Analysts might say the correction will not turn into a bear market but lawyers are warning that the credit meltdown could leave banks, hedge funds and private equity firms embroiled in costly litigation.
The Wall Street Journal warns hedge fund investors of litigation.
Having watched markets for many years, there is a rule that when there is a downturn, there is always an increase in the risk of litigation as investors seek to recover their losses.
But this time, it could be a lot worse because we don't exactly know how far the risk and exposures are spread. I have called that the Rumsfeld effect. The game has become much more complex, which means the litigation will be drawn out. Things could get ugly.
"When things start to go bad we always see a surge in litigation. The potential this time is increased because things are more complicated and there are things that have not been tested. It's not simply a case of dusting off old case law from six or seven years ago. The markets are far more sophisticated than they were the last time the courts had to handle a major downturn," Tom Custance, a partner at British law firm Fox Williams told The Times.
And the lawsuits are already starting. For a handy analysis , check out the D&O Diary blog.
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