Here's an article link

"How is anybody ever going to know the risk of these securities?"

As I understand it, that question is at the heart of the worldwide credit crunch. Since it ssems (is?) impossible to guage the risk of the securities, the value of the securities is being pegged at ZERO, and thus lenders (wholesale lenders, not retail lenders) are refusing to underwrite loans, which in turn leads to retail lenders not having money to write new loans.

It has been proposed that since the underlying properties still have *some* value, that the securities should still have some value as well. While that sounds fair and well, I don't know of any way to pick apart a securtized loan bundle into its underlying properties. Plus, this idea would have all sorts of unintended consequences: For instance, if the note on my house was bundled with a couple hundred "high quality" debts, and that bundle in turn was bundled with a couple dozen subprime debts, which then defaulted, does that mean that the investors who purchased the final bundle now own 1% of my house even though my own loan is still in perfectly good standing? I don't think so!

It takes a lot of defaults to cause problems on these bundles, but when that threshold is crossed, the problems are pretty spectaular.

"How is anybody ever going to know the risk of these securities?"

As long as stories like the one below keep 'popping up', I guess we will NEVER know.

Law.com

11th Circuit Limits Nasdaq's Immunity

September 25, 2007
Alyson M. Palmer, Fulton County Daily Report

By a 7-5 vote, the full 11th U.S. Circuit Court of Appeals has cleared the way for a Florida lawyer to sue the Nasdaq Stock Market for more than $600,000 he says he lost by investing in WorldCom.

Nasdaq and its former parent, the National Association of Securities Dealers, had sought the full court's help after an 11th Circuit panel voted 2-1 last year to deny the two entities immunity from Steven I. Weissman's claims. Weissman, a sole practitioner from Hollywood, Fla., claims that Nasdaq's television and print advertisements fraudulently induced him to buy WorldCom stock by touting the stock's virtues. The company went bankrupt in 2002 and its former president, Bernard J. Ebbers, is serving a 25-year sentence for fraud and conspiracy.

The defendants said the immunity they enjoy for handling government-like regulatory duties should be extended to Weissman's claims over the ads. But last week, the full 11th Circuit backed the panel, ruling out immunity for the ads described in the complaint on the basis that they did not serve a regulatory, adjudicatory or prosecutorial function.

A securities lawyer said he doubts that the decision will lead to many more suits like Weissman's -- but the judges who disagreed with the majority as to one or both of the two advertisements at issue warned that the ruling could chill the ability of self-regulatory organizations like Nasdaq to communicate with the public.

"How is the self-regulatory system to function properly if the SRO must fear ever mentioning the name of a company, lest that act later be characterized as promotional?" asked Judge Gerald B. Tjoflat, the lone judge dissenting completely from the majority position.

The suit stems from 82,800 shares of WorldCom that Weissman bought for himself and his children between 2000 and 2002. In July 2002, the Mississippi-based long-distance company filed for bankruptcy. Weissman brought suit in federal district court in Fort Lauderdale, Fla., about three months later.

Weissman filed a revised complaint in June 2003 that the defendants have characterized as shifting the focus from Weissman's contention that Nasdaq had improperly kept WorldCom on the exchange to allegations about its advertisements.

One is a television ad that Weissman claims ran several times the week of Sept. 24, 2001. It promoted the sale of Nasdaq's index trust and featured companies included in the trust, including WorldCom.

The other piece is an ad Nasdaq ran in The Wall Street Journal in April 2002. According to the complaint, the ad contained statements about the need for Nasdaq-listed companies to provide accurate financial reporting supported by independent audit committees.

Under the words "Our Beliefs Stand in Good Co.," the ad featured the names of several corporate officers and their companies -- including Ebbers.

U.S. District Judge William J. Zloch denied the defendants' motion to dismiss, holding that they weren't absolutely immune from the suit.

Nasdaq successfully sought interlocutory review on the immunity question. Judge Rosemary Barkett, joined by Chief U.S. District Judge Mark E. Fuller, visiting from Alabama, reversed the denial of absolute immunity with regard to claims over Nasdaq's dissemination of WorldCom financial statements. But the panel affirmed the denial of immunity over the advertisements. Tjoflat was the dissenter on the panel.

The case was then plucked for a rare en banc argument before the full court. In June, Douglas R. Cox of Washington's Gibson, Dunn & Crutcher made Nasdaq and NASD's case before all 12 of the court's judges, while Weissman argued on his own behalf.

On Sept. 18, the full court issued its 7-5 decision backing the panel ruling. Barkett wrote the majority opinion, which was joined by Chief Judge J.L. Edmondson and Judges R. Lanier Anderson III, Stanley F. Birch Jr., Joel F. Dubina, Edward E. Carnes and Frank M. Hull.

"Even if NASDAQ's status as a money-making entity does not foreclose absolute immunity for any number of its activities, its television and newspaper advertisements cannot always be said to directly further its regulatory duties under the Securities Exchange Act," wrote Barkett."These advertisements -- by their tone and content -- were in the service of NASDAQ's own business, not the government's, and such distinctly non-governmental conduct is not protected by absolute immunity."

In his dissent, Tjoflat says the majority "skews too far in favor of liberal pleading concerns in its treatment of Weissman's complaint, giving his allegations far too much deference." The inferences in a plaintiff's favor a court draws from a complaint must be reasonable, emphasized Tjoflat.

Weissman's complaint alleges no fact "that would support even a generous inference that NASDAQ effectively communicated the message: 'WorldCom specifically is a good investment. Buy it,'" Tjoflat wrote.

Judge William H. Pryor Jr., joined by Judges Susan H. Black, Stanley Marcus and Charles R. Wilson, wrote an opinion agreeing with the majority that the defendants were not immune from suit over the television advertisement but disagreeing about the majority's disposition of the claims over The Wall Street Journal ad.

"That [newspaper] advertisement communicated to investors that companies listed on NASDAQ must satisfy rigorous financial standards," wrote Pryor."Because the establishment of those standards was a duty delegated to NASDAQ by the SEC, NASDAQ is entitled to absolute immunity for its communication of those standards to investors."

Like Tjoflat, Pryor warned that the court's ruling will chill communication by self-regulating organizations with the public. "The majority opinion creates a disincentive to use The Wall Street Journal and other media outlets to disseminate regulatory information, such as notices of the suspension or resumption of trading."

Pryor added that on remand the district judge may need to examine a separate issue -- whether what he calls Weissman's "sparse" allegations about the television advertisement are enough to state a claim for relief.

The parties to the case had little to say on the ruling. "I think it's an important precedent," said Weissman.

"We are studying the opinion and don't have any comment," said Wayne Lee, a spokesman for Nasdaq.

NASD combined with the member regulation, enforcement and arbitration operations of the New York Stock Exchange in July to form the Financial Industry Regulatory Authority, or FINRA. "We are reviewing the opinion and evaluating our options," said FINRA spokesman Herb Perone.

Theodore J. "Tod" Sawicki, an Atlanta securities litigator not involved in the case, said the nature of Weissman's claim makes the decision more intellectually interesting than practically significant.

"It's novel, No. 1, and No. 2, it's quite a stretch for any type of securities fraud claim," said the Alston & Bird lawyer, noting the need for an investor to prove reasonable reliance on the alleged misrepresentation in order to succeed on a securities fraud claim -- and Tjoflat's stated views on the viability of the claim.

Sawicki said that while he was familiar with cases where brokers and brokerage firms had sued SROs over regulatory decisions, Weissman's claim -- an investor suing the regulators -- was unique. "I wouldn't expect we'd see many of these even in the aftermath of this decision," said Sawicki.

The case was Weissman v. National Association of Securities Dealers, No. 04-13575.