Posted on 12/16/2007 6:16:23 PM PST by DeaconBenjamin
Lehman Brothers (NYSE:LEH) 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, which marketed Lehman-originated CDOs to dozens of Australian councils as well as to charities and a public hospital provider.
The losses suffered by the councils and charities are further evidence of the damaging impact of the recent global credit turmoil as it spreads from sophisticated large investors to small communities round the world - and is increasingly starting to hurt mainstream, risk-averse investors such as local governments and pension funds.
The news comes as central banks worldwide prepare to inject tens of billions of dollars into the financial system in an effort to unblock seized markets, starting with a $20bn liquidity auction in New York on Monday.
Although the unveiling of that stabilisation plan calmed market sentiment last week, tensions remain high in the banking system as a whole. "The financial system is very vulnerable to bad news right now," admitted one senior central banker.
Markets are particularly nervous about the threat of imminent credit rating downgrades for monoline insurance companies. As guarantors for bond issuers, their health has crucial implications for trillions of dollars of securities round the world, many of which are held by mainstream investors such as pension funds and local governments.
Four towns in Norway saw most of the value of their investments in complex funds designed by Citigroup wiped out by the credit crisis.
Lehman has admitted that, "in very few cases", the CDOs sold by Grange breached the councils' investment guidelines because of the length of their maturity dates. It has bought back some CDOs.
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.
Lehman said the councils were suitable investors in CDOs because they were recognised as "sophisticated wholesale investors who have responsibility for their own investment decisions and due diligence". It added: "We believe that everything Grange sold to customers conformed to NSW ministerial [investment] guidelines. There will be cases where Grange does not believe, on objective grounds, they have to cancel [the CDOs]."
The bulls get rich, the bears get rich and the pigs get slaughtered.
I bet this crap was America’s largest export product of the year.
Fair trade, you can’t handle fair trade! We’ll raise you one cdo, for your toxic lead sponge bob bath toy!
There is a lot of legal jeopardy for companies who packaged and sold these subprime loans as safe mortgage backed investments. This is the first in a long line of legal suits.
The deck will be stacked against Lehman in Australian courts, assuming they have a defense.
I seriously wonder if there will be recourse; both for the investors AND the ratings agencies without whose blessings these things could never have been peddled. There is al most certainly well-crafted exclusionary language all over the place in the sales materials. I have been thinking and predicting that the residue of this carnage would be multiple, multi-year lawsuits piled up, primarily against the ratings agencies (Fitch, Moody’s, S&P) I brought this up to an attorney today and he dismissed the idea out of hand, saying the sales lit unquestionably had all manner of liability disclaimers all over it. The best that Wall St. could buy. Most likely, holders of this sludge will end up SOL.
It will be interesting. I am not sure how sympathetic all these foreign courts are gonna be to American corporations. Hatred and jealously can easily overcome well written legal disclaimers. Too many judges rule with their feelings instead of the black and white language.
The defense is that these investors could have bought government obligations if they wanted a risk-free investment, but they stretched for a higher yield, rolled the dice, and lost.
If you can’t understand it, you shouldn’t invest in it.
The ones in charge of the pension money are the ones responsible for this. Nobody forced them to buy anything.
What they were caught up in was the high rate of returns in the highest risk rated tranches of these CDOs.
Well the U.S. government now wants to throw contractual law out the window by allowing mortgage contracts to be modified because real estate gamblers lost on their bets.
Its the kind of example we show to the world so why not have these foreign companies not give a crap about legal disclaimers either.
Yep, let the lawsuits begin. CNBC will be asking “is this the last of the subprime lawsuits?” all through 2008.
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