From 17 Corporate Crime Reporter 17(9), April 28, 2003

INTERVIEW WITH FRANK PARTNOY, PROFESSOR OF LAW, UNIVERSITY OF SAN DIEGO SCHOOL OF LAW, SAN DIEGO, CALIFORNIA

In his new book, Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (Times Books, 2003), Frank Partnoy tells the story of how Gary Lynch saved CS Boston and probably Frank Quattrone, the now indicted former CS First Boston executive, from serious criminal purgatory.

In 2001, CS First Boston was facing a number of investigations focusing on Quattrone's IPO shenanigans.

Investigators were focusing no the practice of clients paying CS First Boston huge fees in exchange for early access to high tech IPOs..

Lynch, who wrote the report for Jack Welch about Joseph Jett's losses at Kidder Peabody, was named general counsel at CS First Boston and was made a member of the board of directors in 2001.

His job: save the firm from Arthur Andersen style death from criminal prosecution.

According to Partnoy, Lynch negotiated a settlement that omitted the most serious charges.

The company was charged with the technicality of mislabeling the extra payments from its clients as "commissions" instead of "IPO fees."

Prosecutors dropped the criminal case against the firm and imposed a $100 million civil fine.

While the media portrayed this settlement as some kind of victory for federal prosecutors, Quattrone points out that the $100 million fine was roughly one year's pay for Quattrone and only a fraction of the fees tech companies paid to CS First Boston the previous year.

The settlement was signed in January 2002.

As for Quattrone, he was indicted last week for obstruction of justice. (See "US Charges Quattrone," page one) rather for the underlying financial wrongdoing.

"What prosecutors did with Arthur Andersen and what they are doing now with Frank Quattrone -- going after parties with obstruction of justice charges rather than charging underlying financial fraud -- is sending the wrong kind of signal to the financial markets," Partnoy said. "If you want to deter financial crime, you have to prosecute financial crime."

We interviewed Partnoy on April 28, 2003.

CCR: What is your current professional position?
PARTNOY: I'm a professor of law at the University of San Diego School of Law.

CCR: How long have you been there?
PARTNOY: This is my sixth year on the faculty.

CCR: What were you doing before that?
PARTNOY: I was an attorney at Covington & Burling in Washington, D.C., for two years.

Before that I spent two years working on Wall Street at the firms of Morgan Stanley and CS First Boston.

CCR: What law school did you graduate from?
PARTNOY: I graduated from Yale Law School in 1992. I clerked for a federal district judge, Michael B. Mukasey, in the Southern District of New York for one year.

CCR: Going from a corporate law firm to teach at a law school is an unusual career trajectory, right?
PARTNOY: Actually, it is not an unusual career trajectory. And Covington in particular has sent a number of lawyers into academia. I have been interested in being an academic for a long time. Having worked on Wall Street and practiced law for some years, I felt it was time to make that transition.

CCR: What do you teach?
PARTNOY: I teach white collar crime, corporate law, corporate finance, and some other advanced corporate law courses.

CCR: This is your second book. Your first book was F.I.A.S.C.O.: Blood in the Water on Wall Street. What was that book about?
PARTNOY: That book was a first person narrative about my experiences at

CS First Boston and Morgan Stanley. It covered the markets I worked in, which were primarily derivatives. It also covered the events while I was working, from 1993 to 1995, which included some fairly major scandals and fiascos. These included the collapses of some major firms, the bankruptcy of Orange County, and other major losses.

CCR: Many of which are recounted in Infectious Greed, your new book.
PARTNOY: Yes. In this new book, I tried to beef up those stories with additional research, expand that time period backward to 1987 and forward to today, and take a bigger picture view.

CCR: Do you work outside of the law school?
PARTNOY: I do some public speaking engagements. I also do consulting work in a litigation and advisory role.

CCR: Both prosecutorial, defense and plaintiffs' work?
PARTNOY: I've advised prosecutors only informally. I have advised some prosecutors who have investigated some of the major corporate scandals.

I testified before the U.S. Senate about the collapse of Enron. But I haven't had any formal contractual relationship with the government.

I have been engaged as an expert and as a consultant, both by financial institutions and by individual plaintiffs.

CCR: Is it plaintiffs side or defense side?
PARTNOY: These cases often have two large parties disputing some complex contract. It is hard to say who the plaintiff or the defendant is. I've served on both sides.

CCR: What was your work at Covington?
PARTNOY: It was mostly white collar crime. I was an associate there. I worked primarily for Bruce Baird. He is a well known and well regarded defense lawyer and former prosecutor. I worked on a variety of white collar cases from the defense side. We assisted companies with internal investigations and provided defense advice in a range of white collar cases.

CCR: You open your book with a stark statement: the risks of a systemwide collapse in the markets are greater than ever before. What do you mean?
PARTNOY: We saw with Long Term Capital Management's collapse in 1998 that everyone ranging from the Cassandras to Alan Greenspan thought that the risk of a systemwide collapse was near at that time.

We came to the brink then and only a last minute Federal Reserve engineered bailout brought us back from the brink. Since then the markets have gotten larger and more complex, and participants have gotten greedier.

We now have not only the kinds of complex financial engineering we saw at Long Term Capital Management, but also the kinds of corporate fraud that we found at Enron, WorldCom, Global Crossing, and others.

Since 1998, risks have spread and been reconfigured in all kinds of new and complex ways. So, I don't think anyone really has a good handle on where the risks are in the financial system now. It is a very dangerous world.

CCR: If we don't have a good handle on it, then how do we know that the risks are greater than ever before for a collapse?
PARTNOY: Because we know that the financial instruments that carry these risks have grown almost exponentially over the past five years.

Take as a starting point 1998, when we knew that the risk was substantial. Since then, the markets have grown substantially in size, disclosure hasn't improved, the markets are largely unregulated. As risks move from more sophisticated institutions to less sophisticated institutions, the risks of collapse or some sort of systemwide trouble increases.

For example, historically, credit risks have been borne by banks. We have had a strong banking regulatory system that was intended to protect against systemic risks and the risk of systemic collapse.

Banks were regarded as special, and they were in a position of providing credit, taking on credit risks. During the last few years, through the credit derivatives markets, those credit risks have been shifting from banks to other less sophisticated and less well regulated parties.

Perhaps the most troubling part of this is the shift in credit risk from banks to insurance companies.

Insurance companies are now in this very unusual position of taking on the risks that banks previously had taken on as lenders. Whenever you have risks being pushed to less sophisticated parties, and you don't have disclosure of where those risks are, then you increase systemic risks.

CCR: The Sarbanes/Oxley reforms didn't give you much comfort, right?
PARTNOY: Parts of them did. The creation of the new accounting board was certainly a good thing. And the emphasis on improving accounting standards was a good thing. But even in that area, the Securities and Exchange Commission (SEC) has moved away from Congress' will.

Congress expressed particular goals in Sarbanes Oxley. And the SEC has not complied with that law. In addition, Sarbanes Oxley did a number of purely cosmetic and in some ways distracting things. It required certification by executive officers and increased the penalties associated with financial fraud.

The problems that we saw during the last decade were not caused because executives calculated that they should commit fraud if the prison sentence would be only ten years instead of 20 years. Executives perceived a zero probability of prosecution or any sort of complex financial fraud. Sarbanes Oxley didn't explicitly change that probability.

CCR: You can't change that probability with legislation. That's a function of prosecutorial will.
PARTNOY: That's right. I agree completely with that. In fact, I say at the end of the book that prosecutors need to show that will in bringing complex cases. What prosecutors did with Arthur Andersen and what they are doing now with Frank Quattrone -- going after parties with obstruction of justice charges rather than charging underlying financial fraud -- is sending the wrong kind of signal to the financial markets. If you want to deter financial crime, you have to prosecute financial crime.

Congress can increase the resources it provides to the SEC. But of course, the SEC doesn't have the power or jurisdiction to bring a criminal case. Sarbanes Oxley had some good provisions, but overall was a largely cosmetic fix.

CCR: We interviewed Sharron Watkins a couple of weeks ago, and she believes that upwards of two dozen Enron executives will end up in prison.
PARTNOY: So far, the top executives have shown remarkable resilience in the Enron prosecution. It remains to be seen whether any of the top executives will be convicted. My best guess is that they won't be. And even if they are, the convictions won't stick.

The public focus in Enron has been on the use of special purpose entities to hide losses and debt. Those uses were at least arguably in compliance with existing legal rules and accounting rules at the time.

The prosecutions that have been brought so far and that have been successful have been for totally unrelated conduct at Enron ? for manipulation of trading strategies and other conduct.

The two dozen number is not a realistic number. I certainly don't think that two dozen executives will be convicted for the kinds of conduct that have been paraded before the public as causing the collapse of Enron.

CCR: You are quite critical of federal prosecutors for failure to attack complex financial crime. On page 212 of your book, you list a group of corporations that have been nabbed for accounting fraud ? Crazy Eddie, Towers Financial, Miniscribe, ZZZZ Best. These are not household named, big companies.

Why do you think big companies that commit complex financial frauds don't get prosecuted, while the ZZZZ Best companies do?
PARTNOY: It is very difficult and resource intensive to bring a case against a big company. It takes a lot of lawyers, a lot of documents, a lot of hours. And you are inevitably facing the very best law firms and experts. So, these cases are incredibly difficult to bring.

In addition to that, over the last decade, there hasn't been a lot of appetite for bringing substantial financial fraud cases.

Unlike the Drexel period when the U.S. Attorney was willing to take some political heat for going after a large financial institution, during the 1990s, the financial lobby was much more powerful. They gave substantial amounts of money to both parties. A complex case requires that the SEC go to the Department of Justice. Politics at the Department of Justice obviously played a role.

So, it is a combination of these cases being costly and difficult to bring. And the financial institutions have been persuasive, not only in getting deregulation of markets, but also in persuading prosecutors to apply a light hand.

CCR: It never stopped Rudolph Giuliani when he was United States Attorney. You would think that other prosecutors would look at Giuliani and say ? hey, that's not such a bad deal?
PARTNOY: There are no more Giulianis in prosecutorial offices now. The closest thing we have to Giuliani is Eliot Spitzer. And he is in a different situation on the state side. He has taken quite a bit of political heat for the cases he has brought.

We are in a very different world now. In the late 1980s, the finance lobby was not nearly as powerful as it is today. They weren't generating the same kind of profits.

People weren't making nearly the same amount of money that they are making today. Martin Siegel, one of the executives Giuliani went after, made $2 million in one of his best years. That's chump change for Wall Street today. Now we have Frank Quattrone making a reported $100 million a year, and plenty of people making $20 million or more.

The markets are awash with funds in a way that they weren't during Giuliani's day.The political risks of prosecuting a major financial firm until a year or so ago were great. Obviously, that is changing now.

Prosecutors are now much more willing to go after financial firms. And they have backing now of some politicians. Senator Carl Levin (D-Michigan) has shown a lot of political courage in going after Wall Street. And now that there is a different political climate, we will probably see more of these cases.

The point I made in the book is that one thing that led to this increase in nefarious activity was the reluctance of prosecutors to bring these complex cases during the 1990s.

CCR: You write about the case of Paul Mozer. Mozer made millions in what you call fictitious tax avoidance trades and in fixing the Treasury bond market.
PARTNOY: Mozer was a very successful trader at Salomon Brothers. He made a lot of money. He was close with John Meriwether, who was head of the arbitrage group at Salomon Brothers. That was the group that made the bulk of the money at Salomon. It was probably the most profitable group of people in history.

Mozer became obsessed with how much money a few individuals in the arbitrage group were making. These numbers are staggering even for the time. One individual made $23 million in 1990. He became obsessed with "getting to 23."

In order to do this, he began bidding in the Treasury auction market for more than the percentage that dealers were supposed to bid for. There had been an informal rule that the U.S. Treasury had applied when they auctioned Treasury bonds to dealers. They said that they didn't want any firm bidding for more than 35 percent of the market.

Mozer began bidding for more than 35 percent of the market ? in some cases for more than 100 percent of the market. Then the Treasury Department formalized that rule. But Mozer continued to bid for more than 35 percent of the market.

He attempted to avoid the 35 percent rule by submitting bids for other parties.

After he had bid for a total of 240 percent for one auction, and a total of 385 percent for another auction, he submitted a bid for just 35 percent for Salomon, but two other bids of 35 percent each for two other parties ? which were clients of Salomon.

And he got caught for submitting what the U.S. government alleged were false bids on behalf of these clients. Interestingly, one of these clients was George Soros.

The Treasury Department found out about this. The size of these transactions was substantial. We're talking about billions of dollars. The government prosecuted Mozer. It was a very high profile case at the time. Salomon Brothers did not try to reign Mozer in. There were cases brought against the other officials, including John Gutfreund, the infamous cigar clenching head of Salomon at the time.

After a lengthy prosecution, Mozer pled guilty. This was an infamous case. It was all over the financial press. Judge Leval in Manhattan ended up sentencing Mozer to just four months in a minimum security prison in Florida and imposed a fine of $30,000.

The other executives who had watched Mozer and not even slapped his wrist while he was engaging in this behavior paid fines of $50,000 to $100,000. None of them did any jail time.

This case showed that even the highest profile cases would not result in much jail time. It sent a signal to Mozer's peer group that the absolute worst thing that could happen to you is that you would get paid a lot of money for engaging in misbehavior, and if you got caught and if there was a successful prosecution, you would be fined a small amount of money and sentenced to a few months in a minimum security facility.

With that kind of signal, it is not surprising that people were engaging in financial schemes.

CCR: How much was he worth when he went to prison?
PARTNOY: I don't know how much he was worth. But he was worth enough so that he was able to retire comfortably and focus on his golf game rather than trying to get work after his prison term ended.

CCR: While he was at Salomon, he tried to browbeat the Treasury Department official who had set the 35 percent rule.
PARTNOY: Yes. That was the one time that Salomon Brothers actually tried to impose some discipline on Mozer. They told him to go to Europe to cool down.

One cardinal rule that you don't violate when you work in a major Wall Street firm is that you don't take your business to the media. Mozer was berating the Treasury Department official, not only to his face, but in the media. And that was too much even for Salomon Brothers. And so he was asked to go to Europe to cool off for a while. But when he came back, he ramped up the trades even more.

CCR: Arthur Levitt has a reputation among financial journalists as being a tough regulator. You have a different take.
PARTNOY: History won't regard Arthur Levitt as a tough regulator. He has benefitted from very good public relations, but when people take a hard look at what Arthur Levitt accomplished and what happened on his watch, history will not treat him charitably. He was the longest serving chair of the SEC. He served for seven years throughout Bill Clinton's Presidency. But he accomplished very little during that time.

Even when he has been interviewed, he has found it very difficult to articulate what his legacy has been. And he oversaw some of the most spectacular collapses and frauds we have ever seen ? and with very little response ? until the end, when he began giving speeches and pressing for rules to prevent accountants from double dipping ? fees from auditing and consulting services from the same clients.

But he paid very little attention to the critical issues during the period ? fraud and the increasing complexity of markets. He seemed largely oblivious to many of the changes that occurred during his tenure. He in fact lobbied for many of the regulatory changes that exacerbated the problem.

One example was The Private Securities Litigation Reform Act, sometimes called the anti-Bill Lerach Act.

That law restricted plaintiffs securities litigation, which was quite unpopular at the time. Levitt not only accepted those changes, many of which are now being reversed, as we learned that they were very bad ideas ? but he even lobbied for the passage of the Act.

It was unseemly to have the chair of the SEC, the supposed investor's advocate, talking about how he had been a defendant in these lawsuits, and they were really a pain, and we shouldn't have companies being subject to these kinds of hassles, so we need these rules restricting plaintiffs' litigation.

The most important thing we need to understand about Arthur Levitt is that he didn't want this job. Unlike Harvey Pitt or many other SEC chairs, he didn't have the training for this job. He wasn't a lawyer. He had done substantial fundraising for President Clinton and he wanted a cabinet level position. He was disappointed when offered the chair of the SEC.

Levitt's father was a prominent public figure. Levitt seemed driven by this desire to measure up to his father. And so he wanted to get a high profile public service position. But in some ways, this was the best he could do. He had been trying to get a high profile public position ? in previous Republican administrations. But he had not been able to land such a position. The SEC was the best he was going to do.

So, it is not surprising that if you put a person with that background as head of the SEC, leave him there for seven-and-a-half years, that he is not going to be a forceful advocate for fair and efficient markets.

He was also essentially out of touch and out of power in the Clinton Administration. President Clinton didn't have much to do with Levitt.

Clinton was a prolific letter writer, but sent Levitt only one note during his tenure. Levitt was largely outclassed by Alan Greenspan and Bob Rubin, who held the power in the Clinton Administration.

Arthur Levitt had a lot of face time in the media. His public relations is very good. But when people take time, and historians assess what it is he has actually accomplished, I believe he will not be treated charitably.

CCR: He wrote a book last year called Take on the Street: What Wall Street and Corporate America Don't Want You to Know. He wrote it with Paula Dwyer of Business Week. Did you read it?
PARTNOY: I did.

CCR: What's your nutshell review?
PARTNOY: I'm reluctant to give negative reviews of books. I love books. Book writing is important. I found some interesting insight into what he had done at the SEC. It would have been much more interesting if Brooksley Born, who was head of the Commodities Futures Trading Commission (CFTC) when Levitt was at the SEC, had written a book. People have forgotten about her. But she was a strong, smart advocate for fair and efficient markets and regulation.

CCR: Where is she now?
PARTNOY: She is now a partner at Arnold & Porter in Washington, D.C.

CCR: Did she oppose a merger between the CFTC and the SEC?
PARTNOY: That's a controversial turf battle. I believe she expressed concerns about the CFTC staff getting lost in a merger. But she strongly opposed efforts to strip away the CFTC's power and jurisdiction. One political solution might have been to merge the two. What we have decided instead is to leave the CFTC as an empty shell.

She pushed very hard for some fairly mild regulation of over-the-counter derivatives and had in effect her head handed to her by regulators and by legislators. She and Levitt both faced these intense lobbying pressures. Both of them were unsuccessful in getting measures they wanted passed. But Brooksley Born was more ambitious and understood the systemic issues better than Levitt did.

CCR: You have many examples of cases where you believe there should have been a criminal prosecution. One is a late 1980s Bankers Trust case where the company lied about the whereabouts of $80 million.

You say the case raises the question ? is it okay for regulators not to prosecute a case where the company lied about a line item?

There are those kinds of examples throughout the book. One message of your book is that we have to re-regulate the markets and bring back the Giuliani-type prosecutor who can understand the complex case and prosecute it.

Another is dealing generally with the risks posed by derivatives to the markets. So, let's do derivatives in a nutshell. What is a derivative?
PARTNOY: A derivative is a financial instrument whose value is linked to something else. The two classic derivatives are options and futures.

Those have been around since the Greeks. Farmers have used derivatives for centuries. But during the last decade or so, these instruments have been combined in all sorts of fantastic ways. And the over-the-counter derivatives markets have grown from relatively small markets to now over $100 trillion.

CCR: And they are largely unregulated. Which parts are regulated?
PARTNOY: They are regulated in that there are some very limited disclosure rules applicable to OTC derivatives.

And you can always sue in court for common law fraud. I would call that a kind of regulation. You can make a common law claim.

CCR: But you make the point also that the high-powered plaintiffs firms like Milberg Weiss don't like these cases because they are too complex ? the same reasons the prosecutors don't like them.
PARTNOY: These cases are very complex. And prosecutors and plaintiffs firms don't like to bring them. That has changed a little bit. During the past two years, plaintiffs firms are realizing there is money in these cases, and prosecutors also are looking at the cases -- although it remains to be seen in particular instances whether they actually bring the complex case or some simpler obstruction of justice type case.

CCR: You don't want to get rid of them.
PARTNOY: We will never get rid of derivatives and we shouldn't get rid of them. They serve valuable and important purposes in the markets.

The problem is that from a regulatory perspective, derivatives are not treated like they are equivalent financial instruments.

Merton Miller, the Nobel laureate economist, had this insight a decade ago. He thought that derivatives were of great value because parties could use them to avoid legal rules. If there was security A that was subject to a regulatory cost and there was derivative B that was not, and the two were equivalent in every way except for this regulatory cost, people could shift from A to B to avoid the regulatory cost. And that started happening ? trillions of dollars of that kind of shifting has occurred over the last decade.

So my proposal is that we treat A and B the same. If people want to argue that these securities/derivatives should be unregulated in certain instances because the parties trading them are sophisticated, or because there is something about the instrument itself ? it is based on foreign exchange, which doesn't need to be regulated as much ? then fine ? don't regulate them.

But don't regulate any securities that are equivalent, either.

And if you think that the instruments should be regulated, then regulate derivatives and securities in the same way.

The bottom line is treat derivatives like equivalent financial instruments.

CCR: If you were to do that, what would the system look like?
PARTNOY: For example, if we did that, Enron's off balance sheet debt, it's use of derivatives to manipulate its reported debt figures would not have been permitted. There would be a general standard that would say that borrowing money must be reported, regardless of how it is done.

This relates to another proposal in the book ? which involves the proliferation of rules over general standards. People who live in a highly rules specific world, not surprisingly, use financial instruments like derivatives more to get around the rules.

Under my proposal, we would treat similar the instruments the same and move from rules to more general standards.

For example, Enron faced a very specific three percent rule that dictated how much outside capital it needed to have in a special purpose entity in order to qualify for non-consolidation accounting treatment.

Instead of that, you would have a general standard that says ? if you are borrowing money from an economic perspective, you have to report it on your balance sheet.

Under such a standard, people couldn't engage in financial shenanigans to effectively borrow money off-balance sheet. In a world with general standards, prosecutors could go to the company after the fact and say ? there is a general standard that says that if you are effectively borrowing money, you have to report it. And you didn't report it.

CCR: Could a derivatives prosecution be brought under the general anti-fraud provisions of the securities laws?
PARTNOY: It is a controversial issue. It was raised in the most stark way in the prosecution of Bankers Trust. If prosecutors want to be aggressive, they could go after many of these financial schemes using the mail and wire fraud statutes ? even if you don't have a security.

CCR: You see no federal prosecutor on the horizon who has shown a proclivity for this type of prosecution?
PARTNOY: I know that the Enron Task Force is investigating some of this. We might see within the next year a group of prosecutors bringing these cases. But it seems at this point that the prosecutors just want to throw people in jail for something ? obstruction of justice ? but not necessarily for the critical conduct that brought down the firm.

I hope we won't lose sight of how important the deterrence function is in white collar criminal prosecutions.

The recent corporate collapses occurred in part because there weren't the kinds of prosecutions that might have deterred individuals or institutions engaging in wrongdoing. I don't think anyone knows yet whether there is another Giuliani on the horizon. I hope there is.

CCR: Has the current wave of corporate corruption and collapse subsided?
PARTNOY: No. We have seen with the HealthSouth revelations that there are certainly more corporations engaging in these schemes.

CCR: Well, in HealthSouth it was just a group of people in the back room padding the books. It wasn't exactly complex financial fraud.
PARTNOY: As to complex financial fraud, the next focus will be on insurance companies. Over the last few months, we have seen some insurance companies announce losses through trading in credit derivatives.

A credit derivative is a derivative based on credit. It is a financial contract whose return is based on changes in the credit of some company or group of companies. You enter into a contract, and you get paid if Enron defaults on its debts.

That's a $2 trillion market, projected to grow to $4 trillion next year. Credit derivatives risks are an example of how risks get transferred in all sorts of unforseen ways ? in this case from banks to insurance companies.

There are a lot of insurance companies out there that have taken on these risks, not adequately disclosed them, not accounted for them, and those are ticking time bombs.

It is only a matter of time before we learn of scandals at these insurance companies and at other companies that have been players in the credit derivatives markets.

When Alan Greenspan used the term "infectious greed," he said that what has changed is not that people have become greedier, but that the avenues to express greed have grown so enormously.

So with these markets ? derivatives generally and credit derivatives now specifically ? the avenues to express greed have grown substantially.

We are fooling ourselves if we think that because of Sarbanes Oxley and because some companies have collapsed that people have stopped engaging in these activities. All of the numbers show that these activities continue.

CCR: But, the publicity given to the perp walks, and the collapses, and the corruption, must have some general deterrent effect on the business community.
PARTNOY: Absolutely.

At a typical company, the boardroom and management have been radically changed.

No one can afford the negative publicity associated with one of these cases.

Managers and directors are being very careful to understand their books, and in many cases to abandon these complex markets, to simply stop engaging in activities that they can't understand.

But until people do real jail time for complex financial fraud, there won't be an adequate deterrent and this hiatus that we are going through now will be short-lived.

And in another year of two, we will start to see the same kind of thing occurring.

We have had several mini-waves of scandal over the past fifteen years, none of which led to wrongdoers being punished.

One of the arguments in my book is that after this last fairly substantial wave, it is absolutely critical that punishment is meted out.

CCR: If you believe truly that the risk of a systemwide collapse is greater than ever before, then you must not be invested in the market.
PARTNOY: I'm sitting on the sidelines right now waiting for the ill wind to pass.

But the history of financial markets shows that people need to be invested in the market.

If you are going to be saving for any period of time it is foolish not to invest in stocks.

What I suggest in the book is that rather than buying a diversified index fund that invests in all 500 companies of the S&P, try to cherry pick companies that don't look like they will be trouble.

I try to follow Warren Buffett's advice, which is to actually look at financial statements and footnotes. If I don't understand what is in there, it is likely that the company doesn't want me to understand it.

If I don't understand it, then I don't buy that stock. That is the strategy that I will be following when I get back into the market.

[Contact: Frank Partnoy, University of San Diego School of Law, 5998 Alcala Park, San Diego, California 92110. Phone: (619) 260-2352. E-mail: [email protected]]