CDOs and SIVs in a Legal Shambles

Arturo Cifuentes says that it's not just the bankers and the ratings agencies who bollixed up the alphabet soup of debt products which are now imploding. It's the lawyers, too:

More than 100 collateralised debt obligations (CDOs) and structured investment vehicles (SIVs) have already entered the murky post-event of default (EOD) state. This number will grow in the coming weeks.
Unfortunately, the legal documents that govern these transactions are so poorly written - full of ambiguities, inconsistencies, "circular references" and worse, contradictions - that many investors, trustees and respective legal advisors do not know how to interpret them.
For instance, in a number of cases it is not clear whether the assets should be sold (liquidation) or let to run off (acceleration). Moreover, even the rules to distribute the money post-EOD (who gets what) are unclear.
In essence, we have gone from bad models to bad writing.

Paul Krugman says the magneto is broken:

The defective alternator is the financial system. We replaced the old, bank-centered system with a high-tech gizmo that was supposed to be more efficient -- but it relied on fancy computer chips to function, and it turns out that there were some fatal errors in the programming.
Anybody know a good mechanic?

He's right, the fancy quant stuff broke - but so did the very unfancy legal boilerplate. The Great Moderation, it turns out, bred a Great Complacency, which reached even into the ranks of top-tier law firms. The resulting legal headache probably won't have systemic consequences, but it will still be very painful and very expensive to deal with.

(HT: Smith)