SWISS banking giant UBS, already among the hardest hit by losses on mortgage investments gone bad, now faces legal claims that it dumped some of the most toxic pieces of those investments on its clients.
In a lawsuit that offers a rare inside perspective on the dealings behind the current financial crisis, mid-size German lender HSH Nordbank alleges that UBS sold it $US500 million ($535 million) in complex investments that UBS's now-defunct hedge fund, Dillon Read Capital Management, later used as a receptacle for troubled sub-prime mortgage securities.
The German bank says UBS's actions led to a loss of at least $US275 million.
The lawsuit, filed in New York state court, portrays HSH as an unsophisticated investor duped by UBS, saying the Swiss bank "exploited the structure for its own ends, at HSH's expense, in violation of its contractual and fiduciary duties." HSH is demanding at least $US275 million in restitution, plus punitive damages.
Claims like this augur an acrimonious stage in the financial downturn, as disgruntled banks and investors turn to the courts to recoup massive losses.
In the US, municipalities are suing banks over souring investments or for contributing to the mortgage crisis. Mortgage lender Luminent Mortgage Capital has sued two banks, alleging that they mispriced mortgage securities.
And in December, Britain's Barclays sued Bear Stearns and two Bear fund managers, alleging that it had been misled about an investment and disclosing private correspondence between the two banks.
With history repeating itself once again after the debacle in the 1980's over CMO's, I thought I might bring to light one of the great stories never told in Indian Country that took place back in the 1980's.
The Bureau of Indian Affairs managed tribal money in NM at their Office of Trust Funds Management. I use the term "managed" very loosely.
In the 80's, the OTFM was a big buyer of collaterlized debt, (CMO'S, Collateralized Mortgage Obligations). CMOs were originally designed to meet the investment needs of the most sophisticated institutional investors and the securities industry quickly sought to market these to smaller institutions. As these investments became even more and more complex and difficult to comprehend, both institutional and individual investors continue to be sold these products with less and less comprehension of what they purchased. Collateralized mortgage obligations (CMOs) are financial debt vehicle first created in 1983 by investment banks Salomon Brothers and First Boston. Legally, a CMO is a special purpose entity that is wholly separate from the institution that created it. The entity is the legal owner of a set of mortgages, called a pool. Investors in a CMO buy bonds issued by the entity, and receive payments according to a defined set of rules. The mortgages themselves are called the collateral, and the bonds are called “tranches” (also called classes), and the set of rules that dictates how money received from the collateral will be distributed is called the structure. CMOs are complex securities which are claimed to be innovative investment vehicles, offering regular payments, relative safety, and notable yield advantages over fixed-income securities of comparable credit quality (AAA rated). Yet, CMOs have for decades have been a tool of some unscrupulous con-artist brokers who had invaded the multi-trillion dollar mortgage debt market to take advantage of even the seemingly most sophisticated investors. The OTFM investment managers were not sophisticated. They were in the bond market every week and roiled prices when they were looking for offers. It was almost a standing joke on trading desks that "the Indians are in the market".
I should know, I called on them every week when I was a salesman for Drexel Burnham Lambert on the West Coast. The OTFM were yield buyers and they bought millions upon milions of of CMO's.
In the 1980's, when interest rates rose above 10%, some CMOs lost 25 to 40% of their value regardless of the fact that these securities were “insured” and “AAA rated”. However, CMOs often have much less upside potential than bonds because when interest rates rise, investors usually re-finance their mortgages which cause higher paying CMOs to carry little premium in the market place. The OTFM held millions upon millions of dollars of CMO's for their tribal accounts. As those securities cratered I often wondered if tribal finance officers or tribal council heads were being called and informed of their loss of principle to their assets. I wondered how many millions and millions of dollars evaporated for the countless Native children across Indian Country who their tribal leadership was entrusted their finances to a governemental entity that owned so much toxic junk.
Nope, not a chance it happened. Tribal leaders were never called. How big were the losses before all was said and done? A few million, a hundred million? Only the trading records can tell the story. And they are securely tucked away just like the BIA wants them to be. Transparency with unsophisicated investors is a one-way street. Twenty odd years later, the story is still untold. And history is repeating itself once again in the bowels of Wall Street. Buyer beware it's each man for himself.
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