Collateral managers beware! The SEC is coming for you.
The SEC on Monday filed a suit against ICP Asset Management — the boutique investment bank once indirectly described by AIG execs as one of the, err, “very best” CDO managers out there.
The main issue, the SEC contends, is that starting in 2007, ICP directed several of the CDOs it managed, the Triaxx series, to buy mortgage bonds from other clients at inflated prices. In effect, this allowed it to book millions of dollars in profits through what the SEC dubbed improper trades.
The full complaint, for those interested, is available below:
For those who are really interested, there’s a copy of the deal summary of ICP’s Triaxx prime CDO 2006-1, one of the CDOs involved in the complaint, available here. The others are Triaxx Prime CDO 2006-2 and Triaxx Prime CDO 2007-1. The trio being referred to as Triaxx 1, 2 or 3 in the complaint.
If the Triaxx CDOs sound familiar it’s because they should.
Some of them made a controversial appearance in the Federal Reserve’s Maiden Lane III portfolio. In other words, bailed-out mega-insurer AIG provided protection on the CDOs in case of default.
Reuters reported back in January:
A controversial regulatory filing detailing the federal bailout of American International Group Inc could put the spotlight back on the former executive who headed the division most responsible for the insurer’s near collapse in September 2008.
The five-page filing raises questions about some of Joseph Cassano’s prior statements that AIG had “limited exposure” to the subprime housing market, even though AIG had written insurance contracts on some $62 billion of mortgage-related securities held by 16 big U.S. and European banks . . .
And of those 25 securities, 7 were tranches or pieces of two big collateralized debt obligations called Triaxx Prime 2006-1 and Triaxx Prime 2006-2, according to the filing. The CDOs, which went to market in the second-half of 2006, had a combined value of $5.8 billion.
The Triaxx CDOs, both highly-rated at the beginning, now carry junk bond ratings from Moody’s Investors Service. AIG insured all, but a small sliver of the CDOs against the risk of default, according to the filing and a prospectus for one of the deals.
So ICP’s Triaxx CDOs ended up with the Federal Reserve, and by extension, in public coffers.
Goldman Sachs, UBS, CORAL Purchasing Ireland, and Dresdner (Remo Finance) are said to have bought protection from AIG on Triaxx deals, made whole courtesy of the US government bail-out.
ICP says it intends to “vigorously defend the allegations” by the SEC.
Related links:
ICP accused of defrauding investors – FT
Sham transactions that led to AIG’s downfall – Huffington Post