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[IMGCAP(1)]NEW YORK CITY-”So much blame to be held and so little liability” is how Stuart Grant, managing director of Grant & Eisenhofer P.A., summed up the origins of the credit crunch that grew out of last summer’s subprime meltdown. However, Grant and other speakers at Thursday’s panel, “The Subprime Crisis: Taking the Mystery out of the Meltdown,” made it clear that efforts are under way both to assign accountability in the crisis and to minimize the possibility of it happening again.

[IMGCAP(2)]Often, the attempt to hold people or organizations accountable for subprime losses has taken the form of a class-action suit. “There’s going to be a lot of litigation” as the result of the subprime meltdown, said Jay Eisenhofer, cofounder of Grant & Eisenhofer, which presented the panel. Grant & Eisenhofer is a boutique law firm representing institutional investors. Already, he said, 25 to 30 class actions have been instituted across the US on “misrepresentation during sale” grounds, and there have been several “breach of fiduciary duty” claims against corporate officers or boards. Eisenhofer pointed out that legal liability is not easy to establish in these areas, and must be looked at on a case-by-case basis. However, he said that “responsibility rests on knowledge,” and there is growing evidence that financial firms were more aware of potential pitfalls than they had let on prior to the meltdown.

Panelist William Patterson, executive director of Change to Win Investment Group, identified another strategy his organization is pursuing: recommending that shareholders vote against certain board members at major financial firms that failed to manage mortgage risk, thus leading to billions of dollars in lost shareholder value. Patterson said reforms in corporate governance must be one of the outcomes of the subprime crisis, and with April a busy month for financial institutions’ annual shareholder meetings, “we intend to pursue that in earnest this proxy season.” He added, “this is not about wholesale retribution,” but is instead meant to take a “surgical” approach to specific failures by corporate boards. To help reduce the possibility of boards failing to provide adequate oversight, Patterson said it’s important that the board be led by an independent chairman rather than have the firm’s CEO take on that role.

Steve Malinowski, managing director of Global Transition Solutions, called the crisis “a liquidity ‘perfect storm’” and said his firm has devised a “stress test” for investors to apply. Among the elements of that test are determining how frequently portfolio valuations are updated, and by whom; estimating transaction costs for all portfolio holdings; and determining the number of brokers willing to provide liquidity. Malinowski noted that the fixed-income trading environment has improved but is difficult to predict, and the markets are “not invulnerable” to another wave. In another nautical reference, Malinowski compared the Federal Reserve’s response in the “unprecedented” chain of events that led to the Bear Stearns & Co. collapse with the stunned assessment from a character in the movie “Jaws” upon first seeing the monster shark: “You’re gonna need a bigger boat.”

In the first half of the three-hour panel, held at the Barclay New York, the roots of the subprime crisis were traced by George Oldfield, principal of the Brattle Group, and Kirsten Flanagan of the accounting firm Schechtman Marks Devor. During a Q&A session that concluded the event, Oldfield and Grant offered differing takes on similarities between the subprime meltdown and the savings & loan crisis of two decades ago. Oldfield said the two financial upheavals were “very similar,” but added that he doesn’t believe securitization will go the way of the many thrifts that closed their doors during the S&L crisis. For his part, Grant compared the securitization of subprime mortgages to the fairy tale “Rumpelstiltskin,” in which a dwarf conspired with the captive daughter of a miller to deceive the king by spinning straw into gold; their system was successful at first but eventually buckled under the king’s increasing demands.

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