Fall out from bad subprime mortgages started hitting where its hurts count — on Wall Street. As the NYT reports today, the outfits that pay interest on bonds have begun to cut off remissions to people who bought bonds that depend on subprime mortgages for their money. The Times article predicts that the drying up of interest payments may force investment banks and others to take drastic write-offs on their bond purchases, further limiting the availability of credit.
Blawgletter knows a teeny dot about the subprime mortgage business and a bit more about commercial litigation. Plus we’ve watched developments on the lawsuit-filing front.
What kinds of case will likely arise from the subprime ashes? Some predictions:
- Auditor malpractice. Fannie Mae led the way with one of these against KPMG.
- Breach of fiduciary duty (derivative). This variety would accuse insiders (officers and directors) of mismanagement (subject to business judgment rule) or disloyalty and would proceed on behalf of the company itself (subject to "demand futility" requirement if board demurs).
- Breach of fiduciary duty (participation in). The aiding and abetting variation hooks in enablers. Probable targets include Wall Street firms and commercial banks that either packaged subprime mortgages into securities for sale to investors or lent the funds that the subprime mortgage companies used to fund or purchase the mortgages themselves.
- Securities fraud. Buyers of stock or bonds whose price fell after disclosure of problem investments in subprime mortgages (either the mortgages themselves or loans to fund the mortgages), subprime mortgage firms (stock), or subprime mortgage bonds.
- Breach of merger agreement. Sallie Mae sued private equity firms for backing out of their agreement to buy the big student lender.
- Bankruptcy. This category may include not only the mortgage companies themselves but also outfits that bought equity in them, purchased their bonds, loaned money to them, or depended on them for business.