The Credit Crunch and the Law
Edited by R P Austin
Ross Parsons Centre of Commercial, Corporate and Taxation Law
Since June 2007, the global economy has been rocked by a credit crisis that Alan Greenspan, former chairman of the US Federal Reserve, has described as a 'once-in-a-century event', and the worst 'by far' that he has witnessed. The end of the crisis is not yet in sight.
How did it occur? What were the 'subprime loans' in the US housing market, and why did defaults on these loans corrupt the world's credit markets as a whole? What were the roles of asset-backed securities, collateralised debt obligations and credit default swaps?
Who is responsible for the disaster? How much at fault were the mortgage originators, who were prepared to disregard prudential lending guidelines? The investment banks, who were hungry to acquire the loans and repackage them in increasingly opaque security structures? The credit rating agencies, who gave these products investment-grade ratings in return for fees from the investment banks? And the investors, who gleefully put their money into products they did not understand, chasing the impossible combination of high credit rating and high interest? Can anything be done to guard against such disasters in future?
In Australia, the credit crisis has generated an odd collection of legal issues. One is the difficulty of valuing investment products for which there is no longer any market. What is a board of directors to do if it simply does not know what impact market turmoil has had, or will have, on the value of the company's assets? Then there are problems arising from the dramatic decline of the equities market during 2008, such as the escalation of price decline when directors' shares are sold into the market to meet margin calls; and the rapid dissemination of rumours, and aggressive short selling to take advantage of those rumours.
Columbia University's Professor John C Coffee Jr and a group of Australian financial and legal experts came together under the auspices of the Supreme Court of New South Wales and the Law Society of New South Wales to explore such issues at a conference held in Sydney in August 2008. This book is, in part, an edited transcript of that conference. It also contains brief essays on the credit crisis.
The fifth in a series of monographs published by the Ross Parsons Centre of Commercial, Corporate and Taxation Law of the University of Sydney's Faculty of Law, this book will be of interest to lawyers, bankers and company directors, and others interested in Australian and global financial markets.