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Sunday, December 16, 2007

CDOs: Here Come the Lawyers

by Calculated Risk on 12/16/2007 09:45:00 PM

Here are a couple of different stories about CDOs and lawsuits. The first story concerns Wall Street selling CDOs to municipalities who now are claiming they were unaware of the risks.

From the Finanical Times: Lehman faces legal threat over CDO deals (hat tip Viv)

Lehman Brothers faces the threat of legal action by municipal councils in Australia over the sale of high-risk collateralised debt obligations by the Wall Street bank's local subsidiary, Grange Securities.

At least two councils in New South Wales and a third in Western Australia are considering litigation against Grange ...

The Lehman-originated Federation CDO, exposed to the US subprime mortgage market, was last month marked down to just 16 cents in the dollar by the bank, leaving councils nursing paper losses of 84 per cent.

The sale by Grange and others of many hundreds of millions of dollars worth of CDOs to Australian councils, some of which had 70 per cent or more of their total investment devoted entirely to CDOs, has sparked an investigation by the state government of New South Wales.
The second story concerns sophisticated investors wrestling over the scraps, from the WSJ: CDO Battles: Royal Pain Over Who Gets What
A recent filing in New York state court provides a window into the legal battles likely to ensue from battered investments. Big players, including Deutsche Bank AG, bond insurer MBIA Inc., Wachovia Corp. and UBS AG are tangled together over a mortgage investment vehicle named Sagittarius.
On Nov. 6, Sagittarius triggered "an event of default." This prompted MBIA to claim it should get all the remaining payments. That put it into potential conflict with Deutsche, the CDO's trustee, and UBS, an investor with fewer rights in the event of default.

Sorting out how to value the assets, who gets paid and whether to pull the plug on struggling CDOs is complicated business. Often little is known about who holds what. "If there's one safe prediction for 2008, it is that legal teams will be busy," wrote J.P. Morgan Chase in a recent report led by analyst Chris Flanagan.
The lawyers will definitely be busy.