CDOs

Rating Agency Developments

On February 9, DBRS published its methodology for rating Canadian government STRIP bonds. Report.

On February 9, DBRS published its methodology for guarantees and other forms of support. Report.

On February 9, DBRS published its methodology for rating CLOs and CDOs of large corporate credit. Report.

On February 9, DBRS published its methodology outlining cash flow assumptions DBRS applies to rating corporate credit securitizations. Report.

Goldman Sachs Settles CDO Class Action

On November 3, 2015, Goldman Sachs Group Inc. agreed to settle a lawsuit brought by a class of investors over Goldman’s sale of two collateralized debt obligations.  The settlement agreement comes on the heels of a September 8, 2015 summary judgment decision for Goldman that we recently covered, which found that Plaintiffs had failed to show evidence that Goldman Sachs knew about the risks associated with the CDOs.  The settlement amount was not disclosed.  Settlement Announcement.

Court Denies CIFG’s Attempt to Refile CDO Suit Against J.P. Morgan

On September 23, Justice Marcy S. Friedman of the New York Supreme Court for New York County denied CIFG’s motion to amend its complaint against J.P. Morgan in a case the Court previously dismissed in June.  CIFG had originally brought suit claiming two causes of action against J.P. Morgan: 1) that J.P. Morgan had made material misrepresentations to induce CIFG to issue insurance on credit default swaps guaranteeing two collateralized debt obligations, and 2) for common-law fraud.  In its June dismissal order, the Court dismissed the first cause of action but allowed CIFG to attempt to replead its fraud claim.  CIFG’s proposed amended complaint included two causes of action, the first of which the Court held was identical in all material respects to the previously dismissed first cause of action.  As to the proposed second cause of action for common law fraud, the Court noted that while CIFG had added additional allegations to attempt plead the action with particularly, it had failed to address whether a common law fraud claim could be maintained based on alleged misrepresentations made by non-insured Bear Stearns about the collateral underlying the CDOs.  The Court granted CIFG leave to amend to attempt to cure this issue.  Order.

S&P Settles RMBS Lawsuits for $1.375 Billion

On February 2, Standard & Poor’s Ratings Services settled claims brought by the Department of Justice, 19 states and the District of Columbia related to credit ratings it issued and maintained for RMBS and CDOs before the financial crisis. As part of the settlement, it agreed to pay a total of $1.375 billion, with $687.5 million paid to the Department of Justice and $687.5 million to the states and District of Columbia.  Settlement Agreement.

Also on February 2, S&P settled similar claims brought by the California Public Employees’ Retirement System (CalPERS). The terms of that settlement agreement have not been made public.

 

Rating Agency Developments

On January 23, Fitch released its criteria for analyzing interest rate stresses in structured finance transactions and covered bondsFitch Report.

On January 22, DBRS released its methodology for rating wind power projectsDBRS Report.

On January 22, DBRS released its methodology for rating solar power projectsDBRS Report.

On January 22, S&P released its methodology for rating Japanese CMBSS&P Report.

On January 22, Fitch released an exposure draft seeking comments for sovereign risk impact on rating structured finance and covered bondsFitch Report.

On January 21, DBRS released its request for comment for rating supranational institutionsDBRS Report.

On January 21, DBRS released its cash flow assumptions for rating CLOs and CDOs backed by corporate debt.  DBRS Report.

On January 21, DBRS released its methodology for rating CLOs and CDOs backed by large corporate debtDBRS Report.

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Second Circuit Affirms Dismissal of Untimely CDO Claims against Merrill Lynch

On November 21, the Court of Appeals for the Second Circuit affirmed the dismissal of a suit brought by South Korea‘s Woori Bank against Merrill Lynch & Co., Inc. and Bank of America Corp. on statute of limitations grounds.  The bank brought claims for fraud, rescission, negligent misrepresentation and unjust enrichment on May 18, 2012 stemming from its $143 million investment in several collateralized debt obligations.  The Second Circuit agreed with the lower court that publicity about Merrill Lynch’s CDOs, related lawsuits and government investigations sufficiently alerted Woori to any claims prior to May 2009.  The bank’s claims were therefore time-barred under South Korea’s applicable three year statute of limitations.  Decision.

Rating Agency Developments

On November 20, S&P released a request for comment on its methodology for rating CDOs of project finance debt.  Comments must be submitted by December 21.  S&P Request for Comment.

On November 19, Moody’s released its updated approach to rating CLOsMoody’s Report.

On November 19, Moody’s released its approach to rating corporate synthetic CDOsMoody’s Report.

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Liquidators of Bear Stearns Hedge Funds Accuse Rating Agencies of Fraud

On November 12, the liquidators for two Bear Stearns overseas hedge funds filed their complaint against McGraw Hill, Standard & Poor’s, Moody’s, and Fitch (collectively the rating agencies) in an action in New York Supreme Court alleging that fraudulent ratings led to over $1 billion in losses for the funds’ investors.  According to the complaint, the funds invested in a portfolio of high-grade structured finance products, including CDOs and RMBS, where “at least 90% had the highest rating available,” and therefore depended heavily on ratings in making investment decisions.  The complaint alleges that the rating agencies knew that the ratings assigned to the securities in which the funds invested were false.  Plaintiffs claim that the rating agencies lacked independence from the issuers of the securities and that their ratings were tainted by a desire to maintain market share in a profitable industry.  The funds also allege that the rating agencies used relaxed standards in their initial ratings and subsequently failed to conduct proper ongoing surveillance of rated securities, leading to delays in downgrading ratings for allegedly faulty securities.  The liquidators initially commenced the action in July through New York’s summons with notice procedure.  Complaint.

Settlement Reached With Liquidators of Bear Stearns Hedge Funds

Several Bear Stearns defendants agreed to undisclosed terms with the joint official liquidators of two Bear Stearns hedge funds, resolving the liquidators’ claims for breach of fiduciary duty, breach of contract and negligence.  The terms of the settlement are undisclosed.  The lawsuit arose out of the failure of the Bear Stearns High Grade Structured Credit Strategies and Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage hedge funds that had allegedly invested heavily in Collateralized Debt Obligations (CDOs) and “CDO-squareds” (CDOs comprised of slices of other CDOs).  The liquidators alleged that the defendants failed to provide adequate oversight and risk management to the funds and placed their own interests ahead of those of the funds.  Complaint.  By virtue of the settlement, the lawsuit was dismissed with prejudice on August 16.  Stipulation.