Navigant Consulting – Compliance Building

On Sept. 16, 2009, Compliance Week and Navigant Consulting presented an exclusive editorial roundtable about compliance practices at financial services firms at The Mandarin Oriental Hotel in Boston.

(Apparently not so exclusive, considering I was able to get in. I even made it into one of the article’s pictures. – That’s me eating my fingers in the background.)

Compliance Week Editor-in-Chief Matt Kelly moderated the session, which featured Daniel Bender and John Schneider of Navigant Consulting. The full roster of participants is in the article’s sidebar.

You can read more about what we discussed during the roundtable in an article in Compliance Week: Managing Risk in the Financial Sector. (Subscription Required)

A few of my favorite quotes from the article:

Lou Iglesias, chief compliance officer of PanAgora Asset Management: Part of the role of a compliance and risk officer is “being a student of history” and learning from past industry mistakes. “And you don’t have to look back too far to find them.”

James Bone, founder of GlobalComplianceAdvisors LLC: Because there is no school for compliance, continually developing new staff to keep up with regulations is also a challenge. Even if you have an unlimited budget to hire talent, “finding people who have the right skill-set to do the things that you need to get done” isn’t always easy.

Securities Docket put on a great webinar on The Subprime Boomerang: After the Writedowns Comes the Litigation.

Bruce Carton moderated a panel of Veronica Rendon of Arnold & Porter, Richard Swanson of Arnold & Porter and Jeff Nielsen of Navigant Consulting, Inc.

Jeff started off my showing how much complicated the picture is for securitized lending compared to traditional lend hold lenders. There is now a dozen + parties involved with very different interests. There are lawsuits between many of these relationships with fingers being pointed in many different directions. There are also lawsuits within the parties as shareholders are bringing securities class action suits against the investors. Some of the parties changed roles through the the lifecycle of the loan. (Such as the originator becoming an investor.) Here is a snapshot of the parties:

Jeff identified 866 subprime related federal filings, including borrower class actions, securities class actions, contract claims, employee class actions and bankruptcy related claims. Of those 576 are in 2008. California has 17% of the suits and New York has 33%. (California has some tough laws that are the basis of borrower lawsuits.) They are also seeing two new cases for every case that is resolved.

Veronica pointed out that the securitization market grew from $157 billion in 200 to $1200 billion in 2006. That was staggering growth over a very short period of time.

Now we are in a period of rising interest rates, declining home prices, rising unemployment and forced sales.

Unfortunately 50% of adjustable rate mortgage originations over past four years have been subprime. There was some bad underwriting with lots of no-doc loans and high debt-to-income ratios.

The current bulk of suits are now “stock drop” case because the institutions failed to disclose their exposure to subprime risk.

Richard focused on some interesting aspects of the pleadings, hearings and decisions coming out of the cases.

There are increasing suits by purchasers of subprime assets. Lots of the focus on misrepresentations in the offering documents and a failure to disclose risks. These are generally very sophisticated parties doing war including state law claims.

There are also criminal investigations on the horizon. Both the FBI and SEC are looking at possibly bringing charges.

You can listen to webcast and see the slides on the Securities Docket Webcasts page.