Several Wall Street’s biggest banks were recently hit with a lawsuit from Space Coast Credit Union over claims it lost more than $100 million from collateralized debt obligations that were sold to Eastern Financial Florida Credit Union.
The $3 billion Space Coast in Melbourne, Fla., acquired the financially troubled Eastern Financial Florida CU in 2009 after it was placed in conservatorship and issued a cease and desist order for questionable loan practices.
In its complaint, Space Coast said the CDOs led to a phony demand for residential mortgage loans, which also led to creating one of the state’s largest housing catastrophes.
Space Coast said creating and selling CDOs revolved around shoe-horning residential mortgage securities into Moody's and S&P's credit rating models to generate investment grade ratings, according to the CU’s suit. Investors were misled because they relied on the credit ratings.
Among the banks named in the suit were Wells Fargo Securities, formerly known as Wachovia Capital Markets, J.P. Morgan Securities, formerly known as Bearn Stearns & Co. Inc., Merrill Lynch and its subsidiary, Merrill Lynch Home Loans, UBS Securities, and Barclay’s Capital Inc. Other defendants named were Richard S. Fuld Jr., former chairman and CEO of Lehman Brothers, and Moody’s Investors Service Inc.
In May 2011, Space Coast filed a suit against Barclays saying the $10 million worth of the firm’s Markov CDOs bought by Eastern Financial Florida were based on riskier synthetic assets. The purchase allegedly led to losses on the entire investment.
A comment from Space Coast was not immediately available.