Illustration: michaelmucci.com

The learned friends were aghast. Surely Her Honour would not permit “sensationalist allegations” to fall into the hands of the dreaded press!

“We object most strenuously to … any discussion by journalists of matters that, in this court, are utterly irrelevant,” ABN Amro’s counsel, Mr Jackman, thundered.

Mr Jackman’s learned friend, Mr Finch, for Standard & Poor’s, was also flummoxed with indignation.

It was Tuesday, in the Federal Court, where 12 NSW local councils were the first plaintiffs in the world to take S&P to trial; actual trial that is, beyond the point of procedural antics in which its legal assailants usually got mired.

The claims? Misleading and deceptive conduct and breach of duty of care by ABN, S&P and Local Government Financial Services in respectively making, rating and flogging the gruesome “Rembrandt” financial products.

Barely months after the councils had invested in this masterpiece of financial chicanery – a “constant proportion debt obligation (CPDO)”, even more tricky and flea-bitten than the usual CDO – it had shed a majestic 90 per cent of its shelf price.

And so the learned friends sought valiantly to pull down the shutters, and your humble scribe – even in his unlearned and niggardly existence as a messenger boy for the hoi polloi – can understand their desire to suppress this stuff … it is wonderful!

Her Honour, Justice Jayne Jagot, thankfully, was not moved by the learned handwringing. So make yourselves a piping hot cuppa and enjoy the following email excerpts from the opening submissions. They illuminate some of the more grisly goings-on in financial products-land.

“Drexler is a smart and charming man. Cian and Sriram were, I think, sandbagged a little … Drexler simply bulldozed it through.” S&P directors Elwyn Wong and Perry Inglis discuss how ABN investment banker Mike Drexler influenced the ratings process, October 2006.

“You are the wuss for bending over in front of bankers and taking it … you rate something AAA, when it is really A-?” S&P’s Sebastian Venus reproaches colleague Derek Ding, May 2007.

“Perhaps we go and flog this for all it’s worth.” ABN’s Jamie Cole to ABN’s David Poet on influencing S&P.

“Btw, when Anti-DPNs knock out, they really knock out, you get nothing back.” Poet emails Cole two days later debating the risk of default (knock out) on the Rembrandts (anti-DPNs).

“The game is, each time you perform badly, then you increase your bet, if you hit a losing streak … you could be in trouble. It’s like the old casino strategy where you turn up with £1024, you bet £1 on a 50-50 bet. If you win, start again. If you lose, double your bet. Repeat. My instinctive worry is that doubling up on losses could, in a realistic bad trend, knock you out quite easily.” Poet to Cole on the CPDO structure.

“Is it normal for rating agencies to allow banks to build their own models for (S&P) to use to rate them?” ABN’s Paul Silcox to colleague Drexler, September 19, 2006.

“No! It is not normal and highly weird. An opportunity, however.” Drexler to Silcox.

“Isn’t this S&P’s job?” Unidentified ABN executive expressing surprise that S&P had merely lifted his bank’s own analysis for its “independent” pre-sale report on the Rembrandts.

“… A fantastic investment opportunity”, “a good fit for council”, “very robust”, “virtually guaranteed”. Some of the ways the “independent” financial advisers, LGFS, described the Rembrandts to council investment officers.

In defence of the investment bankers, are they any more than sleek salesmen whose duty of care ends with their bonuses? Of course they would try to ram one through S&P.

Even now, having been taken over by Royal Bank of Scotland, the old ABN crew is still going hell-for-structured-leather, burning retail investors with the likes of their dubious “Warren Buffett investment”.

LGFS, however, would seem to be in hot water. It can hardly make a profit from the councils by flogging this septic product while holding itself out to be their reliable financial adviser. LGFS may have to resort to the “Edward de Bono” defence that the right sides of their advisers’ brains were quarantined from the left by a psychic Chinese Wall.

S&P has deftly dealt with suits in the US by resorting to First Amendment protection to free speech. “It was only an opinion, Your Honour.” That defence may be tougher here.

Whatever the legal argy-bargy, it is obvious that an investor could reasonably assume “AAA” meant safe, just as S&P intended, and that this “Rembrandt” rubbish should never have been rated AAA.

As for the councils, should their chief investment officers really be deemed novices, unsophisticated investors? Or should caveat emptor prevail? They saw that AAA rating, they say, and were entitled to believe it wouldn’t blow up.

The broader perspective – humanity – may hardly come into play in this case, but it is worth reflecting on. ABN was not the only banker to sell toxic ”exotics” like this, nor S&P the only agency to rate them.

Here in journalism, we failed spectacularly too. Here was the Fourth Estate, at the height of the boom, shovelling out the PR nonsense willy-nilly. What a terrific transaction! What great value this market is! The public is no better served now.

And how about the auditors? PWC and KPMG missing billion-dollar holes in the accounts of Centro and Allco? Whoops. Don’t even mention the feeble regulators.

At what point did we lose the plot? At what point did proper judgment capitulate to commercial reality? Maybe the councils could join “The World” as fifth defendant because, when you live in a place which confers more prestige and financial rewards on a financier for building something destructive than an engineer for building something useful … we rest our cause.