Afternoon:
8°c
When people talk about the success of the City, they tend to overlook the law firms although the magic circle of big City houses have been profitable, and lucrative for their higher-level employees, while managing to avoid for the most part coming under foreign ownership. The law, even English law, remains a less international profession than most of the other City activities.
But the law, as represented by the domination in London of big British firms, could also emerge as one of the casualties of the unfolding financial crisis. The reason is simple. The banks' recent behaviour, and the consequent collapse of so many financial products, will spark a tidal wave of litigation.
Indeed, I have been told that one of the latest innovations in the hedge-fund world is to create offshore funds whose sole purpose is to finance such activity, and whose strategy will comprise financing legal actions for a cut of the subsequent damages - presumably with the optional extra of going short of the target bank just before the action is launched, or long just before publication of an out-of-court settlement.
Given plentiful finance, there are two main obstacles to such actions. One is the shortage of expert opinion that will be needed to provide evidence in court as to the value of derivatives such as collateralised debt obligations (CDOs).
This is not just because the financial services industry has proved much better at inventing and selling CDOs than valuing them but is also a function of the fact that these things often only have a value by reference to the mathematical parameters of the models used to create them.
Now these models have been blown up by events they failed to predict, the parameters no longer exist with which to value the instruments. One of the few outside experts in this field reckons that half the CDOs out there can't be valued at all, and valuations of the other half may well be hopelessly inaccurate within a week.
That also explains in passing why the banks have failed so miserably in their estimates of how much should be written off and why, even after the completion of the current bank reporting season, there is likely still to be much opacity and uncertainty out there.
All this comes before the associated problems of complexity. For example, if an American bank in London sells a French derivative to a Middle East investor, what court has jurisdiction and whose laws apply?
A second barrier to litigation is that it can be embarrassing to the litigant when he admits in court how ignorant, gullible or greedy he was before being taken for a ride by the bank being sued. Barclays Capital has had to put up with this in its current action against Bear Stearns, as have the bankers suing Guy Hands and Terra Firma over the Box Clever deal. But these cases also prove that if the stakes are high enough, the humiliation can appear worth it.
So when it comes down to it, the great barrier holding back the tide of litigation in this country is that the best law firms do not want to get involved because they are conflicted. They have spent the last 20 years working for the investment banks that are now likely to be sued. Therefore, none of the firms wants to be seen aiding litigation against a bank that was, is or may be a client.
But this could be the Achilles heel of the magic circle firms. The Americans have sensed an opportunity and in the past few months several US law firms have opened up in London specifically to pick up the cases the British firms feel they cannot handle.
The opportunity exists, for the first time, for these non-British law firms to get a strong foothold in London, and become involved in long-term litigation where the protagonists are the major City firms. If the magic circle allows them to establish such a foothold, they may subsequently find them impossible to shift.
ACCORDING to the headlines yesterday, even in the Financial Times, the nationalisation of Northern Rock was met by "fury". It was the same message in countless emails from mortgage brokers and financial advisers, who are always out for a bit of free publicity. "Fury", it appears, was everywhere.
Except I saw and heard none of it. There was disappointment certainly among the bidders. There was frustration the process had taken so long. There was resignation at the inevitability of this messy outcome. There was boredom among everyone who is neither a depositor nor mortgagee of the Newcastle bank.
But the only people expressing fury wereRock shareholders - one the selfappointed voice of the private investors who should by now have taken the chance to sell out, the other Jon Wood, a hedge-fund activist who cares so much about the welfare of British taxpayers that he lives in Monaco.
Wood built up a large shareholding in Rock, presumably because he believed no rescue could be mounted unless he liked and accepted the terms. His bluff has been called by the Government, and he stands to lose £80 million or more. That may well make him furious, but it should be with himself for making a wrong bet, not with the Government for refusing to be bounced by him.
