Litigation Consulting

• Equity Markets
• Bond Markets – Government, Corporate, Municipal, High Yield, Collateralized Debt Obligations, Mortgage Backed Securities, and Asset Backed Securities
• Foreign Exchange Markets
• Derivative Markets – Swaps, Options, Futures and Hybrids
• Credit Markets
• Commodity Markets
• Money Markets
• Private Markets

The financial markets consist of both publicly issued financial transactions as well as privately structured deals. Standardized financial transactions are typically traded on a wide assortment of exchanges and are “liquid” – able to be easily bought and sold in the financial markets. Alternatively, customized financial transactions are less liquid or “illiquid” as they are not traded on exchanges. These structured deals are commonly traded “over-the-counter” (OTC) or off-exchange which involves trading done directly between two parties without the trading infrastructure of an exchange. Evaluating the risks and valuing “illiquid” structured transactions is more difficult and requires the use of industry tools and methodologies.

CapMarket Consulting has significant experience with both liquid and illiquid markets and transactions.

Risk management in the capital markets is commonly subdivided into three risk components: market risk, credit risk, and operations risk. Market risk represents the potential changes in the market price of a particular transaction, investment, or portfolio. Credit risk is the risk of financial loss of the provider of credit, where the borrower will not perform as required under the agreement. In a simple loan transaction, for example, the lender has credit risk that the borrower will not repay the loan. Operational risk includes the risks of financial loss resulting from inadequate or failed processes or systems. Operational risks of transactions, trading strategies, and hedging techniques can be broadly defined as the risks associated with execution details, and typically include systems, processes, tax, legal, accounting, regulatory, and reputational risks.

The use of industry risk management practices can be beneficial in Litigation Consulting engagements to uncover the financial drivers of transactions, trading strategies, and hedging techniques. Participants in the capital markets assess, measure, and manage specific risks to achieve desired objectives.

Structured Finance is a specialized area of finance that involves the transfer of risk using non-standard methods. Structured Finance is often used in transactions to lower funding costs, change the composition of a balance sheet, affect financial reporting, or influence the tax characterization of a deal. Two widely used Structured Finance tools are Securitization and Credit Enhancement.

Securitization techniques are commonly used to create securities that are backed by diversified pools of assets. Almost any combination of financial assets can be securitized:

• Asset Backed Securities (ABS)
• Mortgage Backed Securities (MBS)
• Collateralized Debt Obligation (CDO)
• Collateralized Bond Obligations (CBO),
• Collateralized Mortgage Obligations (CMO)
• Collateralized Loan Obligations (CLO)

Credit Enhancement is a technique used to improve the credit worthiness of a deal and often employs customized credit derivatives, financial guarantees, and/or credit insurance.

The characterization of financial transactions can often have significant implications on the tax liability, accounting, and/or the regulatory requirements. Therefore, the “label” used by the deal’s participants may be driven by a desired outcome. An analysis of the financial risks of the deal done in accordance with industry practices may be inconsistent with the desired “label.”  For example, a deal may be documented to appear as a “sale” instead of a “loan” or documented as “equity” instead of “debt.”  However, an analysis of the deal’s risks will identify the participants’ economic intent of the structure which may be inconsistent with the participants’ desired characterization represented by the label.

CapMarket Consulting uses an industry standard framework for evaluating the risks of a deal compared to the risks of the “label.” The risk analysis includes analyzing the deal’s purpose as well as the specific risks taken – whether market, credit or operations risk. Inconsistencies between the represented risks and the financial market risks are then evaluated. This capital markets characterization approach is based upon experience trading, structuring and risk managing complex financial transactions. Assessing the capital market risks of a deal is not typically performed by economists in litigation but is commonly performed by capital markets practitioners who do the deals and is best achieved using capital markets industry tools and practices.

Management Oversight and Internal Controls are the tools financial intermediaries – banks, investment banks, insurance companies, pension funds, hedge funds, etc. – use to ensure that they operate and undertake financial transactions appropriately. In the financial service industry, effective management and oversight involves identifying, assessing, monitoring, and controlling risks associated with an institution’s activities. Financial intermediaries typically comply with three control infrastructures:   internal control, industry standard practices, and regulatory requirements.

Often a critical fact in litigation is whether a financial intermediary abided by internal controls and standard industry risk management practices. CapMarket Consulting’s depth of industry experience is a unique strategic advantage in dealing with litigation involving control breakdowns and/or insufficient management oversight at financial institutions.