Wall Street Firms Scam Each Other


Citigroup, one bank that has been accused of scamming investors in CDO transactions, appears to have been scammed by another Wall Street Bank, UBS, that engaged in similar activity. The U.S. Department of Justice’s recent lawsuit against Standard & Poor’s has identified dozens of collateralized debt obligations (CDOs) that were allegedly given the highest AAA rating by S&P when it knew or had reason to know that the ratings were false and misleading.  One of those was a CDO named Vertical ABS 2007-1, which was underwritten by UBS.  Citibank invested $15 million in what it believed was the safest tranche of that CDO, and lost its entire investment  (“Citigroup Lost $15 Million With UBS’s ‘Crap’ CDO Blessed by S&P,” Bloomberg).

The Vertical ABS CDO was composed of 75 percent subprime residential mortgage-backed securities, more than a third of which was rated BBB or below, according to the article. It defaulted on Oct. 19, 2007.

As the article’s title indicates, UBS internal emails referred to this CDO as “crap.”  When it was downgraded by Moody’s, one S&P employee wrote in an email: “The cat is out of the bag.”

Other S&P internal emails said things like: The deal’s “likely not to perform” and we’ve tried “a lot of ways” to have the model pass, “unfortunately we are still failing.” The next day the analyst wrote the “model is passing now,” explaining there was a “mistake in the waterfall modeling that was more punitive than necessary.”

One UBS banker wrote an email complaining that S&P was “jeopardizing the deal.”
The U.S. DOJ alleges that S&P intentionally misrepresented the risks of the CDOs it rated, and ignored warnings and data from its mortgage securities unit that the ratings were flawed, in order to keep its lucrative business with the CDO issuers.  The DOJ’s complaint reportedly provides at least 58 examples of S&P executives either appeasing issuer banks or acknowledging how pressure from the banks could compromise S&P’s ratings.

Federally insured financial institutions like Citibank suffered losses in reliance on bogus ratings from S&P, according to the lawsuit, which seeks to impose penalties on S&P and its parent McGraw Hill of more than $5 billion.  The case is U.S. v. McGraw-Hill, 13-00779, U.S. District Court, Central District of California (Los Angeles).

Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.