Quantifying CDO Litigation Risk For The Less-Than-Godly Banks

Now that the attention of the investment community has once again turned to regulatory risk, analysts will be focusing on the question of who may be most at risk for comparable CDO-related overtures by the SEC. The table below presents CDO league tables for top CDO underwriters in the 2006 and 2007 period. By and far Merrill Lynch and Citi appear to be most at risk (from Credit Suisse).

In a separate report Credit Suisse confirmed that based on deals with "salient" characteristics to Abacus, the firm once again sees Merrill/BofA as the most likely to suffer the wrath of the SEC. Reports Bloomberg:

Bank of America Corp. and Merrill Lynch & Co. led Credit Suisse AG’s “CDO litigation risk” list after offering $16.85 billion of collateralized debt obligations similar to the one that drew a U.S. fraud suit against Goldman Sachs Group Inc.

The tally of lead underwriters of CDOs with “salient characteristics” of the disputed deal between 2005 and 2008 may help investors gauge the risk that lawsuits will spread to other firms, Credit Suisse said in a report yesterday. Bank of America, the largest U.S. bank, acquired New York-based Merrill Lynch in January 2009.

“Problems of this sort are rarely confined to one institution,” Credit Suisse said. “The dot-com era shows us that in the wake of a crisis, business practices which were considered normal at the time can look very much worse with the benefit of hindsight and in a legal setting.”

Of course, Bank of America's CEO Brian Moynahan immediately came out with information that he was unaware of any implications of his firm in any related SE C investigation, saying "he had “no knowledge” of claims such as the ones leveled against Goldman Sachs by U.S. regulators about a 2007 CDO offering."

The other two firms that fill out the top three list for the 2005-2008 period with "comparable deals" are UBS AG which ranked second with $15.8 billion, and JPMorgan Chase & Co. was third with $9.9 billion, primarily due to its purchase of Bear which despite being one of the biggest underwriters of CDO, passed on the Paulson proposed deal structure citing "ethical concerns", as we reported yesterday.

Below is a detailed list of selected historical SEC settlements with various banks, again via Credit Suisse.