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Deutsche Bank agrees a $55 million CDO settlement with investor, reports Reuters
Deutsche Bank has agreed a $55 million settlement with M&T Bank over Gemstone CDO VII, a CDO of ABS which the bank arranged and closed in March 2007, according to Reuters. M&T Bank, based in Buffalo, had invested an $82 million figure in the CDO which securitised mortgage backed securities. The trade quickly turned sour as the underlying assets saw their value crash. The regional bank had stated that the value of its investment had fallen to $1.87 million within a year.
The cash settlement brings to a close a three-and-a-half year legal battle, which was one of the first instances of an investor suing an arranging bank over a CDO. A number of similar cases have sprung up since then where banks have allegedly taken short positions on assets and profited as a CDO collapses.
A CDO trader working for Deutsche Bank at the time is reported to have compared the collateral in Gemstone CDO VII to “pigs” and “crap”.
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CFlux secondary
CLO index levels:
| Index | 21 May |
|
| CFlux USD AAA | ↑ | 96.2 |
| CFlux USD AA | ↑ |
88.3 |
| CFlux USD A | ↓ | 84.1 |
| CFlux USD BBB | ↓ | 75.3 |
| CFlux USD BB | ↓ |
74.1 |
| CFlux USD EQ | ↑ | 77.5 |
Moral of the story - if you were an investor in any of these products from that vintage, sue!
As this article notes, there are many lawsuits of this type. If plaintiffs score victories in most of these similar to M&T, there will be significant consequence to the investment banks. One aspect that may be under-reported is that the banks scrambling to sell deals in 2007 knew with certainty that the marks on the collateral were well below the purchase prices of the SPVs. Investment bankers have an ethical obligation to believe and represent that the securities they sell are "fair" and sound. The legal question is what consequences should result from the bankers' ethical lapse.
Would the settlement have been more had he compared it to "toxic waste" as every second newspaper seems to refer to 2006/2007 vintage sub prime mortgages these days ? Obviously the deal was a lump of coal rather than the "gemstone" it was described as.