Director Conduct in the Face of Corporate Insolvency

April 2010Articles Malin Bergquist Public Company/SEC Newsletter

In the current economic environment, risk and uncertainty seem to be the dominant themes of the day. While the future remains murky, in hindsight some lessons appear clearly out of the trauma that has engulfed the economy during the past two years. Among the more important lessons is the seemingly obvious notion that events in the financial economy have a significant impact in the real economy. At some point relatively late in the crisis Americans became aware that difficulties originally thought to be contained within the financial sector had spilled over into the real economy. As this realization surged into the public consciousness, the perceived scope of crisis enlarged significantly.

In the credit market, as the smoke clears above the smoldering remains left in the wake of the securitization excesses still wreaking havoc on that market, the convergence between the financial and real economies becomes evident. Without appropriate regulatory oversight, asset securitization resulted in the decoupling of underwriting risk from ownership and balance sheet risk. When the last buyer purchased the last tranche of debt issued by the last marginally solvent borrower and backed by the last nominally solvent ratings agency, the house of cards began to tumble. And tumble it did — with a velocity and magnitude not seen previously in modern history.

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