Who Else is at Risk for CDO Litigation?

Considering the hits from the CDO market that keep popping up and their role in the various fiscal storms that have buffeted this Nation, it makes sense to look at market and who might be at risk. According to Bloomberg News Merrill Lynch and Bank of America might have the most to lose by further litigation:

Bank of America and Merrill Lynch, which combined in 2009, were collectively the largest underwriters of CDOs with components of the Goldman Sachs offering --“structured finance collateral and an ‘arbitrage plus cash flow’ structure,” Credit Suisse said in the report. Goldman Sachs has denied wrongdoing in the offering. That type of security was a subset of the total CDO market, which peaked at $418 billion in 2007, according to UBS analysts. Bank of America and Merrill Lynch together ranked first that year with $9.97 billion of those offerings, said the Credit Suisse report, citing Dealogic data.

Moynihan’s View

Bank of America Chief Executive Officer Brian T. Moynihan said April 16 he had “no knowledge” of claims such as the ones leveled against Goldman Sachs by U.S. regulators about a 2007 CDO offering. The Charlotte, North Carolina-based bank doesn’t comment on analyst reports, spokesman William Halldin said.

For the entire 2005-2008 span, Zurich-based UBS AG ranked second on the Credit Suisse list with $15.8 billion, and JPMorgan Chase & Co. was third with $9.9 billion. Spokesmen Brian Marchiony at JPMorgan and UBS’s Doug Morris declined to comment. New York-based JPMorgan bought Bear Stearns Cos., one of the biggest underwriters of mortgage securities, in 2008.

“Clearly, not every structured synthetic CDO issued during the period will necessarily be the subject of litigation,” Credit Suisse said in the report. The firm didn’t allege that any of the firms allowed outsiders to influence the composition of the CDOs for their own benefit.

The Securities and Exchange Commission filed a fraud suit against Goldman Sachs last week that accused the New York-based firm of selling a CDO linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle, known as Abacus 2007-AC1. Clients lost about $1 billion from the trade, the SEC alleged.

My understanding of a CDO is that several borrowers are pooled together and then this "package" of debt can be kept as an investment or sold for quick cash. Its also my understanding that on paper it looks good, but in reality we don't know what these assets are worth since some borrowers won't pay them back. When the housing market went under, these CDO's became poison pills that wrecked numerous fiscal houses. As for Lynch, we all know what happened to them, in regards to Bank of America, they have been buffeted by their own in-house scandals.