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Is Credit Default Swap Litigation the Next Big Thing?
The American Lawyer
October 03, 2008
Correction: Due to an editing error, an earlier version of this story contained a paragraph that inaccurately described the outcome of a credit default swap case involving Quinn Emanuel Urquhart Oliver & Hedges.
It seems that hardly a day goes by anymore without someone predicting with utmost confidence that boom times for litigators are just over the horizon.
Thursday's prognostication, courtesy of a media lunch hosted Wednesday by Paul, Hastings, Janofsky & Walker: It's going to be all about the credit swaps.
Robert Claassen, chair of the firm's derivatives group, and Keith Miller, chair of the credit crisis group, told reporters that the banking industry's implosion means that banks with a piece of the $43 trillion market in these unregulated instruments are likely to sue to recoup their losses. And who are they going to sue? Other banks.
A credit default swap, for those of you who aren't versed in the obscurities of sophisticated financial instruments -- a group that until yesterday included us -- is a credit derivative contract in which the buyer makes regular payments to the seller in exchange for the right to a payoff if there is a default or "credit event." Basically, these are insurance contracts, which were widely sold as a hedge against declines in the markets for complex securities.
But if credit default swap litigation takes off, big Wall Street firms could end up on the outside looking in.
The problem is conflicts.
As we've written before, banks don't generally like to sue other banks, and they particularly don't like the law firms that get in the middle of such disputes.
Miller speculates that firms outside of New York that don't ordinarily represent the big banks will have real entree here, just as they have in signing up the hedge fund clients that are already active plaintiffs against banks.
On the other hand, we don't expect to hear much from the winner of that case, either. It was Merrill Lynch, represented by Skadden, Arps, Slate, Meagher & Flom.
