Credit-Related Derivatives are “Financial WMD’s”

American investor and philanthropist Warren Buffet calls credit-related derivatives a financial weapon of mass destruction, and he claims they just went off.

Prof. Jesse Fried of Boalt Hall School of Law, University of California, Berkeley, posted an article today on the Harvard Law Corporate Governance Blog.  Fried points out,

Over the last two years, Wall Street financiers took home more than $60 billion in bonuses, much of it in cash. Lehman Bros. alone shelled out almost $6 billion in bonuses in 2007; it recently filed for bankruptcy.

Analysts have pointed to the Lehman Brothers and AIG bailout as the reason for the massive economic slowdown in the U.S.

A Scotiabank Group report indicated yesterday that this may affect Canada as well,

We are now forecasting recessions in both countries.

Fried recommends a claw back of Wall Street bonuses to share the cost of economic troubles, and avert future risks.  He points to the Bankruptcy Code as the basis for recovering pre-bankruptcy bonus payments.

If companies do not become insolvent, the New York “fraudulent conveyance” statute allows insider payment recovery if:

  1. fair consideration for payment was not received
  2. an unreasonable small capital for business operations existed

Fried explains,

Some courts have held that managerial services do not constitute fair consideration for purposes of this type of statute. The statute may thus permit the government, to the extent it is considered an unpaid creditor of a bailed-out firm, to recover a bonus payment to one of that firm’s executives.