The 2007-2008 Financial Crisis was not a ‘Black Swan’ Event


Many commentators have noted recently that the Wall Street meltdown of 2007-2008 was not a “black swan” ? that is, an unprecedented and therefore unpredictable occurrence. Named for an influential 2007 book titled The Black Swan by investment fund manager Nassim Nicholas Talib, the black swan was used as a metaphor to explain why humans rely too much on the past to predict future events, and it has since been used as a defense by Wall Street to justify its inability to predict the 2008 crash. Talib himself maintains that the 2008 crisis was not a black swan event because, unlike the avian rarity of nature, it was predictable. The crisis was not only predictable, but it was actually predicted by many analysts whose voices were either ignored by the firms that employed them, or drowned out by the exuberant hype of brokers pushing the firms’ latest financial products without regard for their soundness.

It is bad enough that Wall Street allowed our economy to depend so heavily upon highly leveraged derivatives tied to subprime mortgages and other risky debt, but calling the subprime crisis, the credit crunch, and the ultimate financial meltdown ? each of which gradually evolved into the other ? an inconceivable “black swan” event is nothing more than a cheap rationalization. It is Wall Street’s way of saying that the crisis was unpreventable, justifying the failure of Wall Street firms to provide full disclosure to investors of the risks being taken with their money, when those very firms were not only aware of such risks but were in some cases betting that markets would fail by taking short positions in the same securities they were advising their clients to go long on. The “black swan” has become a convenient scapegoat for those who knew the system was fraught with danger but chose to throw caution to the wind as long as the commissions were flowing. Perhaps a more apt analogy is “red herring” ? that is, trying to divert attention away from the true causes of the crisis.

“We call that the crystal ball defense,” says Craig T. Jones, an investor’s rights attorney with the Atlanta law firm of Page Perry, “and we see it in virtually every case where an investor files an arbitration against a brokerage firm to recover losses due to broker misconduct.” The firm claims that the investors losses were due to market events that were completely unforeseeable, when in many cases lawyers are able to discover internal reports and memos indicating that the firm did foresee what was happening and opted to value firm profits over investor protection. “Other times it is called the ‘blame the market’ defense,” says Jones. “Firms claim it is not their fault that the market went down, but that is not the point. The issue from the investor’s standpoint is whether the risks of the investment were fairly disclosed, and was the investor given a complete presentation of both the upside and downside potential?”

According to attorney Jones, “when brokers do their job and present a fair picture of both the risks and benefits of an investment, the investor is making an educated decision on his or her own and cannot blame the broker. But when material truths are withheld and the investor is kept in the dark, brokerage firms are setting themselves up for liability.”

Jones points out that there is still time for many investors to make claims from the 2008 market crash, but that time is quickly running out. The amount of time remaining depends upon the peculiar laws of each state, which impose different statutes of limitations on different types of legal claims, and in some instances give additional time where facts are concealed due to fraud. “If your broker is blaming a black swan for the loss of your portfolio, you ought to at least let a lawyer who handles these types of cases take a look.” Jones’ firm, Page Perry, is based in Atlanta but represents investors in arbitrations all over the country.