In just six months, Standard & Poor’s AAA blessing for a slice of a $1.5n collateralized debt obligation cost Citigroup its $15m investment.
Bloomberg reports that the Vertical ABS 2007-1, a mezzanine cash flow structure built with asset-backed securities underwritten by UBS AG, is one of dozens of deals listed in the Justice Department’s February 4th lawsuit against S&P and its parent McGraw-Hill Cos. that received the ratings firm’s highest AAA grade. Internal UBS e-mails referred to CDOs 'as ‘crap’ at the same time that the bank was selling them', Senator Carl Levin said in an April 2010 subcommittee hearing on the causes and consequences of the financial crisis.
Federally insured Citigroup’s Citibank unit bought into what was supposed to be the safest portion of the CDO, relying in part on S&P’s assessment of the securities, according to the complaint. It lost the entire investment when the CDO defaulted on October 19th, 2007.
In the meantime, Bloomberg also reports that Standard & Poor’s slapped its best possible grade on 84% of a $500m collateralized debt obligation named for a thorn tree, 98% of which was subprime residential mortgage-backed securities. The sting came a year later.
About $420m of Acacia Option ARM 1 CDO Ltd., underwritten by UBS AG, received a credit rating of AAA in May 2007, according to the Justice Department complaint. A bank unit of Chicago-area First Midwest Bancorp Inc., a federally insured financial institution, lost almost all of its $8.8m investment in the CDO when it defaulted in May 2008.
Acacia Option is one of dozens of deals listed in the government’s lawsuit that received S&P’s highest AAA grade. The U.S. is accusing the world’s largest credit rater of deliberately misstating the risks of mortgage bonds to keep its share of the booming business of repackaging home loans for sale as securities. The lawsuit seeks penalties that may amount to more than $5bn, based on losses suffered by federally insured financial institutions.
image: © Garry Knight