40
Scott Canon, “Telecommunications Mogul Is in a World All His Own,”
Kansas City Star,
October 4, 1999, p. A1.
45
Gretchen Morgenson, “Despite Access, Star Analyst Missed WorldCom Trouble Signs,”
New York Times,
July 9, 2002, p. C1.
46
Jack Grubman, Congressional Testimony, July 2002.
47
Charles Haddad, Dean Foust, and Steve Rosenbush, “WorldCom's Sorry Legacy,”
BusinessWeek,
July 8, 2002, p. 38.
48
Haddad, Foust, and Rosenbush, p. 38.
49
Charles Gasparino, Susanne Craig, and Randall Smith, “Two Congressmen Want to Know If WorldCom Executives Received Hot Shares in Bid to Curry Favor,”
Wall Street Journal,
July 10, 2002, p. C1.
50
WorldCom Revised Statement Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934, July 8, 2002, pp. 2-6.
51
WorldCom Revised Statement Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934, p. 6.
52
WorldCom Revised Statement Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934, p. 6.
53
WorldCom Revised Statement Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934, p. 2.
54
Michael E. Kanell and Russell Grantham, “WorldCom Scandal; CEO Had Great Run, Hard Fall,”
Atlanta Journal-Constitution,
July 1, 2002, p. 1A.
55
WorldCom Revised Statement Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934, p. 2.
56
WorldCom Revised Statement Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934, p. 4.
57
WorldCom Revised Statement Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934, p. 5.
59
Creswell, p. 106; Melvyn Westlake, “Surviving the Credit Crisis,”
The Banker,
May 1, 2002, p. 109.
60
Westlake, p. 109; Stephen Fidler and Vincent Boland, “Debt Mountains Threaten Avalanche,”
Financial Times,
May 31, 2002, p. 18.
62
Nina Mehta, “Stress Test,”
Institutional Investor,
February 2002, p. 73.
63
Mark Parsley, “Credit Derivatives: You Ain't Seen Nothing Yet,”
Euromoney,
December 1997, p. 72.
64
Federal Reserve Supervisor Letter SR 97-18, Application of Market Risk Capital Requirements to Credit Derivatives, June 13, 1997.
65
Tom Kohn, “WorldCom Bankruptcy May Spark Payout on $10 Bln of Derivatives,”
Bloomberg News,
July 22, 2002.
66
International Swaps and Derivatives Association, “Enron: Corporate Failure, Market Success,” April 17, 2002, p. 12.
67
Shawn Tully, “Risky Business,”
Fortune,
April 15, 2002, p. 116.
68
Ed Blount, “Can You Still âKnow Your Counterparty' in the Age of Enron?”
ABA Banking Journal,
April 2002, p. 41.
69
Phillip L. Zweig, “Dizzying New Ways to Dice Up Debt,”
BusinessWeek,
July 21, 1997, p. 102.
70
Grant Ringshaw, “Banks Pass the Bonds Buck,”
Sunday Telegraph,
June 30, 2002, p. 8.
71
“Financial Fault-Lines,”
Financial Times,
March 2, 2002, p. 14.
73
“Financial Fault-Lines,” p. 14.
75
Greg Ip, “Credit Window: Alternative Lenders Buoy the Economy But Also Pose Risk,”
Wall Street Journal,
June 10, 2002, p. A8.
76
Andy Serwer, “Dirty Rotten Numbers,”
Fortune,
February 18, 2002, p. 74.
77
“The Jack and Jeff Show Loses Its Lustre,”
The Economist,
May 4, 2002, p. 58.
78
“The Jack and Jeff Show Loses Its Lustre,” p. 57.
80
General Electric Form 10-Q, July 23, 2001, Item 1.
81
Martin Mayer, “The Dangers of Derivatives,”
Wall Street Journal,
May 20, 1999, p. A20.
82
“Global Financial Stability Report,” International Monetary Fund, March 2002.
83
Stephen Fidler and Vincent Boland, “Debt Mountains Threaten Avalanche,”
Financial Times,
May 31, 2002, p. 18.
84
Andrew Webb, “Four Questions Facing the Credit Derivatives Market,”
Derivatives Strategy,
April 1999, p. 31.
85
John Ferry, “J. P. Morgan Refutes Credit Derivatives Wrongdoing,”
http://www.risknews.net
, February 27, 2002. In October 2002, I was retained to testify on behalf of a Korean party to a dispute with J. P. Morgan Chase related to credit derivatives based on Argentina's debt.
88
Jenny Wiggins, “Growth of Structured Finance Sector Set to Slow,”
Financial Times,
July 1, 2002, p. 26.
89
Rebecca Bream, “Moody's Expects Pressure on CDOs,”
Financial Times,
July 10, 2002, p. 31.
91
Britt Tunick, “Williams' Boomerang: Should Merrill and Salomon Have Known before Pricing Convertible?”
Investment Dealers' Digest,
February 11, 2002.
92
David Barboza, “Complex El Paso Partnerships Puzzle Analysts,”
New York Times,
July 23, 2002, p. C1.
93
Carol J. Loomis, “El Paso's Murky Magic,”
Fortune,
July 22, 2002, p. 206.
94
David Barboza, “Ex-Executive Says Dynegy Asked His Help to Cook Books,”
New York Times,
August 5, 2002, p. C1.
95
Dan Colarusso, “Derivatives Under Fire,”
Investment Dealers' Digest,
May 20, 2002.
96
Heather Landy, “AOL Bonds Decline,”
Bloomberg News,
July 8, 2002.
97
Wachtell, Lipton, Rosen & Katz, “Report to the Board of Directors of Allied Irish Banks P.L.C., et al.,” March 12, 2002.
98
Deborah Solomon and Susan Pulliam, “Adelphia Off-Balance Sheet Debt Is Put Higher,”
Wall Street Journal,
April 3, 2002, p. A10.
99
Gretchen Morgenson, “I.P.O. Plums for Titans of Telecom,”
New York Times,
August 4, 2002, Sec. 3, p. 9.
Epilogue
1
Frank Partnoy, “Financial Derivatives and the Costs of Regulatory Arbitrage,”
Journal of Corporation Law, Volume 22
(1997), p. 211.
2
Frank Partnoy, “Adding Derivatives to the Corporate Law Mix,”
Georgia Law Review, Volume 34
(2000), p. 599.
3
For an excellent article assessing the limits of the “rational actor” approach to thinking about the relationship between brokers and sophisticated customers, see Donald C. Langevoort, “Selling Hope, Selling Risk, Some Lessons for Law from Behavioral Economics About Stockbrokers and Sophisticated Customers,”
California Law Review Volume 84,
May 1996, p. 627.
5
James D. Cox, Robert W. Hillman, and Donald C. Langevoort,
Securities Regulation: Cases and Materials,
3rd ed. (Aspen Publishers, Inc. 2001), pp. 1146-1148.
6
Frank Partnoy, “The Shifting Contours of Global Derivatives Regulation,”
University of Pennsylvania Journal of International Economic Law, Volume 22
(2001), p. 421.
7
Jeff Madrick, “Enron: Seduction and Betrayal,”
New York Review of Books,
March 14, 2002, pp. 21, 24.
8
Enron's 2000 annual report stated, “In 2000, the value at risk model utilized for equity trading market risk was refined to more closely correlate with the valuation methodologies used for merchant activities.” Enron 2000 Annual Report, p. 28.
9
Partnoy, “Financial Derivatives and the Costs of Regulatory Arbitrage,” p. 211.
10
Floyd Norris, “Accounting Reform: A Bright Line Vanishes,”
New York Times,
June 7, 2002, p. C1.
11
Robert E. Litan, “Accounting and Disclosure after Enron,” Testimony before the Senate Committee on Banking, Housing, and Urban Affairs, March 2002, p. 17.
12
United States v. Simon,
425 F.2d 796 (2d Cir. 1969).
13
Floyd Norris, “An Old Case Is Returning to Haunt Auditors,”
New York Times,
March 1, 2002, p. C1.
14
Frank Partnoy, “Barbarians at the Gatekeepers?: A Proposal for a Modified Strict Liability Regime,”
Washington University Law Quarterly, Volume 79
(2001), p. 491.
15
Frank Partnoy, “The Siskel and Ebert of Financial Markets?: Two Thumbs Down for the Credit Rating Agencies,”
Washington University Law Quarterly, Volume 77
(1999), p. 619.
16
Frank Partnoy, “The Wrong Way to Prosecute Fraud,”
The San Diego Union-Tribune,
May 11, 2002, p. G-3.
17
Frank Partnoy, “Why Markets Crash and What Law Can Do about It,”
University of Pittsburgh Law Review, Volume 61
(2000), p. 741.
18
Frank Partnoy, “Multinational Regulatory Competition and Single-Stock Futures,”
Northwestern School of Law Journal of International Law & Business, Volume 21
(2001), p. 641.
19
Dirks v. SEC,
463 U.S. 646 (1983).
20
James Grant, “Bargains Everywhere but on Wall Street,”
New York Times,
March 4, 2002, p. A27.
21
Bridget O'Brian, “Enron Backer Gets $2 Million for 2001,”
Wall Street Journal,
April 3, 2002, p. C15.
ACKNOWLEDGMENTS
I
could not have written this book, or even imagined it, without the encouragement and vision of John Sterling at Henry Holt. Thank you, John, for your wisdom in directing this project, for your trust in me as a writer, and for your brilliant last-minute counsel. I also am very grateful to David Sobel of Times Books. Thank you, David, for your insistence that this book be broad in scope, for your uncanny ability to focus my thinking, and for your keen insights into how a reader best understands technical material. It truly was an honor to work with both of you.
I am grateful to the staff at Times Books and Henry Holt, and especially Robin Dennis and Heather Rodino, for their skill in shepherding the manuscript through the editing process. I also want to thank Chris-tine Ball and Elizabeth Shreve for their untiring efforts in making this book a success.
I especially want to thank my agent, Theresa Park. Thank you, Theresa, for taking me on as a client, for believing in my ability to pull off a “big picture” book, for being a hardnosed negotiator and lawyer, and for being a good friend and adviser. Yes, I am thinking about our next project.
I received invaluable comments on drafts from Laura Adams, Rex Adams, Laurence Claus, Anna Coppola, Michael Devitt, Michael Greenberger, Peter Huang, Henry Kaufman, Donald Langevoort, George Needham, Helen Parry, Shaun Martin, Michael Rieke, Gregg Shapiro,
John Tishler, Adam Winkler, and several others. Thanks to all of you for important insights, which greatly improved this book. Thanks to Andrew Franklin for helping me keep perspective. I owe special thanks to Dean Dan Rodriguez and the University of San Diego for their unwavering support.
In researching this book, I conducted more than 150 interviews of traders, regulators, corporate executives, and others, most of whomâunderstandablyâwished to remain anonymous. I have honored those wishes, and I do not cite these individuals directly; I am grateful to each of you. I am especially indebted to Andy Krieger for agreeing to do interviews on the record. I also want to thank the many business reporters who agreed to share information with me about their various investigations.
Finally, thanks to Alan Greenspan for coining the phrase “infectious greed” in July 2002, just as I was abandoning hope of finding a pithy title that captured both the financial theme and viral metaphor of this book.
INDEX
ABN AMRO Bank
Accounting firms
consulting services of
insulation from private lawsuits
manipulation of financial statements and
See also individual firms
Accounting issues
manipulation of financial reports
“materiality”
shifting from rules to standards and
stock options
See also
Financial Accounting Standards Board (FASB); Off-balance sheet transactions
Adelphia Communications
Aggressive employees, inability of managers to control
financial crises of 2008-2009 and
See also names of individuals
Ahrens, Kent
AIG (American International Group)
AIG Financial Products
Air Products and Chemicals
Allfirst Financial
Alliance Capital
North American Government Income Fund
Alprin, Judge Walter J.
AMBAC Inc.
American Banker
American Business Conference