S&P Granted Top Grades to Doomed Lehman CDO as Downgrades Rose

The Titanic

A unit of New York Life Insurance Co. issued a $1.5bn collateralized debt obligation named after a Northern sky constellation in April 2007. The deal burst when it defaulted less than a year later.

Bloomberg reports that the Corona Borealis CDO, underwritten by Lehman Brothers, is one of dozens of deals named in the Justice Department’s February 4th lawsuit accusing the world’s largest credit-rating company of deliberately misstating the risks of mortgage bonds as it sought to keep its share of the booming business of repackaging home loans for sale as securities.

Eastern Financial Florida Credit Union lost its investment after purchasing a portion of the Corona Borealis CDO, relying in part on Standard & Poor’s assessment of the securities, according to the Justice Department’s complaint filed in federal court in Los Angeles. The U.S. is seeking penalties against S&P and its New York-based parent, McGraw-Hill Cos. that may amount to more than $5bn, based on losses suffered by federally insured financial institutions.

S&P was aware of its influence over such firms, and knowingly 'devised, participated in, and executed a scheme to defraud investors', according to the complaint.

Ed Sweeney, an S&P spokesman in New York, declined to comment.

Eastern Financial, founded in 1937 as the original credit union for Eastern Airlines, was forced to merge with Space Coast Credit Union after being seized by regulators in April 2009.

Hit the link below to access the complete Bloomberg article:

S&P Granted Top Grades to Doomed Lehman CDO as Downgrades Rose

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