Barclays vs. Bear Sterns: Opening Shot in First of Many

Barclays PLC (BCS) has sent the first shot heard ’round the litigation world. The British bank has, among more detailed claims, asserted Bear Sterns (BSC) committed fraud by concealing requested performance updates on the now defunct highly leveraged BSC hedge funds, promising savvy risk management tactics for said funds, and failing to keep a promised line of open communication.

Now that guns have been brandished, battalions of additional law firms should soon be contracted to surge against the wrong-doers.

These lawsuits possess three important “I”’s:

Indemnity: A party may now be forced to pay for errors. However, I would love to see Bear turn around and blame the rating agencies so we can truly see how fraud masquerades as legitimacy (e.g., “Hey, we said this was risky. Moody’s said it was AAA …”).

Irony: Although institutions perpetrated the housing bubble and financial engineering scams, individuals such as Alan Greenspan and the individual fund managers will get pinned with the donkey’s tail. This has been the strategy since time immemorial. Most recently, for example, Bush had a bunch of his advisers resign so his administration could later pin the ex’s with whatever blame necessary (a derivative of Malcolm X’s strategy). Like other institutions, corporations never want to sacrifice their individual interests for the betterment of our tribe (e.g., environment, health, family), however they ask their employees to sacrifice themselves for the betterment of the corporation as a whole — irony on a Shakespearean level.

Insight: Once the lawyers send their 160K/yr associates to sift through warehouses of documents, we should get some real insight as to how this whole fraud worked. If we are really lucky, it will force some of the banks to put their cards on the table so we can see how much toxic debt is in their hand.

Don’t hold your breath: we may not get any answers for a couple years (lawyers like their billable hours) … and by that time we will already know how the housing debacle will unfold in the real world and whether a recession is upon us. But one thing is sure to happen in the immediate future: more lawsuits and headline risk for the financial sector. China’s Summer Olympics now has competition for most interesting spectator sport of ‘08.