Wachtell Memos Urge ‘Bold’ SEC Action to Protect Market Integrity
Several memos written last week by the law firm that advised the Treasury Department on the takeover of Fannie Mae and Freddie Mac urge the Securities and Exchange Commission to take actions to maintain investor confidence and protect the integrity of the markets.
The memos by lawyers from Wachtell, Lipton, Rosen & Katz urge the SEC to take action against “manipulative” short sellers and to review the market for credit default swaps, the American Lawyer reports. The review of the swaps, a type of insurance policy that protects against a corporation defaulting on its debt, should determine what kinds of rules and regulations are needed for the transactions, the memos say.
“It is indefensible that the CDS market, with trillions of dollars of notional value, has virtually no regulatory oversight,” one memo says (PDF posted by the AmLaw Daily). The credit default swap market is being used by speculative traders who “bet against the future of American business” and send misleading signals about an increasing risk of a credit default by companies that issue debt, according to the writers. At the same time, the speculators take a short position in the stock of the companies, essentially betting that it will go down in value and creating a self-fulfilling prophecy.
The authors of the memos are Edward Herlihy, co-chair of the firm’s executive committee; former SEC lawyer Theodore Levine; and associate Carmen Woo.
New York’s attorney general announced an investigation last week into whether an illegal short-selling scheme contributed to plunging stock values at investment banks and the American International Group.
John McCain has called for the firing of Christopher Cox, the chairman of the Securities and Exchange Commission. A Time story reports that he “has been painted as something of a regulator missing in action” during Wall Street’s financial meltdown.
Updated at 4:33 p.m. to correct that an article linked to appeared in Time.
