Records & Information Management in the Post-Bailout World: The Backlash from the U.S. Financial Market Crisis Is Sure to Include a Rush to Legislation, Regulation, and Litigation That Will Present a Host of New Compliance and Discovery Challenges That Organizations Should Begin Preparing for Today

Article excerpt

Although records and information management (RIM) professionals may have only a passing acquaintance with the Basel II Framework, it undoubtedly has had a serious effect on their personal lives recently because of its relationship to the financial market crisis. For the same reason, it is also bound to have a profound impact on their professional responsibilities in the near future--regardless of the industry in which they work.

Regulations issued under the Basel II Accord require financial institutions to maintain a certain level of capital reserves as protection against bad loans. The size of these reserves depends on the value of the institution's loan portfolio and how risky it is. That risk is determined by analysis of loss experience, changes in portfolio value, and related factors.

A large factor in the recent financial market meltdown was that accounting rules required re-valuation of loan portfolios because of a downturn in housing prices; and this, combined with an uptick in defaults, created additional capitalization requirements under Basel II and its implementing legislation. Acquiring that capital turned out to be a problem for many institutions and forced them into technical insolvency. Thus, a fire sale or shotgun wedding to other, better-capitalized banks, and a government bailout for those in such bad shape no one would buy them.

The fallout is considerable: shareholders in these institutions have lost most or all of their money; the stock market has dropped dramatically; employees of affected institutions find their jobs at risk; and credit has tightened sharply, pinching the overall economy. Institutions in Europe have been similarly affected, and European governments have been forced to take similar steps.

Predictably, investigations and legal actions are part of the landscape, As early as May 2008, there were reports and investigations of irregularities in reporting the London Interbank Loan Offered Rate (or LIBOR, a benchmark interest rate for interbank lending, to which rates for many other financial instruments are pegged). More recently, the Federal Bureau of Investigation reported opening a probe of fraud at Fannie Mae, Freddie Mac, American International Group (AIG) and Lehman Brothers.

Does this all sound distressingly like the Enron, Worldcom, and other recent fiascos? It should, because it is. It also sounds a lot like the savings and loan collapse of the 1980s, the stock market crash of 1929, and many other financial bubbles and collapses. Their common characteristics are:

* Absurd, unrealistic optimism about the upside of some market phenomenon

* Serious financial negligence and/or irregularities

* Collapse of an industry and its major players

* Major loss of wealth for shareholders, employees, and others

* Investigations and lawsuits

* Rushed legislation to fix the mess

The difference this time is that nearly a trillion dollars of taxpayer money is on the line in the United States alone, so that the pressures to "fix" the problem will be even greater than in the past. The pressure for accountability is enormous, so it is reasonable to expect more investigations by both law enforcement and regulatory agencies and, perhaps, criminal charges against institutions and individuals.

RIM Challenges Ahead

Regardless of the outcome of these investigations, civil litigation is inevitable as shareholders and others seek to recoup their losses with allegations of negligence, civil fraud, and breach of fiduciary duty. And, of course, extensive additional regulation is a foregone conclusion. For RIM professionals, the finger-pointing and the fix are likely to pose a series of challenges as a result of investigations, litigation, regulations, and legislation.

Investigations and Litigation

Investigations and litigation will make heavy demands for production of records and data, and these demands will be far-reaching. …