the experience you bring to this issue, what you see as really the key and central litigation and legal issues that are coming out of this so-called meltdown. And since I identified you first, Dan Brown, let's start first with you and then go around.
DANIEL BROWN: Happy to. I think the key issue, as we see through the most-recent developments, is going to be valuation. I think valuation is going to factor in the earnings announced as we've seen as of late, and I think it's going to be a continuing problem that entities that hold subprime exposed securities are going to wrestle with going forward. And as they change their valuations, obviously, the underlying valuations are going to change and, in many instances, dramatically, and I think that's going to lead to litigation exposure and then lawsuits filed. I think the other key issue is going to be entities that hold subprime exposed securities for investment and the investment decision is going to be under scrutiny, in particular for entities that are advising pension plans or ERISA plans are going to be an area where there's going to be a lot of litigation.
ROBERT AMBROGI: All right, then let me put the same question to Mark Thomas.
MARK THOMAS: Well, from my perspective, what I've been seeing is the most incredible implosion of mortgage originator bankruptcies that we've ever witnessed. And I think that one of the things that people are going to start doing is a lot of D&O litigation against directors and officers who were operating and managing these mortgage originators prior to their rapid demise. There actually is a Web site, and if you Google "implode" you’ll find an implode-o-meter which has been tracking all the various mortgage originators that filed bankruptcy. And what I've seen over the past several months is companies that literally shut their doors overnight, file Chapter 7 liquidating bankruptcies and leave hundreds if not thousands of employees stuck with unpaid wage claims, vacation claims, and immediate cessation of benefits.
Really what you get down to, I think, if you sort of follow the entire subprime mortgage track, is it starts with inadequately capitalized homeowners who are buying houses beyond their means. And they buy those houses beyond their means because there's an army of originators and brokers and appraisers who for years have been making a fortune packaging up a product, which is in effect sort of a negative amortization loan. So the people buy a house and get further and further in debt, and they're inadequately capitalized and it just creates a domino effect. But, in terms of future litigation, there are a lot of employees and creditors who are being left holding the bag in these bankruptcy cases and I think you're going to see a lot of litigation trying to obtain proceeds from directors-and-officers liability insurance.
ROBERT AMBROGI: Brian Olasov, let's bring you into this. And I just want to make clear that, while you work with a law firm, you are not yourself a lawyer, but you obviously consult with the litigation group at your firm. What's your perspective on this?
BRIAN OLASOV: The way that I come at this is starting with who's bearing the pain in the situation, and there's a lot of pain to go around – I think a number of parties Mark and Dan have already named. But what makes this particularly interesting for me is that the role of securitization has broken up what had been a pretty straightforward borrower/lender relationship. When we go back to the '70s and '80s and think about portfolio lenders, there weren't all that many parties involved in the process so there weren't all that many potential defendants. Now, as a consequence of the division of labor that goes into securitization and the broad expansion of mortgage lending to include nontraditional lenders, if you're a triple-A investor in a mortgage backed security, you really don't need to know much of anything at all about the mortgage market or the underlying borrowers. So, when you have a meltdown like what we're talking about, some of the recriminations and inter-se litigation among all the parties I think is what's going to be particularly complex.
We've got, as we're commenting today, we're probably looking at two-million foreclosures, we're looking at $40 billion in realized losses among institutions so far, $70 billion in downgraded mortgage-backed securities, with more on the horizon. And the result of all of that is that all of those parties that have suffered from any kind of losses at all are likely to play different guises, in many cases both plaintiffs and defendants.
ROBERT AMBROGI: What's fascinating about this so-called meltdown is really that fact – that there are so many potential defendants and so many potential plaintiffs and one might be the other depending on the scenario. I wonder what you see as sort of the litigation lineup here? Who are likely to kind of drive these cases as plaintiffs, who are likely to be the significant defendants as these cases begin to evolve? Dan, if you want to take that, or anybody else?
DANIEL BROWN: Yeah, I'm happy to. I'll answer your question in the context of my answer on the litigation risk that I identified. I think that the risk that flows from evaluation challenges, it's going to be the large banks and holders, the investment banks, who were sponsors of these products and who consequently have a lot of exposure both from holding residual pieces of the bonds that they underwrote, and also from the loan facilities they provided to go out and purchase and package these bonds. We've obviously already seen it with the announcements of late. The plaintiffsthere of course are going to be the law firms that typically lead these large class-action lawsuits against public companies that have earnings announcements that cause their stock to drop.
From the other piece I talked about, in the ERISA area, I think what's going to happen is, you're going to have plan participants who are going to be in plans that have suffered losses from investments in subprime exposed securities, and there's going to be a pressure on the fiduciaries of the, say, pension plan to try to recover some of those losses through affirmative litigation, lest they be exposed to a breach of fiduciary duty case themselves. And the interesting thing in play there is when a fiduciary – when a sort of outside party, an investment advisor – takes on the management of a piece of an ERISA plan, a pension plan, they can themselves become an ERISA fiduciary. So that you'll have the trustee of the underlying pension plan in a position where they can bring a breach of an ERISA fiduciary duty claim against an advisor or manager that had a piece of the fund and was managing it and placed some subprime exposed securities into it.
That can make a, it can solve some problems that normally are attendant to a securities-fraud-type claim, because it can become a much more streamlined, straightforward claim where just the investment decision is called into question and less an emphasis is put on disclosures and things like that. Because I think that at many levels, a lot of the underlying mechanics of these deals were disclosed through lengthy documents. But to just to bring the investment decision into question and play, I think can be, maybe, something that will be attractive to ERISA plan fiduciaries who would bring these cases.
BRIAN OLASOV: And, Robert, this is Brian. I would hasten to add that those class actions are already forming. If you take a look just as recently as this morning, there are already class actions both on behalf of ERISA plan participants at Citigroup and Merrill-Lynch, and also the stock investors of both of those companies that have already filed, and I'm sure that's the first and second in a long series to happen.
MARK THOMAS: Yeah, but, this is Mark Thomas, and as a restructuring attorney as opposed to a litigator, the thing that I find curious about the situation, is that the people that are getting sued, the Citicorps and what have you, they are the investment banks that have been making a fortune off fees off of these products that have come to life in the last several years. Getting back to what you said, Brian, back in the day, if you wanted a mortgage, you'd go to a bank and you'd meet a bank officer. You'd put a deposit down, you'd sign a contract, you got a mortgage, and if you defaulted there was someone you could talk to. Nowadays with the pooling and the packaging of the paper and the sale of that paper to investors who take various strips and traunches, you've got sort of an amorphous servicer out there whose actually servicing the paper and doesn't seem to have the flexibility or wherewithal to work out individual restructurings with homeowners who are facing foreclosure, which unfortunately leads to government intervention.
We've been reading a lot about what the government might do to try to save all these people who've gotten themselves into a certain predicament. I, however, am more of a free-market type and I don't think that a bail out – whether it be of the Wall Street banks who created the product, the rating agencies who rated the product or the homeowners who were buying homes that they couldn't afford through vehicles that caused them to continually get deeper and deeper in debt – I don't think that any of them are really worthy of a government bailout. I think the rating agencies will be faced with some substantial litigation because the subprime meltdown has sort of led to the SIV meltdown right now and I think that over the next week or two we will see what the rating agencies do that will result in these SIVs, structured investment vehicles – think Enron off balance sheet – having to dispose of assets that are non liquid at fire sale prices.
BRIAN OLASOV: And all of that – this is Brian again – all of that is in the context of the consortium that Paulson at the Treasury Department has tried to orchestrate between Citigroup, Bank America and JP Morgan, to build a super-SIV to help the orderly liquidation and management of about $100 billion. And that will be vastly complicated by that being assembled in the face of additional rating downgrades by the rating agencies. So, there is an element to all this that has at least the prospect or the risk of a downward spiral to it. Obviously the fixed income markets are driven in large measure by the need of individual investors to buy to a rating, so that the downgrade in those ratings, in and of itself, leads to the forced liquidation of securities, so that when you’re trying to sell into an illiquid market you have additional market value write downs and reduced credit availability to the underlying mortgagors who are at a point where they desperately need some kind of take-out financing. So there is a certain circularity to some of these impulses.
ROBERT AMBROGI: Mark, do your comments suggest that the government, either the federal government or state governments – I hear you saying that you're a free market kind of guy, but what is their role, and what should their role be going forward in addressing this issue?
MARK THOMAS: My view is that this all started with homeowners buying houses. And if you start from the bottom and you look up, you figure out what house were they buying, who packaged up their debt for them that said, "Hey, you don't have to buy a 30-year fixed rate mortgage, you can buy an adjustable ARM mortgage that will reset in two years and you'll save a point over a year and a half." My bottom line is I'm not in favor of the bail outs, and I think in these situations it's painful, but it is an absolute necessity that the easy money, people understand that it can't always be easy money and if there's up side there's down side, and you just have to let the pain shake through and people have to restructure and reprice and revalue.
You know, the old, we'll give you a note document mortgage at 100 percent of the appraised value of your house, and the appraised value was an inflated value, and you couldn't afford the monthly payments, but don't worry, we'll just give you an interest-only mortgage where you don't even have to pay all the interest, and that kind of leverage is not healthy for the economic system as a whole, and that's what's happening now.
ROBERT AMBROGI: As an outsider to a lot of this, I was surprised as I began to learn about the extent to which mortgage loans are securitized these days, I think I've read its anywhere from 60 to 70 percent of all loans are now securitized. Does that suggest that, well, we've talked about class actions, and who are the class actions likely to be focused at? What are they likely to be seeking out of these actions?
BRIAN OLASOV: In my experience, when we’re talking about structured finance litigation, the class action plaintiffs don’t really know who to sue, and so they sue everybody. In particular, when you're dealing with aggrieved borrowers, and obviously when we're looking at two million potential foreclosures, you can see all sorts of allegations about predatory lending claims and RESPA violations and all of the other potential fraud claims that may support some kind of lender liability action. And it's not clear to the underlying borrowers exactly who their lender is or was or who the decision maker with respect to that loan is or was.
And as confusing as that is, I think that there's also a basic misunderstanding on the part of a lot of the regulators about the mechanism of securitization. One conference that I attended a couple of weeks ago, listening to regulators from a number of the different bank offices, both federal and state banking offices, had the aspect of regulators marching onto the battlefield and shooting the wounded. They were thinking about regulating players who no longer existed. I think Mark has already talked about there have been something like 120 mortgage broker/mortgage banker operations folded since the beginning of the year. Seeking to impose some kind of fiduciary responsibility on the part of lenders – which at least there are strains of that in Barney Frank’s bill, for example, that made it out of his committee and is likely to pass the House – is going to have a terrifically chilling effect on the availability of credit, particularly to marginal borrowers. I think the law of unintended consequences is going to be governing the way the regulators address some of these problems.
ROBERT AMBROGI: Dan Brown, you still with us?
DANIEL BROWN: I’m still with you, yes. Yeah, I was wondering if particularly Mark was going to comment on the Frank legislation that came out – in particular the provision, as I understand it, that would essentially allow bankruptcy judges to rewrite the terms of a mortgage down to the present market value of a mortgage – what that impact was going to be. The other fact that we didn't talk about and I think Mark's thought that it's going to hurt borrowers is correct, but the, some of the distress is caused by the downward trend in home prices, has been an aggravating factor in this if not necessarily one of the causal factors.
MARK THOMAS: I think also the litigation is going to, you know, like it always does, they're going to try to find the deep pockets. And when the people that are bringing this litigation are trying to figure out, sort of, what caused the domino, what tipped the domino, what caused everyone to start collapsing, I think what they'll look at is the Wall Street firms that really were sort of on all sides of this type of situation. They were securitizers, they bundled up assets, and they made massive fees, and they sold off the slices. They also, though, were investors, they also were buying these loans, and there came a time this past spring when all of a sudden the originators, the mortgage originators who had bundled up, for example, $100 million in loans to pay a bunch of closings for individual borrowers, found out that they couldn't then turn around and sell those loans to the typical investor pools because the investors were not willing to pay over par. Once those investors weren't able to pay over par, the originators were too thinly capitalized to satisfy their debts to the warehouse lenders. And I think you'll see people saying, Well, let's go get the investors and the syndicators who really were "obligated" to buy this paper at par plus and at the last second pulled out and that's the first cause, that’s the first domino. Whether that's the case is beside the point, but they have the deepest pockets.
ROBERT AMBROGI: What about the, what about the claims against the lenders by the underwriters trying to get them to buy back these loans? Is that something we're going to see?
BRIAN OLASOV: That's actually constituted the bulk of the filed suits so far among the 140 or so suits that I'm familiar with. The bulk of those, I believe, are repurchase claims being asserted by, really by various plaintiffs. Starting with the servicers to the mortgage-backed securities trusts, they have a responsibility under a document, their contractual obligation to the trust. It's called the pooling and servicing agreement, and they represent the trust's interests and obviously, indirectly the interests of the certificate holders, where if they see a breach of representation or warranty on the part of the previous mortgage loan seller, and that breach is a material and adverse breach in terms of impact to the trust and the certificate holders, they have an obligation to pursue a repurchase claim against the mortgage loan seller. And we're starting to see that happening more and more frequently.
The problem, of course – which we've already hinted at – is that a number of the original mortgage loan sellers are judgment proof because they're gone. That actually has given rise to an additional theory of litigation, which is we'll go after the warehouse lender, who aided and abetted the origination and packaging of these mortgages in the first place.
ROBERT AMBROGI: On what grounds are they going after the warehouse lenders?
BRIAN OLASOV: What they're saying is that the warehouse lender, in its capacity as a lender, and in its customary due diligence, in taking a look at borrowing-based collateral, should have been familiar with the difficulties in the mortgage loans that they had to collateralize their loan agreement. That they either did know or should have known as a result of customary prudent lending practices, that in fact that they were conflicted as a result of the sole source of their repayment coming from the bundling up of those ultimately defaulted, defaulting mortgage loans, that was the primary source of repayment in order to get them paid off as warehouse lender.
MARK THOMAS: Yeah, that's a difficult and interesting theory when you find that many of the repurchase claims that are being asserted are based on "early payment defaults," or the EPDs, where the borrower defaults on payment in the first 60 or 90 days of the mortgage. I wonder how any warehouse lender could do appropriate due diligence on the ability of a borrower to repay the first one, two or three months of its mortgage when a lot of these mortgages were touted and sold as no-document loans. And so therefore the due diligence would have required someone to say, "Well, here's an application for a loan, but there's no documents that were submitted by the borrower in support of the loan. No tax return, no W-2s, no proof of income." So maybe they shouldn't have been making no-doc loans in the first place.
BRIAN OLASOV: Well, and as I mentioned earlier, I think the market response is that we're not seeing those loans in the market any more and we probably won't see them for some period of time.
DANIEL BROWN: Yeah, this is Dan Brown; I'll add going back to Brian’s observation that in a number of these cases, the bulk of the cases that have been filed so far, are that plaintiffs are beginning to try the aiding-and-abetting theory. Of course, the Stoneridge case, that the Supreme Court heard oral arguments on in early October, will have potentially a large impact on the types of claims. I thought perhaps Brian could speak to whether – these claims as I understand them sound in fraud – but whether the outcome of Stoneridge will dictate or potentially open the door for broader federal court fraud claims depending on how it comes out.
BRIAN OLASOV: Well, it certainly will, but we also have the First Allied/Lehman case that was upheld at the court of appeals level, although the damages got reduced. In that case, as I remember, the court actually took a look at some flaming e-mails from inside the warehouse lender where there was some acknowledgement of unsafe and unsound lending practices. And they were both … again, the warehouse lender played several different capacities, they were both warehouse lender and I believe depositor into the trust, and the investment bank underwriter of the bonds. But, back to the Frank legislation, the Barney Frank legislation actually codifies what some of the courts have split on, which is that it does impose direct liability on the behalf of the securitizers subject to certain safe harbor exceptions for high cost mortgages. Obviously it's very troubling for everyone in the securitization industry.
ROBERT AMBROGI: What is the … I'm sorry, go ahead.
MARK THOMAS: This is Mark Thomas, I was just going to say that the legislative fix that was being considered a day or so ago – which is to sort of allow bankruptcy judges to modify mortgages and impose a "current market rate" of interest and write down the mortgage to the present value of the asset – that is something that's available in corporate bankruptcy cases to bankruptcy judges. So they're well suited in a corporate case to value an asset and cause a forced restructuring of a secured loan. The problem is if you have two million foreclosures and half of those people go to bankruptcy court to get relief from their mortgages, we're going to have some very tired bankruptcy judges.
ROBERT AMBROGI: What are the implications of the so-called meltdown for potential defendants? Are we likely to see consolidation of cases? Are we likely to see cases assigned to the multi-district docket? Are we likely to see defendants working together in orchestrating defenses of these cases?
BRIAN OLASOV: This is Brian. I'll hazard a guess because we've seen some of this, and it gets back to my earlier comment, which is that, particularly when you have the underlying borrowers, the mortgagors, bring class-action suits and their preference is simply to name everyone who has ever touched the mortgage as a defendant, what's happening is that that's also clogging up the system. But at the end of the day, I think that there are so many fault lines in these securitizations in terms of various interests that I'm not sure that it really lends itself to many joint defense agreements. These individual participants are going to be doing a lot of finger pointing among themselves.
ROBERT AMBROGI: It's not very neat, is it? It doesn't line up in a clear left and right.
BRIAN OLASOV: No. Even though these contractual obligations borne by all of these parties, they're obviously spelled out, in a lot of cases the contract language isn't as precise as one would hope.
ROBERT AMBROGI: Maybe there's other thought …
DANIEL BROWN: I was just going to say that I think Brian is right, his analysis is right. The fault lines are so many in these deals that the parties don't line up naturally on one side or the other. There is the availability of many sorts of counterclaims and cross claims. I think at one level, because of the different hats that many of the participants wore at different times with different deals, you may come to see sort of decision that entities will decide not to pursue claims as an up front practical matter just because the payoff is that they don't have to defend against those same claims on a different deal that they may be in that position as well. So it's sort of a mutual assured destruction kind of détente. And I don't know where that's going to line up, but I think that maybe that's going to be an issue that some of these big players are going to have to grapple with and probably come to some sort of decision like that.
ROBERT AMBROGI: And I realize that we're probably in the early stages of however this might play out, but have there been significant developments to date out of the courts that have had an impact on how these cases will proceed in the future?
BRIAN OLASOV: I'd love to hear what Mark and Dan think about this, but there haven't been that many cases in any kind of structured finance debacles. The cases that I've been involved with over the years, the vast majority of them tend to settle out of court. And these are new enough markets and these markets have grown up in very robust real estate times where the underlying borrowers and their lenders could essentially count on double-digit inflation bailing them out of any kind of structuring or underwriting problems. Now the music has stopped and so now we're going to see whether or not the mechanisms of securitization hold up properly. I just don't think that they've been particularly time nor court tested.
MARK THOMAS: Yeah, in connection with the bankruptcy cases filed by the mortgage originators, the people that were actually doing the fundings at the closings when borrowers were actually purchasing their houses, they have not been around long enough yet for the investigation and causes of action to truly be sort of instigated by the creditors committees, who are the ones who are likely to be bringing the causes of action in the bankruptcy cases. I know from experience that they have been bringing claims against directors and officers, and I know that there are many of these cases where there are detailed investigations regarding the roles of the warehouse lenders and the roles of the investors and in several cases the same institution was both a warehouse lender and an investor. So it's a little too early to sort of figure out where that's going to end up.
BRIAN OLASOV: Well, and the first major blow up was New Century Financial Enterprises, and they only filed on April 7. I think that there was a bankruptcy examiner appointed only three or four months ago. So obviously they've got a long way to go before we get that official story.
ROBERT AMBROGI: Dan?
DANIEL BROWN: Yeah, I was just going to add that I agree with the observations of Brian and Mark that it's still too early to really draw any conclusions about trends at this point, but loss causation obviously is going to be the big issue in many of these securities class action claims. Whether, simply stated, I think the question is, What was, what precipitated this? Was it something external to the deals, is it the loss of a robust real estate market, is it macroeconomic factors, or is it something about the deals and about the way that the deals were put together and the businesses were run. If it's the former, then that is good news for many of the potential defendants. If the latter view starts to take over, than loss causation may not be as effective in getting these claims knocked out early.
BRIAN OLASOV: And all of these cases are going to be winding their way through the courts against a backdrop of a declining market, so the damages are only deepening over time. And I think that adds additional complexity not only to allocation of liability, but also estimation of damages. Who's responsible for what when? And in the course of the court case, the market continues to drop.
ROBERT AMBROGI: We are just about at the end of the scheduled time for this, and before we close I'd like to go around and give each of you an opportunity to provide your wrap-up thoughts, your final thoughts on this topic, and also if there's anything else you want to speak on that we haven't talked about at thispoint, now's your chance. So let me just go around and since I started with Dan before, let's start again with Dan Brown and get your final thoughts.
DANIEL BROWN: Final thoughts, I still think we're at the beginning of all this and I think as the stress continues to work its way through the economy, as I guess as the losses mount, we're only going to, probably to see more litigation.
MARK THOMAS: This is Mark Thomas, and I think, my thoughts are that, you know, irrational exuberance and over leverage causes problems, whether it's a homeowner or a business owner, and this market, the housing market and the easy availability of credit and too much credit to people who couldn't afford it has, I think the downfall was inevitable and it went on for as long as it did because there were some big players making a lot of money in the process of sort of assembling and creating this product and then selling it off, without regard to what the "asset" was that was in the gift basket that they were selling to their investors.
ROBERT AMBROGI: Brian, your final thoughts.
BRIAN OLASOV: Yeah, and obviously I've got a very slightly different perspective because I'm looking at it from a finance perspective. As much of an advocate as I have always been for securitization, the benefits are manifold and I think the U.S. consumer has particularly benefited from increased credit availability, more flexibility, lower pricing. We're seeing the soft underbelly of securitization, which economists call moral hazard risk. Which is that, again in the good old days, if I'm a portfolio lender and I make a mistake in underwriting or loan administration, I pay for it. In the days of securitization, I can make that loan and may not make it as cleanly as I would have as a portfolio lender, knowing that I'll be able to sell it off in the marketplace and it's someone else's problem. So, I think that's going to be one of the broad themes that we see emerge out of all this litigation: Whose responsibility was it to properly originate, underwrite and service these loans?
ROBERT AMBROGI: Well thank you very much to all of you for taking the time to participate today. We sincerely appreciate it. Thanks again to Dan Brown of Mayer Brown, Mark Thomas of Winston & Strawn, and Brian Olasov from McKenna, Long, & Aldridge. Good afternoon, gentlemen.