Re:Balance -- Jim Peterson

Ernst & Young Consolidates -- And History Asks: Who Cares?

This one comes straight from the heart.

First, I salute the plan announced in early May by Ernst & Young, to merge its practices in 87 countries in Europe, the Middle East, India and Africa. Sharing of management, strategy and costs will create the most integrated accountancy structure since the disintegration of Arthur Andersen in 2002.

It’s a bold move, in a terrifying environment, both worthy and full of challenges to execute and deliver.

But, to say with reluctance, it compares with the poor cabin boys re-arranging the deck chairs on the Titanic.

I was first an outside counsel, and later an employee, of the late Andersen firm. I was then privileged to be one of its worldwide partners – and personally fortunate to have retired before the wrenching events of its failure.

So the discouraging phrase – “been there, done that” – hangs over E&Y’s initiative. Its necessary evolution will address the complex demands for quality services to global companies. But that is insufficient – nay, irrelevant – to shorten the list of life-threatening issues facing the Big Four.

E&Y is not operating in virgin territory. Andersen’s worldwide partners shared both economic risks and benefits. We supported start-up practices in new countries, and lagging economies in others. And we reaped unequalled revenue and profitability from the effective deployment of shared technologies, methodologies and personnel.

But while Andersen’s unique cohesiveness drove an almighty profit machine in times of prosperity, it proved weak and fragile under stress – shattering into local fragments within days of the US firm’s Enron-related criminal indictment.

Unifying E&Y’s practices will be a big deal for its partners – but much less important to its employees – and a matter of indifference to issuers and the consumers of its audit reports. As an inward-facing matter of management strategy, it does not change the commodity nature of the standard audit report, whose value in the capital markets is so diminished as to be serving no purpose beyond regulatory compliance.

The report is instead an unevolved and obsolete barrier to the required re-engineering of the corporate financial reporting model, and a litigation ticket to oblivion as much for a re-designed E&Y as for the other firms.

E&Y’s consolidation may have a quality impact on its cross-border work. All concerned should hope so. But just as Parmalat in Italy and Lernout & Hauspie in Korea showed that major litigation inheres in cross-border work, there is also deadly peril from purely local jobs – examples run from the Houston-based impact of Enron on Andersen to the pending exposure of BDO International to litigation damages for the Miami work of Seidman, its US firm (here).

Giving E&Y the benefit of the doubt, a single regional partnership may – with massive investment of resources and personnel – mitigate its cross-border divisions. These are driven by differences in culture, language, corporate governance, professional standards and education. But those issues deeply persisted in Andersen’s regional operations, despite decades of effort -- making E&Y’s reprise an incremental step at best.       

At the same time, as Andersen showed, a unified structure that suffers a knockout blow in a critical country does not survive. And it need not be an American issue.

A look at France is instructive. The latest report from its market regulator on auditor/client relations among the CAC 40 – here -- shows the depth of E&Y’s blue-chip client list: of the 37 companies for which data are available, E&Y is principal or secondary auditor of 22.

Included are global companies that are hardly risk-free – among those with media notoriety are EADS, Société Générale and Vivendi. Any on E&Y’s global roster could inflict on its French practice a blow that would be fatal to its EMEIA structure. For in a globalized world, a firm that cannot practice in all economies on the scale of the G-8 countries cannot viably provide comprehensive service to large companies in any of them.

All these examples show that mega-threat litigation remains the uninvited elephant crashing E&Y’s party. EMEIA and Far East mergers may not actually raise the EY network’s collective exposure – firewalls and careful agreements may have some slight effect.

But again, the Andersen experience shows the irrelevance of structure to the outside world. Quality issues and the assertion of cross-border jurisdiction both track the actual performance of cross-border, risk-laden audit work. And it makes not a bit of difference to investors’ lawyers whether multi-country engagement teams are led by fellow partners or franchisees using only a common name.

The partners of Arthur Andersen, who designed and ran its unified global practice, banked their fortunes under the impression that they were riding a gravy train, resistant to external shocks or self-inflicted mis-management.

The history of their downfall suggests that while we should wish the best for the vision of E&Y’s leaders, the warning lights on its track to the future are blinking brightly.

The Future of Auditors as Gate-Keepers -- A Glossary of The Non-Solutions

Do investors get real value from their gate-keepers? It was a main question at a conference of international investment managers where I spoke last week.

This group -- who sit over funds across the spectrum from public employee and union pensions to hedge funds and private equity – had common concerns: corporate governance, ethics, compensation and performance, and the quality and reliability of the third-parties – the analysts, rating agencies and outside auditors.

On the subject of the auditors, I had a brief opportunity to offer this three-fold view – familiar enough to regular readers here, but beyond orthodoxy to many in the audience (and with thanks to Mark Cobley at Financial News Online for the uptake):

•    That the traditional form of auditor’s report is obsolete and provides no investor value, especially compared to the possible forms of assurance that are impossible under the current model -- here;

•    That the overwhelming pressures on the Big Four firms render their current business model unsustainable, and their litigation-based exposure makes disintegration inevitable, absent a radical and comprehensive re-engineering – here;

•    That the current dialog on achievable solutions is vapid and sterile, due to denial, blame-shifting and the limited vision of all of the interested constituencies -- here and here.

In the ensuing barrage of panelists’ skepticism, audience questions and post-session follow-up, I was challenged to answer in single sentences to all the standard one-dimensional “solutions” to the fragility of the current Big Four structure.

Bringing those exchanges together here, with links to their more extensive treatment elsewhere, seems worthwhile – even if only in sound-bite form: 

•    Q: Why isn’t the litigation threat to the Big Four well handled by insurance?

A: Having learned from the savings & loans in the 1980’s the expensive lesson that auditor liability fails the basic criteria for insurability – diversification, predictability and quantification – the insurance industry has voted with its feet -- here.  

•    Q: If lack of auditor choice is the issue, how about creating competitors by splitting up the Big Four?

A: For starters there’s no workable legal theory. Either industry and geographic expertise would stay concentrated, in which case nothing is achieved, or they would be so split up that today’s talent level would be severely diluted.

•    Q: Can’t the issue of Big Four concentration be solved by built-up competition from the smaller firms?

A: The size gap is just too large to bridge – see here – and the smaller firms are if anything even more at litigation risk – see here. Anyway, smart risk managers in those firms would avoid global-scale engagements for which they lack either the skills or the risk appetite.

•    Q: If the rules on audit firm ownership were relaxed, wouldn’t outside capital both strengthen the Big Four firms and support new competitors?

A: The Big Four don’t want or need extra capital to run as they do – here. And the bankers have shown they are smart enough not to sacrifice new money that would only fuel the litigation fires.

•    Q: How about improving audit quality by requiring the rotation of auditors?

A: Italy being the only large country to mandate changes in auditors, experience provides a one-word rebuttal: “Parmalat.”

•    Q: Doesn’t a system of joint or dual audit promote higher quality of performance?

A: Proponents in France, which has almost no history of auditor liability litigation, would quickly change their tune when joint auditors became subject to 100% joint and several liability in the courts of other countries.

•    Q: Isn’t the problem of impaired audit independence the fact that it’s the clients who pay the bills?

A: Consider the alternative: funding audits through an agency or regulator amounts to nationalization – and no one makes the case for audits by government civil servants. 

•    Q: How about caps on litigation liability – either money limits or percentage allocation of fault?

A: Because the size of claims arising out of large corporate failures so completely dwarfs the limited financial capability of the Big Four – here – the political process cannot set a survival bar so low as to ensure the stability of a large firm under serious litigation threat.  

•    Q: Wouldn’t performance standards based on principles rather than rules recognize the judgmental nature of auditing?

A: Standard-setters cannot reduce the liability threat, so long as it is courts and juries who assess auditor fault and liability, unless there is the readiness – so far unseen – to enact “safe harbors” to protect the auditors’ judgments.  

•    Q: If another Big Four firm were failing, couldn’t regulators waive the scope of service limitations so that another firm could step in?

A: Even if the large firms weren’t so ostracized already that this solution is politically untenable, they are already fully-stretched and without resource capacity, so that when another firm crashes, the three survivors could not possibly pick up the pieces out of the wreckage. 

•    Q: If another firm is threatened with disintegration, how about replacing its tainted management with a credible outsider?

Q: As shown by the failure of Arthur Andersen despite Paul Volcker’s well-meaning initiative, the speed and complexity of a disintegration would out-strip any outsider’s powers or resources – see here.   

•    Q: In the end, won’t the regulators act to prevent the collapse of another global audit firm?

A: There is no more candid response than the concession of William McDonough as he neared the end of his term as chairman of the Public Company Accounting Oversight Board: as to what the regulators would do about another disintegration threat, “they don’t have a clue.”

These are sound-bites only, as I said, and I may have missed a point or two. Either way this compilation should be a good reference point. Please don’t hesitate to write with your reactions and suggestions.

Insurance to Save the Auditors -- Yet Another Non-Starter

This column was originally published in the IHT on August 27, 2005. With other related work in the pipeline, I pick it up now mainly for archival reference, although -- with apologies for the anachronisms --  it remains just as current today as it was then.

Plot Twist Hits Reality

This has been a good summer for melodrama. First, there was Steven Spielberg's film "War of the Worlds," with its specter of alien invaders. Then there was "Attack of the Giant Liabilities," with the mega-settlements paid by banks in the Enron case - and the prospect of more to come in the cases of Parmalat, AIG and others.

The movie's hero was Tom Cruise. No similar savior exists for the Big Four accounting firms, beset by performance worries, liability overhang and structural threats to the viability of their core product, the standard audit.

But as part of a healthy debate over the future of the profession, a proposal was floated in July by a fellow columnist, Joseph Nocera of The New York Times -- here: Corporations would buy an optional "audit insurance," which their insurance companies would issue after a new and separate form of audit examination. This new coverage would, in theory, protect shareholders from losses resulting from faulty auditing.

An entertaining idea. But is it realistic? A few questions to explore:

Are there accounting firms available to do this new work?

The U.S. Securities and Exchange Commission and other regulators are not willingly going to surrender their requirements for standard audit reports, so companies would have to find a second accounting firm with the skills and resources to perform the new audit. That, by definition, means another member of the Big Four: PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche and KPMG.

The problem is that most Big Four clients - after eliminating their current auditor and any firms of which they are consulting clients - will find there is at best only one other firm eligible to bid for new work. This was shown last autumn when Fannie Mae had nowhere to go but Deloitte after firing KPMG. The choice, already poor, threatens to become irreducible.

What about personnel?

The Big Four firms are already operating flat out, to the point of staff abuse, under the burden of work required by Section 404 of the Sarbanes-Oxley Law, and they are hiring workers as best they can to replace those they chew up. It is not a recipe for success to think that they could ramp up further, to perform a new, high-value service with workers hired from the next lower level of education and professional competence.

If the current audit firms took on a new role, what additional work would they do?

Auditors today already put their reputations and their survival on the line by issuing opinions that financial statements are free of material error. There simply is no more or different work they are competent to do - either to bolster that opinion, to manage their overhanging catastrophic litigation exposure, or to entice the insurance companies. Because if there were, they would be doing it.

Would the numbers work out?

As Nocera recognized, the problem is one of scale. Audit insurance would never cover an Enron-like debacle - namely, investor losses from a $67 billion bankruptcy. But in positing that the new coverage would be more than enough for shareholder losses from bad audit news, he misses two key points.

First, in the U.S. legal system the auditor can now be held liable for 100 percent of all investor losses, even in a large-scale debacle like Enron. Second, whether or not a shareholder suit ever comes to trial, the escalating size of the pretrial settlements - like those of the banks in Enron and WorldCom - threatens to eat up the accounting firms' total capital.

In other words, an incremental addition of small-scale insurance is a proposed solution for the wrong problem. It's the mega-cases, the ones threatening to kill the Big Four, that are running amok through the current legal system and its puny arsenal of defenses.

Would the insurers want to play?

The popular perception is that insurance capital is a rainbow pot of infinite size. The truth is that the role of insurance as a risk-spreading intermediary is constrained by competing demands on its limited capacity. The insurers, burned by a generation of bad experience, have already looked at the auditors' exposure and are devoting their resources to more predictably quantifiable disasters - like hurricanes and airplane crashes.

Audits of real value to investors can be done - but only with realistic and achievable standards, at higher cost, and with tolerable liability limits. The chances of getting there, with the engagement of all the necessary players, may be as unlikely as an invasion of aliens. The process has just begun.

Accounting Standards Convergence -- Sometimes the Bear Eats You

For months now the trans-Atlantic regulators have kept up a complex choreography, hoping to converge the global standards for accounting, reporting and auditing corporate financial information.

It’s like watching a carnival performance of dancing bears – notable not that they’re so slow and clumsy, but that they dance at all.

The publicity machinery has been cranking:

First was the US Securities and Exchange Commission, announcing in November – here -- that it would start to accept the financial statements of non-US companies, as prepared in accordance with International Financial Reporting Standards – widely used around the world except in the US – only now without the reconciliation to US standards that has been so costly, disruptive and questionably useful.

Next followed EU internal markets commissioner Charlie McGreevy – here -- with a symmetrical plan for American companies to list in Europe using accounting principles generally acceptable in their home country – good old familiar US GAAP.

Third was the December 5 announcement by the US Public Company Accounting Oversight Board – here -- that starting in 2009, its inspections of non-US audit firms would move toward fuller reliance on the inspection and enforcement regimes of that agency’s counterparts in other countries.

And lately, inputs from the US Chamber of Commerce – here – to the SEC’s Advisory Committee – here -- have been extolling the necessity of integrated global standards and principles.   

A theme played for years, the case for convergence has stayed consistent -- that the use of common standards promotes strong globalized capital markets, supports investor comprehension and confidence, and fuels economic growth.

But the background has changed since the time the Americans were calling the tune: When convergence was first seriously sounded, corporate listings were migrating to the New York Stock Exchange, the Euro-to-be was predicted to be a regional form of play money, and the extensible hegemony of accounting principles as issued in the US was taken for granted. Little wonder the Europeans were mostly unenthusiastic wallflowers at the party.

And then? Still shadowed by the darkening gloom of the Enron era, the American-led scandals around executive options and subprime mortgages have showed the limits on its capacity for regulatory detection and deterrence. London became the center of the IPO market, and the Euro is hovering around $1.55.

Europe ascendant has had its mis-steps, of course. The French-led opposition to unqualified EU endorsement of the standards for derivatives accounting showed the survival of its parochial difficulties.

And although the subprime contagion started in and primarily affects American markets and institutions, it extends from the regional German banks to the funding of villages in northern Norway, while the Bank of England stubbed a toe against the collapsed mortgage lender Northern Rock and UBS showed the storied competence of Swiss bankers to be as holed as its cheese.

Back in the USA, while the London bankers merrily stole the lunch of their New York counterparts, the SEC’s readiness to accept IFRS-based financial statements – half a decade after Sarbanes-Oxley -- now rings as an effort to protect against market-share erosion. And fair-value accounting has become the target of choice for blame-shifting to evade the dysfunctions of the bankers’ black-box valuation models.   

At the same time, the PCAOB’s readiness to “increase its level of reliance on non-US oversight systems” needs to be translated out of agency obfuscation into real English. If so, a candid statement from Chairman Mark Olson would read like this:

    "Since 2002 we haven’t made a dent in achieving the legislatively-imposed mandate to inspect and oversee the 800 non-US audit firms forced by the law to register with us. We will never solve the foreign law prohibitions or find the competent resources to do this ourselves. We have no realistic choice but to devolve our responsibility over to the authorities of 86 other countries, although they mostly have neither real track records of success nor the resources to get there. Whether any progress is actually made or even measurable will not be known for many more years to come."         

Meanwhile, taking a look at the PCAOB’s record at home, Sarbanes-Oxley has neither restored virtue to financial reporting nor unsprung the auditors from the limits on their performance:

•    The subprime-triggered chaos across the capital markets originated with and is traceable to the confessed failure of the players to understand, value, control, account for or report on entire balance sheets full of complex financial instruments. What leadership role does an audit regulator deserve, having sat that one out?

•    The academics’ confident proclamations of a year ago, that the level of US securities class action litigation was enjoying a structural reduction, now yields to the reality: case filings are back up to Enron-era levels, with the very large and rapidly-expanding group of subprime-based cases still comprising only a fraction.

So let’s wait a bit to evaluate the extent and effect of whatever convergence may actually be achieved within our lifetime.

Or, to invoke the ursine advice of the 17th century French fabulist La Fontaine, “don’t sell the bearskin until you’ve killed the bear.”

Risks and Choices -- Managing the Odds in an Uncertain World

A while ago I set out with my editor at the IHT to broaden out beyond the financial and accountancy issues on which the "Balance Sheet" column has focussed since its launch in 2002.

The broader premise was that life involves the constant need to make complex choices, with real consequences, based on incomplete information. Even when priorities are unclear, or head and heart are in conflict, there are useful tools and methods to help. Instinct is not a substitute for ignorance.

Space constraints in the newspaper meant that we didn't get far. But the topics remains worthy of consideration, so I propose to offer the occasional essay here. Your reactions are welcome and invited -- by comment or e-mail -- including ideas for other topics.

This column was originally published in the International Herald Tribune on February 2, 2007.

Vegas is No Fun Once You Know the Odds

It's a little complex to explain, without sounding like a complainer, why my recent weekend in Las Vegas — a first-time trip — will also most likely be my last.

A dozen of us gathered to celebrate a friend's major birthday. Our host chose the venue, and who could possibly complain? We had comfortable rooms, abundant food and drink, a poolside cabana with attentive staff - all the essentials for good friends to enjoy each other's company.

Thankfully for our purposes, the larger Vegas ambiance was irrelevant. Compared to its relentless marketing and bloated artificiality, the world of Disney would have looked positively real. When we wandered for breakfast into the Parisian Hotel, past the faux Eiffel Tower and into the disinfected bistro, our waiter actually was a 20- something from Lyon on a year's leave in the United States. We could have kissed him for his authenticity.

In its blandness, Vegas has nothing left of the edgy and faintly sinful style of its bygone era. Our parents' generation dressed up, flying with airlines that still served meals with linen and crystal. They may have left their holiday budgets at the gaming tables, to be laundered in the cash rooms for the benefit of sinister figures from Chicago or Cleveland. But they enjoyed the frisson of tipping a dinner-jacketed captain for improved cabaret seats to hear Frank or Sammy.

I'm not choosing for anybody else. There is a huge, popular market for the over-the-top architecture, the theatrical light and water shows and the ear-splitting night-life sound systems — at least to judge on our Sunday departure amid the enormous worse-for- wear crowds choking the grubby third-world chaos of McCarran International Airport.

I just couldn't get the casinos. Still at the core of Las Vegas, they support the entire structure of phenomenal staff and overhead expense, through the remorselessly grinding odds by which the lavishly appointed houses so plainly always win.

There are two reasons I find no appeal in gambling. Neither is judgmental of those who do take pleasure at the tables — just as long as they don't try to convince me that they have somehow out-smarted the inevitable effects of long-term probabilities.

We all make choices and set priorities every day, from vital to frivolous — weighing risk against reward, and assessing cost against benefit. As often as not, gut instinct or the heart's inspiration prevails over what the head well knows. And that's fine. The scientists explain that the reason we still make odds-defying decisions is that to survive as a species, our prehistoric ancestors' DNA triggered split-second reactions to the giant wolves and saber-toothed tigers.

With the slow pace of evolution, we are little different from the first cave- dweller who grunted optimistically that his drinking gourd was half-full, not half-empty. Except that now it's hardly ever a life-or-death decision whether to press a bet or split a pair. Instinct is wrong too often to be a comfortable substitute for ignored information.

My first concern is that I've devoted a career to the management of my client's risks and exposures. It's my business to hazard big- money consequences on being right or wrong.

With that as a day job, even if not as hazardous as the caveman with only his club against a mammoth, my view of a blackjack table is that it just feels like more work. And unless they're addicted to the rush, crisis managers and first responders — air traffic controllers, paramedics, hostage negotiators — might feel the same, or at least that's how I'd bet it.

Second, success in making calculated predictions based on incomplete information includes paying close attention to knowable adverse odds. I'm as eager as the next guy to have Lady Luck hold my hand and whisper in my ear. But believing that fortune favors the well- prepared, I can't help thinking that it's a poor proposition — and perhaps an affront to the Lady herself — to play against the inexorable probabilities built into the zeros on the roulette wheel or the 7s and 11s at craps.

Life is full of choices made against the teachings of well-known probabilities. Otherwise, whole industries would disappear. If informed rationality strictly ruled, there would be no day traders, nor mutual fund salesmen; convenience stores would be unable to sell the calculable losses of either cigarettes or lottery tickets; no more would appliances be sold with extended warranties, nor vacation homes built on sand bars or flood plains.

My friend Bill, a banker, perceptively puts it that as the caveman's fight-or-flight instincts apply to our modern time horizons for risk aversion and deferral of gratification, the ancient DNA hard-wires us for the adrenaline jolt of the turn of a card or the tick of a stock price.

If Bill is right, and I suspect he is, that would go a long way toward explaining why it can be so hard to defer satisfaction for the long view — to contribute to a private pension plan, or save for a child's university tuition — especially when there is a more remote and seemingly less painful way of achieving the same end -- whether Social Security or college loans.

So on one hand, I understand and am not really against the idea of a Las Vegas holiday built on dreams uninfluenced by reality. That's the very sustenance of such an oasis in the desert.

But for me, the reason to go there — carefully keeping my wallet in my pocket and my hands off the dice — was more concrete: to wish my friend a happy, healthy, and very lucky birthday. Although, while waiting for another such occasion, I will check the point spread if ever the Chicago Bears are again in the Super Bowl.

What the Wine Sellers Buy -- A Metaphor for Understanding Subprime

The credit crunch spreads – from tapped-out holders of adjustable-rate mortgages, to specialty insurers desperate to preserve their ratings, to the leaders of Citigroup and Merrill Lynch on begging-bowl fundraisers in Asia and the Middle East, to a swell of big-number litigation enough to enrich the lawyers world-wide.

And as spring foretells the release of the finest French wines, my wine-collecting friend in Paris confronts a crunch of his own. 

He prefers his tangible cellar of fine vintages over a portfolio of financial derivatives. But he has learned that – as with countless investors ranging from holders of the Bear Stearns subprime funds to pension funds and village treasurers and any number of other yield-chasing funds and institutions -- he has an uncomprehended and volatile commodities market exposure.

Like the small investors who clamored to share the sexy returns of the hedge funds, my friend ventured beyond his retail wine shop. Going to an internet wine vendor in 2006, he bought a quantity of a fine Bordeaux 2005, then being offered en primeur – that is, an advance sale just after the harvest but two years before the wine would be ready for retail sale.

In simpler times, the wine makers would sell perhaps half of their production en primeur – only to sophisticated professionals – in a direct form of forward contracting that both financed inventory and mitigated price volatility.

But the en primeur market then became open to individual players. Buyers of the 2005 vintage made the leap of faith that as this wine is even now being released for delivery, they will actually receive the specific wine contracted for, rather than some poorly made or inferior substitute.

Additionally, though, my friend faces a huge market exposure.

Namely, the vendor – who is said to have made some € 10 million of advance sales – is now exposed as were Bear Stearns or Merrill or Citi, who had sold highly-leveraged investments in hard-to-price slices of the subprime mortgage sector. Instead of locking in a contract with the vineyard for the necessary physical supply, at the time it took its customers’ deposits, the vendor reportedly chose to wait and play the fluctuating secondary market.

That is, like the bankers who sold the mortgage-based derivatives on the assumption that ever-rising housing prices would bail out all the dodgy mortgages, the wine-seller assumed an ability to cover its needs at delivery time, perhaps even hoping that a soft market might give it a windfall.

Here arises the problem of unexpected risk and uncontrollable price volatility in an underlying commodity. Holders of subprime paper were whacked by collapsing real estate values, unpredicted under their black-box pricing models. Just as with killing frost in the orange groves or warfare in the oil fields – serious re-pricing has hit the wines of 2005. With the publicists touting 2005 as a vintage for the century, the entire Bordeaux market took a major upward spike. Prices for my friend’s particular wine are up over 60%, and the very top wines have shot up 300% in less than a year.

Again as with the subprime sector, my friend has learned to his bewilderment that he is in an unraveling commodity hedging operation -- the vendor’s naked delivery problem being piled onto a whole structure of risks.

At a simple level, the vendor generated two years of float for itself, by immediately cashing its customers’ checks. And although dealing frequently with Anglo customers investing dollars and pounds, the vendor could easily hedge any currency fluctuation exposure.

But like Bear Stearns or New Century Financial or Northern Rock or UBS today – or others in recent memory such as Long Term Capital Management or Amaranth – the wine vendor is hostage to externally-delivered pricing shocks.

With the vendor facing a massive and expanding loss, my friend has the entirely legitimate anxiety that when the time comes, it may be unwilling or unable to deliver.

While he waits, it has been brought home – for both the bankers’ one-time valuation geniuses and their management who blithely assured that their controls were all in good Sarbanes/Oxley order -- that market reality has a stubborn unwillingness to behave according to unprovable mathematical models. And there is a lesson for central bankers: one-time bailouts have a terrible tendency to be under-calculated, insufficient, and fraught with unintended consequences.

Time will tell. Come this summer, while the Bordelaise prepare to press the grapes of 2008, my friend may be preparing to press his legal rights.   

Meanwhile, shareholders and investors in subprime funds have enlisted their lawyers to assess whether their glasses are half-full, half-empty or only holding the bitter dregs.