(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) 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) 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)/Lehman $702 mln to $1.44 bln Credit Suisse Group AG CSGN.VX $456 mln to $934 mln Goldman Sachs Group Inc (GS.N) $351 mln to $719 mln Morgan Stanley (MS.N) $333 mln to $682 mln Royal Bank of Scotland Plc (RBS.L)/
ABN AMRO NV $296 mln to $607 mln JPMorgan Chase & Co (JPM.N)/Bear
Stearns $274 mln to $562 mln Deutsche Bank (DBKGn.DE) $245 mln to $503 mln (Reporting by Amiteshwar Singh in Bangalore; Editing by Amitha Rajan)