Federally insured Citigroup’s Citibank unit bought into what was supposed to be the safest portion of the CDO, relying in part on S&P’s assessment of the securities, according to the complaint. It lost the entire investment when the CDO defaulted on October 19th, 2007.
In the meantime, Bloomberg also reports that Standard & Poor’s slapped its best possible grade on 84% of a $500m collateralized debt obligation named for a thorn tree, 98% of which was subprime residential mortgage-backed securities. The sting came a year later.
About $420m of Acacia Option ARM 1 CDO Ltd., underwritten by UBS AG, received a credit rating of AAA in May 2007, according to the Justice Department complaint. A bank unit of Chicago-area First Midwest Bancorp Inc., a federally insured financial institution, lost almost all of its $8.8m investment in the CDO when it defaulted in May 2008.
Acacia Option is one of dozens of deals listed in the government’s lawsuit that received S&P’s highest AAA grade. The U.S. is accusing the world’s largest credit rater of deliberately misstating the risks of mortgage bonds to keep its share of the booming business of repackaging home loans for sale as securities. The lawsuit seeks penalties that may amount to more than $5bn, based on losses suffered by federally insured financial institutions.
Citigroup Lost $15 Million With UBS’s ‘Crap’ CDO Blessed by S&P
UBS’s Acacia CDO With S&P’s Safest Grade Stung Midwest Investors
image: © Garry Knight
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