Wachtell Lipton Rosen & Katz wants regulators to take definitive actions against short-sellers and launch a sweeping review of the credit default swap (CDS) market to stave off a wider Wall Street crisis.
So say several memorandums penned during the past week by executive committee co-chair and banking transactions rainmaker Edward Herlihy, 14-year Securities & Exchange Commission (SEC) veteran and firm of counsel Theodore Levine and associate Carmen Woo.
"In today's markets, short sales continue to be at record levels, there are false rumours in the marketplace about the demise of financial firms, bear raids and abusive short-selling are taking place, and there is significant disruption in the fair and orderly functioning of the securities markets," said Herlihy and Levine in their first memo on 16 September. "The markets are in crisis."
Herlihy and Levine implored the SEC to execute "immediate bold measures" that can be used "to constrain the abusive short-selling and rumour-mongering, to dampen volatility, and to restore confidence in the markets."
Whether the agency was listening to the top New York law firm is unknown but late last week the SEC instituted a moratorium on short-selling starting on 19 September and continuing until 2 October. The UK's Financial Services Authority (FSA) has instituted a short-selling ban for select financial services stocks until 16 January in a move that has been welcomed by regulatory lawyers in the City.
But in memos issued on 17 September, Herlihy and Levine said the SEC's initiatives themselves fell short and necessitated further action. They requested that the SEC bring enforcement actions against "manipulative" short sellers and make public the results of its own internal investigations into short-selling activity. Herlihy and Levine also advocated that the SEC use its emergency powers to halt short-selling for a 90-day period.
In the wake of the federal Government's $85bn (£47.7bn) bailout of AIG, the Wachtell lawyers then focused on the clouded CDS market.
"The SEC, in cooperation with the Federal Reserve Board, the FSA, and the Treasury Department, should undertake a 60-day comprehensive review of the credit default swap market in order to determine what rules and regulations are needed and whether there has been any improper or violative conduct by those engaged in CDS transactions," the trio said in their memo of 18 September. "In this market crisis, it is unacceptable that there is no regulatory structure to oversee the extraordinarily important CDS market sector."
In a subsequent memo on 22 September, the Wachtell lawyers praised the SEC's enactment of its emergency powers to require institutional investment managers to disclose their short positions, but maintained that "permanent solutions" are needed to stabilise the volatile marketplace.
And while revisiting the notion that it is "indefensible that the CDS market, with trillions of dollars of notional value, has virtually no regulatory oversight," the Wachtell lawyers showed they can also compromise by cutting their requested period for a complete regulatory review from 60 days to 30.
The intervention by senior lawyers from what is arguably Wall Street’s most influential law firm will be seen as adding extra weight to the case for serious reform of global banking.
Herlihy in particular has been a key figure in a number of recent rescues, leading Watchell’s team on sale of Merrill Lynch to Bank of America, advising the US Treasury on the bailouts of mortgage giants Fannie Mae and Freddie Mac and acting on the sale in March of Bear Stearns to JPMorgan.
The Am Law Daily is the website of The American Lawyer, Legal Week's US sister title.
Click on the links below to download the Wachtell memos.
16 September: Today the SEC must step up
17 September: Too little too late
