Subprime suits: the slow pace of litigation.

• Author: Chockley, Frederick W., III

As the American subprime mortgage crisis progresses, a litigation aftershock moves through U.S. courts. Though court filings lag behind the triggering subprime events, a wave of securities-related lawsuits reflects the magnitude of the current crisis. More than six hundred lawsuits have been filed through the second quarter of 2008, exceeding the total associated with the savings and loan crisis of the 1980s. In the civil cases filed to date, plaintiffs have employed various theories of liability, generally focusing on claims of fraud and inadequate disclosure and oversight. The litigation reflects the size of the subprime mortgage meltdown but only hints at the global nature of the crisis.

Many international economists, such as Martin Wolf of the Financial Times, trace the origins of the current crisis to foreign roots: the Asian financial crisis of the late 1990s. As affected governments sought to build large currency reserves to avoid borrowing again from the International Monetary Fund, many invested that money in the United States, giving a ready supply of cheap money that enabled the American housing bubble. When that bubble burst, foreign entities were injured alongside iconic American financial institutions.

The varied foreign players in the subprime crisis include sovereign wealth funds from nations such as Singapore, China, Abu Dhabi, and Kuwait, private multinational banks, including UBS and Credit Suisse, and individual investors. International investors lost billions alongside American investors when the subprime market crashed.

Wise foreign investors navigating the subprime crisis might take note of previous lessons learned. The Asian crisis precipitated a backlash against globalization and foreign investment. Certainly, the same reaction can be seen in debates over U.S. government bailout aid to foreign entities and nervousness over large stakes in American banks now held by sovereign wealth funds. Although the United States welcomed outside capital at the height of the crisis, a white knight in the throes of a desperate situation may be perceived as a villain once markets stabilize. Recent scrutiny of the lack of transparency of sovereign wealth funds has also fostered protectionist sentiments in the United States.

What does this mean for litigation? Foreign investors looking to recover their losses on securitized investments may face considerable challenges and uncertainties in the U.S...