THE INSANITY OF AMERICAN CAPITALISM

I've often thought that the MOTU greatest desire is to escape the accountability confines of Adam Smith's theory of capitalism and it seems that this is one way to do that.

Special Report: For some people, CDOs aren't a four-letter word
Reporting by Matthew Goldstein; editing by Jim Impoco and Claudia Parsons
Thu May 27, 2010 11:17am EDT
Delaware (Reuters) -

Puglisi, a 64-year-old grandfather who left teaching a decade ago, serves as the sole independent director on the Delaware-based corporations behind more than 200 mostly subprime-backed CDOs. And for every deal, Puglisi still collects a modest annual fee of several thousand dollars for reviewing and signing the initial transaction documents and continuing to handle mostly routine clerical matters.

He pockets those annual fees -- which structured finance experts say can range from as little as $2,000 to as much as $10,000 -- as long as a CDO hasn't been dissolved and is still generating cash flows from the underlying mortgage-related assets.

Puglisi won't discuss his CDO earning power. But using the most conservative back of envelope calculation he is taking in at least $400,000 in director's fees.

That's because in the world of structured finance, independent directors are like the Wall Street equivalent of a notary public, with no real power or authority over deals they get involved in.

In light of that limited role, independent directors like Puglisi have managed to walk away largely unscathed by the damage unleashed by collapse of the CDO market on the world financial system. And they continue to draw their fees.

"Currently independent directors do not seem to have a meaningful role as a gatekeeper," and they do not serve as a "fiduciary with respect to the underlying quality of the investment," said Jill Fisch, a University of Pennsylvania Law School professor, who specializes in corporations.

In light of those limitations, she said one could rightly ask, "Why not just get rid of them?"

In a typical securitization, a company, or special purpose entity, is set-up by a bank as the legal issuer of bonds backed by a pool of mortgages, credit card loans and other assets. The independent director's main job is to make sure the SPE issuing the bonds operates within its narrow legal charter and determine when it is appropriate for a company to be placed into bankruptcy.