Steven Lubben reviews the lawsuit by Fannie and Freddie shareholders against the government for bailing out the firm in a way that killed the value of their investment (true, it certainly did that).  Once again, you can see how the Takings Clause is basically the only way that the government's financial crisis actions are being reviewed by the courts.  And, by the way, these sorts of claims have been brought in the past by bank shareholders against European governments that bailed out banks and zeroed out shareholders - you can imagine the case to be made by someone just pointing at the breakup value of those branches, ATMs and so on as a better deal for shareholders than a bailout.

In the US, however, Lubben identifies a potential problem:

The conservator process was enacted as part of the Housing and Economic Recovery Act of 2008. That law does not indicate which power Congress was using when it enacted the act. Arguably, the conservatorship provisions might be deemed an exercise of power under the Bankruptcy Clause, which gives Congress the power to enact bankruptcy laws.

While the Supreme Court has held that laws enacted under the Bankruptcy Clauseare subject to the limits of the Fifth Amendment, it has done so only in cases involving secured creditors. Our plaintiffs here are not even unsecured creditors; they are shareholders, meaning that they are at the bottom of the capital structure in the event of a bankruptcy.

Therefore, it’s not even clear that the plaintiffs have an interest in “property” that is protected by the takings clause of the Fifth Amendment. That would seem to be kind of important if one is bringing a takings claim.

It will be interesting to see how the Court of Claims rules on this - it has let takings claims by AIG shareholders and GM auto franchisees go forward.

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Call for Papers

AALS Joint Program of the Financial Institutions & Consumer Financial Services Section and the European Law Section

Taking Stock of Post-Crisis Reforms: Local, Global, and Comparative Perspectives on Financial Sector Regulation

AALS Annual Meeting, January 3, 2014

New York, New York

    The AALS Section on Financial Institutions & Consumer Financial Services and Section on European Law are pleased to announce that they are sponsoring a Call for Papers for their joint program on Friday, January 3, at the AALS 2014 Annual Meeting in New York, New York.

    The topic of the program and call for papers is “Taking Stock of Post-Crisis Reforms: Local, Global, and Comparative Perspectives on Financial Sector Regulation.” The financial crisis of 2008 was truly a global crisis, and the world continues to face a wide range of post-crisis economic and political challenges. Today, several years after the market turmoil began, both the United States and the European Union are in the midst of major regulatory reforms in the financial services sector. The effects of these financial regulation reforms however, remain unclear. Structural reform in the U.S. is thus far limited to a yet-to-be finalized "Volcker Rule," while in the U.K. and the Eurozone, respectively, Vickers- and Liikanen-style "ring-fencing" remain incomplete if not inchoate. Debate in the U.S. still rages around whether and how smaller "community banks" should be regulated differently from megabanks, while the E.U. continues to debate whether to form a "banking union" at all and, if so, what it might or could entail, given various political constraints. Meanwhile, the U.S. Federal Reserve continues to innovate in the realm of monetary policy in the absence of functional fiscal policy, while the European Central Bank moves furtively toward acting as a full Fed-style central bank capable of backstopping sovereign debt instruments and providing real liquidity. Where might these multiple developments be ultimately heading, and what might the Americans and Europeans learn from each other as they grope tentatively forward? What broader implications do they raise for political accountability and legitimacy in a post-crisis world?

Form and length of submission

     The submissions committee looks forward to reviewing any papers that address the foregoing topics. While the preference will be given to papers with a clearly comparative focus, the committee’s overall goal is to select papers that will facilitate discussion of, and comparisons between, American and European approaches to various aspects of financial services regulation. Potential topics include macro-prudential regulation, consumer protection, monetary policy, regulation and supervision of financial intermediaries, structural reforms, and related issues of political accountability and legitimacy.

    Abstracts should be comprehensive enough to allow the committee to meaningfully evaluate the aims and likely content of papers they propose. Eligible law faculty are invited to submit manuscripts or abstracts dealing with any aspect of the foregoing topics. Untenured faculty members are particularly encouraged to submit manuscripts or abstracts.

    The initial review of the papers will be blind. Accordingly the author should submit a cover letter with the paper. However, the paper itself, including the title page and footnotes must not contain any references identifying the author or the author’s school. The submitting author is responsible for taking any steps necessary to redact self-identifying text or footnotes.

    Papers may be accepted for publication but must not be published prior to the Annual Meeting.

Deadline and submission method

    To be considered, papers must be submitted electronically to Saule Omarova at omarova@email.unc.edu and Peter Lindseth at peter.lindseth@law.uconn.edu.

    The deadline for submission is September 3, 2013.

    Papers will be selected after review by members of a Committee appointed by the Chairs of the two sections. The authors of the selected papers will be notified by September 30, 2013.

    The Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

Eligibility

    Full-time faculty members of AALS member law schools are eligible to submit papers. The following are ineligible to submit: foreign, visiting (without a full-time position at an AALS member law school) and adjunct faculty members, graduate students, fellows, non-law school faculty, and faculty at fee-paid non-member schools. Papers co-authored with a person ineligible to submit on their own may be submitted by the eligible co-author.

    Please forward this Call for Papers to any eligible faculty who might be interested.

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Prompted by an excellent conference at Chicago organized by William Birdthistle and Todd Henderson, I've been thinking about how the FSOC, exactly, is going to persuade agencies to do its bidding.  The result is up at the Times/DealBook, do give it a look:

The Financial Stability Oversight Council has the power, under Section 120 of Dodd-Frank, to review and make recommendations related to a member agency’s regulation of a systemically significant sector of the financial system. Ms. Schapiro and Mr. Geithner successfully persuaded it to urge the S.E.C. to adopt a floating net asset value rule or to require money market funds to hold extra capital to deal with shocks.

But the problem with the council’s Section 120 powers is that they are not paired with the ability to force a member agency to act. If the S.E.C. does not want to regulate money market funds in the way the the council suggests, it need not do so. Under Section 120, it only has to provide an explanation to the council as to why it is not adhering to the council’s recommendation.

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The resolution of the Cyprus crisis - no bailout, resolution of one bank, huge losses for depositors aboved the insured amount, and capital controls - has been received pretty well by banking types, who think that bailouts lead to moral hazard.  Well, except for the capital controls bit (Cypriot euros don't really seem like euros if you can't remove them from Cyprus).  But others aren't so sure, and Peter Lindseth has a nice post why up on the EuropeUS blog.  It's an interesting blog, if you're interested in Europe, so give it a look:

The situation in the EMU today reflects the perversely ‘partial’ character of banking integration in the Eurozone.  I say ‘partial’ because Eurozone banks have apparently been well ‘Europeanized’ in terms of deposits and lending (very much consistent with the single market aspiration) but apparently not much else that is necessary to make such a single banking market a durable functioning reality. Despite the conveniently exculpatory critiques from the likes of Angela Merkel that the problem was the ‘Cyprus business model’, that model is arguably different only in magnitude but not in kind from what prevails in many other member states. As Gavyn Davies nicely put it in the FT, Cyprus is simply a ‘microcosm of the entire eurozone crisis, if a microcosm on steroids’: ‘an over-leveraged banking system, with insufficient capital and reliance on foreign funding,” all of which “is familiar territory in the Eurozone’.

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I do international financial regulation, but you really have to turn to others for sovereign debt.  Here's Buchheit and Gulati's three page long solution to the Cypriot debt crisis.  Here's Felix Salmon on it:

Their plan is simple:

First, leave all deposits under €100,000 untouched. Hitting those deposits was by far the biggest mistake of the Cyprus plan as originally envisaged, and everybody would be extremely happy if guaranteed depositors could be kept whole.

Second, term out everybody else by five years, or ten if they prefer.

That’s it! That’s the whole plan, and it’s kinda genius. If you have bank deposits of more than €100,000, they will be converted into bank CDs, with a maturity of either five years or 10 years — your choice. If you pick the longer maturity, then your CD will be secured by future Cypriot gas revenues, which could amount to hundreds of billions of dollars.

And if you have sovereign bonds, they too will be termed out by five years, giving Cyprus a bit of breathing room to get its act together.

Do that, say Buchheit and Gulati, and you manage to reduce the size of the needed bailout bymore than the €5.8 billion that Cyprus is currently planning to raise with its tax on bank deposits — and you don’t touch anybody’s principal at all. To be sure, the new CDs, which would be tradable, would surely trade at less than par: there would be a present-value haircut on deposits over €100,000. But that’s going to happen anyway. And at least in this case patient depositors will have a chance of getting all their money back in full — with interest. And, most importantly, guaranteed depositors will remain unscathed.

And here's Matt Levine on how the crisis is so strange.

The various reasons to object to this boil down to its violations of absolute priority; the way things are supposed to work is more or less:

• When a bank goes bad its equity holders lose,
• If zeroing the equity holders doesn’t cover the losses, then the bondholders lose,
• If zeroing the bondholders doesn’t cover the losses, then the depositors lose,
• But even there deposits under €100,000 shouldn’t lose, since they’re government guaranteed under the EU deposit insurance scheme.

In Cyprus sort of the opposite happened: equity holders are being diluted but not confiscated,¹bondholders weren’t touched (there are essentially no bonds),² and depositors under €100,000 were haircut in order to limit the damage to depositors over €100,000. The reasoning for this is unclear; a leading theory is that softening the blow on over-€100,000 deposits was viewed as necessary to retain Cyprus’s status as a haven for offshore deposits by tax-dodging Russian oligarchs. This is an odd theory; losing 9.9% of their money is no doubt a more pleasant proposition than losing 15% though it’s not what you’d call absolutely pleasant and they don’t seem particularly pleased with it. 

It is strange, but I agree with Andrew Sorkin that haircuts, in this case, aren't supremely terrible to contemplate.

By the way, if you’re wondering why investors left so much money in troubled Cypriot banks, here’s a trivia question: Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?

The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.” If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.

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I'm less exercised about the revolving door than most.  But this American Banker story on Promontory Financial, the lucrative place where retired regulators go to read the riot act to banks in crisis, in an effort to get them out of the jail that is CAMELS 5, is pretty interesting.  It has made Eugene Ludwig, the former Comptroller of the Currency. something like dynastic wealth, and it seems to afford other career bureaucrats, incuding Princeton economist (and Fed vice-chair) Alan Blinder, seven figure sums for post-retirement work.  

I don't have problems with either of those things, and Promontory really does seem to salt the private sector with consultants who expect compliance with regualtory edicts.  What does surprise me is that I can't think of a similar example of this particular sort of revolving door elsewhere, though one presumably exists for defense contractors.  Does EPA have a Promontory?  OSHA?  It might be that the money for "tell me how I can make this right with the FDIC" sort of advice exists in finance alone. HT: Counterparties

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One of the things Europeans have been talking about in the wake of the financial crisis is the "ring fencing" of banks.  In theory, you can ring fence lots of parts of a bank, all of which makes the bank a little less of a nexus of contracts and a little more of a nexus-of-contracts-with-some-contracts-blocked.  The US could ring fence BNP Paribas' American subsidiary so that if one went bankrupt, the other would be solvent, for example.  That's one kind of ring fencing.  But what Europe means by ring fencing is the separation of retail banking from investment banking, as Jim Hamilton has observed about Germany's new law:

It is interesting how quickly a continent that never had Glass-Steagal has gotten very interested in it after the financial crisis.  The US got rid of the separation of banking and securities partly because its banks complained they wouldn't be able to compete with European and Japanese banks that could do it all.  Maybe it will be rethought over here if this sort of legislation becomes the norm abroad.

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I've got a piece in DealBook today about the S&P litigation.  Here are a couple of teasers, one on the constitutional implications of the suit:

Still, if S.&P. is singled out for ratings that were matched by the other ratings agencies, the government’s case might look like an exercise favoring certain speakers over others, and that might be a problem. It might even encourage the government to file lawsuits against other ratings agencies.

And one on the new perspective that it may mean the government is taking on settlements:

The S.&P. suit shows that at least part of the government has come around to Judge Rakoff’s way of thinking. If so, we should expect to see fewer settlements and more court cases in the future.

There's more at the link, so do give it a look, and let me hear your own views, either here or over at the Times.

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A small sampling of recent legal scholarship on "shadow banking" (a topic of I've written about myself):

• Chrystin Ondersma (Rutgers Newark): Shadow Banking and Financial Distress: The Treatment of 'Money-Claims' in Bankruptcy; and
• Ed Greene & Elizabeth Broomfield (both, Cleary Gottlieb): Promoting Risk Mitigation, not Migration: a Comparative Analysis of Shadow Banking Reforms by the FSB, USA and EU (in the Capital Markets Law Journal)

Steve Schwarcz of Duke also produced a bevy of articles on the topic at the end of last year.

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The Post says that international financial regulatory reform is grinding to a halt, and Mark Carney, who, as Bank of Canada supremo got so active in the subject that the Bank of England hired him to be its supremo, filed a report to the G-20 that was positive, but observed that only 8 of 27 rich jurisdictions have issued final Basel III regulations.

Dan Drezner concludes that travail and intermittent progress is all you can expect from IFR, and most things, presumably.  I only sort of agree.  Carney's report to the G-20 is way better than the sort of mealy-mouthed declarations that characterize much international missive-writing.  Europe is going to implement something substantially stronger than Basel III - call it Basel III plus a Tobin tax - and that will add a bunch more jurisdictions to the total.  And anyway, the deadline for the accord is not yet upon us.

But nobody promised you a rose garden.  If you put your trust in international process, as financial regulators must, you expect backsliding, inconsistency, and progress at extremely ponderous speeds.  You might even characterize is as the worst way to regulate - except for all the others that have been tried.  

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• This podcast of Joseph Grundfest on the SAC insider trading investigation is admirably clear.
• Should Goldman really be seeking restitution from Gupta?  Here's their restitution memo opp, and here's Gupta's.
• And here's Frontline on the lack of criminal proseuctions in the wake of the financial crisis.

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In the recent edition of The Atlantic, Frank Partnoy (law & finance professor at the Univ. of San Diego who recently wrote Wait: The Art and Science of Delay)  and Jesse Eisinger (a journalist with ProPublica and columnist for the New York Times DealBook) authored What’s Inside America’s Banks?. They present an extensive analysis of the public disclosures made by major banks. The centerpiece of the article was an effort by Partnoy and Eisinger to unpack and understand the annual statement of Wells Fargo, a large bank that has been less associated with complex derivatives and trading activities than firms such as JP Morgan, Citi, and Goldman Sachs. They conclude that the public securities disclosure makes it impossible to understand adequately the risk-taking of even a more “traditional” large bank.

Frank agreed to engage in the following e-mail q&a on the article:

Q: You paint a pretty bleak picture of opaque disclosure and potential hidden time bombs lurking in the balance sheets of big banks. How does this problem compare to the toxic assets hidden in Japan’s zombie banks in the 1990s after their real estate bubble collapsed?

A: It’s a great comparison, and the degree and type of opacity are very similar. For example, I wrote in F.I.A.S.C.O. about the AMIT deals we were selling to Japanese banks back then, and looking back from today I think that the games played during the real estate bubble echo the games played in Japan during the 1990s. (And the zombie point is also a good one; we actually used that word in an early draft of the piece.)

Q: Is this a post-crisis phenomenon? Is it a function of banks trying to hide bad assets from before the bubble burst? Did the problem start there?

A: Yes, and I think it’s a friendly amendment to Charles Kindleberger’s work on crises, or even Hyman Minsky’s. As the bubble builds, credit expands, and risk increases, and inevitably the banks at the center of the expansion increasingly hide their risky assets. The assets aren’t necessarily bad – at least not at first – but they are hidden because they are risky. Then there is a dislocation and a panic as the assets “become” bad and ultimately the losses are disclosed.

Q: Is the opaque disclosure a sign that the United States runs the risk of a zombified banking sector like Japan’s?

A: That remains unclear. Bank stocks have performed well recently, in part because of the faith in the implicit U.S. government guarantee. Japanese banks weren’t as fortunate. But we think the risk is a real one, and it was a major reason why we wanted to write the piece. I don’t know if the right metaphor is zombie or rot or something else, but historically opacity has been at the center of major financial problems, especially over the long term.

Q: Do you have a sense whether the problem is as acute for large banks overseas – the Barclays, UBSs, and Deutsche Banks of Europe?

A: The gap between disclosure and reality is not nearly as wide in Europe, though banks there have plenty of other problems. For example, European regulators and bankers continue to rely heavily on credit ratings; that is a huge ongoing problem and will almost certainly result in massive misallocation of capital and future crises.

Q: You don’t seem to have much confidence in the ability of regulators or even bank management to understand the risks these banks are taking despite having nonpublic information. Is there other evidence of this besides the London Whale tale of JP Morgan?

A: Oh, there are so many. Regulators have failed to comprehend the risks at banks over and over during the previous two decades. My book Infectious Greed documents many of those incidents from the 1980s through 2003. As for more recent examples, the recent revelations about what Fed officials thought in 2007 is notable. So are the regulators’ positions about risks at Citigroup in late 2007 and early 2008. I attended several conferences with regulators during 2007-08 and was surprised by how little they knew about Structured Investment Vehicles. And so on. Kids, you really need to get out more.

Q: Why did Warren Buffett invest in banks after the crisis? What could he figure out that you (or other investment fund managers you interviewed) couldn’t? Did he have special access? Why is Berskshire Hathaway still invested in Wells Fargo if the disclosure is so opaque?

A: Buffett obviously has special access and his bet turned out to be a good one last year. He’s experienced investing in companies with opaque derivatives exposure, going back to General Re, and while sometimes he is warning that derivatives are financial weapons of mass destruction he is also often profiting from them. The key to Buffett’s investing style has always been timing – he is a genius at managing delay, waiting for the “fat pitch,” and I suspect he’ll know when it’s the right time to unload bank stocks so that he doesn’t get burned again. He understands that just because something is a black box doesn’t necessarily mean you should avoid it. Even buying into a pyramid scheme can be very profitable if you get the timing right.

Q: Why wouldn’t the market address this? Wouldn’t one large bank collect new investors and be able to sell equity above book value by offering better disclosure?

A: Oh, you’re right – how silly of me. The market addresses all such problems. Never mind.

(But seriously, imagine what our economy would look like today if the markets actually had worked. What if all of the major banks had failed in 2008 and Google, Microsoft, Amazon, and Walmart had stepped in to provide basic financial functions?)

Q: If this opacity scares away equity investors, why isn’t it also scaring away the creditors and derivative counterparties of these big banks? Why aren’t they demanding more margin or collateral or higher effective interest rates? Do these counterparties assume that the problem would have to be large enough to threaten the big bank?

A: Implicit government guarantees. And even so, they are demanding more collateral and clearer contractual arrangements, which are creating another set of problems. Also, there is some truth to the notion that the banks are so large and diversified today that creditors and counterparties probably aren’t at huge risk of failure. Catastrophe yes, but maybe nothing so big to cause insolvency. JPMorgan’s $6 billion loss was a nit.

Q: You offer a detailed indictment of Levels 2 and 3 of fair value accounting. What did you make of the outcry during the financial crisis that mark-to-market accounting was exacerbating the crisis by causing fire sales? Might some of the reforms you suggest, including improving fair value disclosure, have nasty procyclical effects?

A: No, quite the opposite. The outcry during the crisis was about marking down assets to more realistic levels – obviously bank managers didn’t want to do that. But if managers had understood they would be required to mark assets down immediately when they declined in value, they would have been less likely to buy them during a bubble – hence, an anti-cyclical effect. The smartest investors and managers say that if you can’t mark something every day, you shouldn’t buy it. Period.

Q: Your analysis of Wells Fargo’s “customer accommodation” trading focuses on some of the fudged language in the disclosure, namely that this trading might not be driven by actual customer demands, but “expected” customer order flow. You also write that

“Some traders can disguise speculative positions as “hedges” and claim their purpose is to reduce risk, when in fact the traders are purposely taking on more risk to make a profit.”

Does this mean that you are skeptical of the Volcker rule’s effectiveness in reducing risk-taking because the built-in statutory exceptions to proprietary trading are too easily manipulable?

A: Absolutely. I use the metaphor of a piece of Swiss cheese with holes that get bigger and bigger – until it is gone.

Q: Are you really limiting your proposed fixes to better disclosure and more vigorous securities enforcement? Or are you saying, as Felix Salmon blogged, that banks need to become much simpler? Do you agree with his assessment that moving back to a simpler age of banking or a simpler age of disclosure is quixotic?

 A: I think getting simpler would be a result of better disclosure and enforcement. And I have very little confidence that regulators could draft a set of “simplicity rules” to pare down what banks are permitted to do and what they are not, especially in the face of the financial services lobby. I don’t think ex post adjudication in a principles-based regime is quixotic. If anything it’s a more sophisticated way of impounding market information in regulatory decisions. But good use of the word “quixotic.”

Q: Doesn’t disclosure still have the “you can lead a horse to water…” problem? Would even sophisticated investors demand or make use of the disclosure you envision? How do you know?

A: True. Some of the reception to our piece has made me wonder whether some supposedly “sophisticated” investors are in fact not wearing any clothes. On the Wells Fargo earnings call after our piece was published, one person asked about it, but the various investors and analysts seemed placated by the CEO’s response that Wells Fargo is “pretty plain vanilla” and “I’ve never seen us be more transparent.” There’s been virtually no follow-up about the bank’s Variable Interest Entity disclosures, for example. But I think there are enough truly sophisticated investors out there, and they have huge amounts of wealth under management – as long as they drink, the other horses eventually should come along. And the most sophisticated investors tend to pile on very effectively once even one of their ilk has made a good case. Which is why managers hate (and fear) them so much.

Q: Are you coming out in favor of principles in the old rules vs. principles debate on accounting standards? Aren’t simple, broad standards also subject to gamesmanship?

A: Yes, I am. It is much more difficult to game broad standards when they are adjudicated ex post. This after-the-fact element is just as important as rules vs. principles.

Q: How much promise do you think technology offers in improving the quality of disclosure (for example, the SEC’s XBRL initiative)? [Editorial note: this is my latest research project]

A: It’s a fantastic project, and I wish you the best with it. In theory, technology can vastly improve the quality of disclosure. But one problem with systematizing disclosure is that you can miss crucial angles that are “outside-the-box” or more like narrative. What would XBRL have done with Enron’s footnote 16?

Q: If you were to offer a few concrete suggestions for the new SEC Chair on improving disclosure and enforcement, what would they be?

A: Keep it simple and be willing to be vague. Single out financial firm disclosure as a hot topic, and make it clear that banks must make better disclosures of risks and worst-case scenarios, or face consequences. Get the board members of the major banks to sign on to these initiatives, through a series of early meetings and then a highly-publicized roundtable. Keep trying to win “should have known” cases, especially against employees of financial firms. Good luck!

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The Basel Committee just put out some core principles with the un-earth-shaking but nonetheless important goal "to strengthen banks' risk data aggregation capabilities and internal risk reporting practices."  Who helped them come up with the principles?  You might begin to answer that question by looking at the comment process.  Who wrote in once the committee completed a draft of the principles and sent it around?  It turns out that Basel kept a list:

Prefontaine is a Canadian professor, and JWG a beltway bandit/think tank.  So, in other words, other than the Poles, this is a comment process dominated by banking industry groups.  Basel has not in the past radically changed its rules during the comment process (though it changes them some), and I'm glad the committee is no longer operating entirely in secret.  But it does show that the new openness in international financial regulation isn't being exploited by everyone.

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One doesn't always think about the national security implications of a secure financial system, but Iran appears to be engaged in an odd demonstration project designed to remind us about it.  As Stewart Baker observes over at Volokh:

One thing is sure, they’re the opposite of the cyber Pearl Harbor everyone’s talked about. Unless Adm. Yamamoto called up the Navy on December 7, 1941, and said, “We’ll be attacking Pearl Harbor for an hour and then the Philippines for an hour, but only on Tuesdays, Wednesdays, and Thursdays.” Because that’s pretty much how the bank attacks are going – short duration, scheduled disruptions.

That raises a couple of questions.  First, why would a country launch such a limited attack?  It could be a demonstration designed to show capability without actually provoking a response — sort of like sending an aircraft carrier to a trouble spot but staying in international waters.  Indeed, some of the details of these DDOS attacks do show surprising sophistication, and there’s no doubt the actual impact of the attacks could be greatly ramped up if the attacker wanted to. Second, if that’s the case, the best response would be to demonstrate that our defense can counter the attacker’s offense – sort of like surfacing an undetected submarine alongside the carrier.

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