Indecent Disclosures

My friend, who has been stranded on a beach in Turks & Caicos due to Hurricane Sandy, has hooked me onto this recent article in the NY Times Dealbook, Reading the Fine Print in Abacus and Other Soured Deals. It’s a spot-on article and it’s based on a research paper called “Limits of Disclosure”.  The research paper is 32 pages, so read at your leisure, but what made this article come alive for me were the comments; for out of the mouth of–I won’t pick on any specific commentators, but I will talk to some general themes. However, please read my own disclosures first at the bottom.

1. Adhesion Clauses
My understanding of adhesion clauses is limited, but the example I’m most aware of is in software terms of agreement, you have the option to either say “Yes” (and be able to use the software) or “No” (and not). Unlike financial transactions of this nature (i.e. pensions funds, hedge funds, etc.) there are rather qualified lawyers on both sides of the table negotiating these deals. I don’t believe these qualify as “adhesion clauses”.

2. + Boilerplate Language
In supporting the “adhesion clause” argument, it was pointed out that buyers aren’t in a position to say no. I disagree. Large asset managers and hedge funds hold a large amount of power against investment banks; if they’re not onboard, then it’s not happening. Now, I don’t accuse or suspect collusion on the buy-side, but both the magnitude and standardization points to tacit agreement and understanding.

3. The nature of contracts
Just because I’m not a fan of the consequences doesn’t mean I don’t have to bear them. I sign to a mortgage; changing my mind later on does not disabuse me of my duty to pay, each month, what is due. Unless there is outright fraud – and that’s yet to be proven here – I don’t get to complain.

4. There are two sides to every transaction
For every buyer there is a seller. For every long there is a short. Let that sink in. When it comes to investments, if someone thinks it’s going to go up, there is someone who thinks it’s going to go down (which could be why they’re selling it). And that comes to my last and most important point:

5. There is no such thing as an altruistic transaction
I’m not quite sure when it became acceptable to publicly declare the wanting of something for nothing. For risk-less reward. Free lunches all around.
You see, there is something to be lost and gained in every transaction:

a) I buy this house so that I have a place to live (on the flip side, I sell you this house because I don’t want to live in it anymore or I no longer need it as an investment or I found a better place to live or the relative who owned this no longer is alive to hold it, et al.)
b) I buy two cars because one is for work and one is for play/my ego/towing my boat (on the flip side, I sell you these two cars because you want them and I want the sales to add to my sales count so that I can get paid so that I can buy a house/pay rent to live in with myself/my family/my pets)

Do you see the point? There could be pride, property, prejudice, ego, grief, loss, gains in all transactions; so the assumption of “fair” is inherent to understanding the context. Get your perspective lenses on.

For retail investors, maybe contract language should be written in plain English – fair, I’ll give on that. I’ve personally had to slog through a number of terms, conditions, regulations, disclosures; it’s not a simple process for the uninitiated.

However, for qualified investors? Most especially those large asset managers and funds with rather intelligent legal counsel? No. A requirement for a reduction of “legalese” or an assumption that they can’t be bothered to read and therefore “boilerplate language” is essentially meaningless (and therefore unenforceable)? No.

Stop calling for takebacks. This isn’t junior high school anymore. There’s a lot of attack against capital markets firms based on the concept of “fiduciary duty”. It is incumbent upon all buy-side entities  to exercise the same duty to their clients. Therefore, folks, read the fine print.

My Disclosures
[1] I am not a lawyer; I approach all legal terms from that of a layman with a measure of knowledge of their usage in certain financial situations.
[2] At one point in time I worked for a ratings agency — my opinions are not reflective of, or on, that entity.
[3] At one point in time I worked for one of the financial firms mentioned in this article — my opinions are not reflective of, or on, that entity.
[4] I currently work for a consultancy that is focused on the financial industry, and through that firm I work for a capital markets firm — my opinions are not reflective of, or on, those entities.
[5] The discussion above does not comment towards any guilt or lack thereof as it relates to Abacus, Timberwolf, et al. for any parties; I’m agnostic to the end result, I am not agnostic to the process.

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