UPDATE 1-CDO-related lawsuits to spike in '09/'10: Bernstein

martes 11 de noviembre de 2008 15:54 CET

 (Recasts, adds details)
 Nov 11 (Reuters) - Wall Street litigations related to
collateralized debt obligations (CDOs) will likely rise sharply
in 2009 and 2010, as the notes default and investors target the
underwriters, Sanford C. Bernstein & Co said.
 "With CDO notes having lost over 50 percent of their value,
litigation against CDO sponsors and related MBS underwriters by
disappointed investors is rapidly increasing," analyst Brad
Hintz wrote in a note to clients.
 CDOs are complex bonds that pool securities to boost yield
and in theory spread risk. In practice, many of the CDOs at the
heart of the credit crisis have plummeted in value because they
were backed by subprime mortgages and U.S. homeowners began
defaulting on their payments.
 "The very real costs associated with another litigation
bubble and the build up of litigation reserves during 2009 to
2011 in anticipation of these settlements will serve to slow
the earnings improvements of the investment banks when economic
conditions improve," he said.
 The three largest CDO sponsors -- Merrill Lynch & Co Inc
MER.N, Citigroup Inc (C.N: Cotización) and UBS AG UBSN.VX -- are also
the ones that have the most number of sponsored CDOs in
default; Merrill has 42 defaulted CDOs, UBS has 38 defaulted
CDOs and Citigroup has 33 deals in default, the analyst noted.
 CDOs gained popularity during 2005 and 2006 as tight credit
spreads encouraged investors to seek out higher returns. As
spreads gapped out, however, many of these deals have suffered
significant losses in market value.
 Most of these deals have triggers that require they be
liquidated if they drop to a certain value.
 Following are the companies with Bernstein's estimates of
their CDO litigation liability based on the number of CDOs in
default or accelerated payout schedules:
 Company                              CDO Litigation Liability
 Bank of America Corp (BAC.N: Cotización)
 pro-forma for Merrill Lynch           $2.59 bln to $5.31 bln
 Merrill Lynch & Co Inc                $1.65 bln to $3.38 bln
 Citigroup Inc                         $1.34 bln to $2.74 bln
 Bank of America Corp                  $943 mln to $1.93 bln
 Barclays Plc (BARC.L: Cotización)/Lehman          $702 mln to $1.44 bln
 Credit Suisse Group AG CSGN.VX      $456 mln to $934 mln
 Goldman Sachs Group Inc (GS.N: Cotización)        $351 mln to $719 mln
 Morgan Stanley (MS.N: Cotización)                 $333 mln to $682 mln
 Royal Bank of Scotland Plc (RBS.L: Cotización)/
 ABN AMRO NV                        $296 mln to $607 mln
 JPMorgan Chase & Co (JPM.N: Cotización)/Bear
 Stearns                            $274 mln to $562 mln
 Deutsche Bank (DBKGn.DE: Cotización)              $245 mln to $503 mln
 (Reporting by Amiteshwar Singh in Bangalore; Editing by Amitha