Eastern Financial Knew the CDO Risks, Says Wall Street
Several Wall Street banks and credit rating agencies are claiming that the former Eastern Financial Florida Credit Union knew the risks going in before investing in $100 million in collateralized debt obligations.
This is the latest update on a suit filed in February by the $3 billion Space Coast Credit Union in Melbourne, Fla., against Merrill Lynch, Wachovia Capital, Barclays Capital, Lehman Brothers’ former CEO Richard Fuld and major U.S. credit rating agencies, Standard & Poor’s and Moody’s, alleging that they conspired to inflate allegedly toxic bonds into investment-grade securities using fraudulent credit ratings and that the investment banks dumped those inflated securities onto unsuspecting investors.
The Wall Street banks recently told a federal court judge in Miami that Eastern Financial was warned about the risks associated with CDOs.
“Each of the twelve CDOs at issue here was offered pursuant to a separate offering circular. These offering circulars contained page after page of disclosures and disclaimers, explaining to Eastern Financial the nature and risks of the particular CDO investments, the place of each tranche within each CDO, and the credit rating expected to be assigned by the rating agencies of each tranche,” according to a joint motion from the banks and ratings agencies to dismiss the suit.
Space Coast spokeswoman Meredith Gibson reiterated the credit union’s position it had when the complaint was initially filed.
“The depiction of the level of risk associated with these investments, and therefore Eastern’s ability to make a sound risk-based decision, is at the heart of the legal action,” Gibson wrote in a statement to Credit Union Times.
Space Coast had previously said it could identify several ways that the defendants allegedly manipulated the credit ratings, including making out-of-model or manual adjustments to the rating agencies’ credit rating models to obtain better ratings.
Space Coast said the defendants allegedly knew that the credit rating models rested on fraudulent data due to the fact that the investment banks waived defective loans, allowing them to be included in the mortgage securities.
At the time of the credit union’s filing, Space Coast President/CEO Doug Samuels said the credit union plans to move forward with its suit.
“It is our duty, on behalf of our members, to attempt to recover the loss and ultimate destruction of Eastern resulting from this sale of the mortgage-related securities,” Samuels wrote in a statement. “These mega brokers knew at the time of sale that these securities were worth less than face value and took advantage of a less sophisticated buyer.”