UBS Suit Bodes Poorly for Banks
STAMFORD, Conn. (
) -- A judge's unfavorable order for
UBS
(UBS) - Get Report
on Tuesday is troublesome for other firms that issued structured finance products that turned out to be "crap."
Judge John F. Blawie said UBS must set aside $35 million for possible payouts related to a lawsuit filed by Pursuit Partners. The hedge fund accuses UBS of selling it millions of dollars worth of collateralized debt obligations, or CDOs, backed by real estate, knowing the products would go sour.
In his finding, the judge cited emails from UBS bankers who called the then-investment grade CDOs "crap" and "vomit." Of course, we all know now how right they were.
The case is important not just for UBS -- whose lawyer called the finding preliminary and pledged the bank's innocence -- but for other banks that peddled similar wares, and credit ratings agencies that deemed them safe.
In Pursuit's case, it purchased the CDOs from July through October of 2007, the month on which
Moody's
(MCO) - Get Report
downgraded the top-notch securities. Competitors like Fitch and
McGraw Hill's
(MHP)
S&P soon followed, as did further downgrades, while the housing and credit markets fell into disarray.
Merrill Lynch
springs to mind as another bank that faced issues with SIVs that were widely considered to be suspect on the Street. Those securities led to escalating losses that eventually sent Merrill into
Bank of America's
(BAC) - Get Report
arms.
Merrill already has settled hundreds of millions of dollars worth of claims related to subprime CDOs sold to state pension funds.
MBIA
(MBI) - Get Report
filed suit against Merrill for similar reasons this year as well.
Merrill is perhaps the best-known instance of the CDO nightmare, but it doesn't stand alone. While the market for such derivatives has lost tremendous value and remains relatively icy, Wall Street firms were issuing hundreds of billions of dollars worth of the products during the boom years of 2005, 2006 and even 2007. The market topped $2 trillion in 2006, according to several estimates.
Merrill and UBS weren't issuing all of that debt.
Perhaps no one truly realized what scale the crisis would reach in the coming years -- that the housing market would collapse, credit market would freeze and banks would require trillions of dollars in government support across the world to stay solvent as a result.
Yet it's hard to believe that sophisticated investors were completely unaware of the risks they were taking on. Other investors like retirement funds and small banks also jumped into the SIV market during the boom as well. All of them have been searching for evidence that investment banks selling the products knew the risks better.
Firms like Merrill-BofA,
Citigroup
(C) - Get Report
, UBS,
Wells Fargo's
(WFC) - Get Report
Wachovia,
Goldman Sachs
(GS) - Get Report
,
Detucshe Bank
(DB) - Get Report
,
RBS
(RBS) - Get Report
,
Morgan Stanley
(MS) - Get Report
and
Lehman Brothers
, which were among the top issuers of CDO debt, are aware of this and staying on guard.
-- Written by Lauren Tara LaCapra in New York
.
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