There are two nominations that go along with this post. One is for headline of the year; the other is the award for worst (synthetic) CDO ever made, quite possibly.
From Reuters on Tuesday:
German bank sues Aladdin over alleged CDO losses
Jan 31 (Reuters) – Aladdin Capital Management LLC was sued on Monday by Germany’s Bayerische Landesbank (BLGGgh.F) to recover at least $60 million of alleged losses related to a collateralized debt obligation.
BayernLB accused Aladdin of being “reckless and grossly negligent” in performing its duties as the portfolio manager for the CDO, according to a complaint filed in the U.S. district court in Manhattan.
The German bank said Aladdin marketed the CDO as “investment-grade,” but that at least 11 of the underlying entitles suffered “credit events,” enough to “totally wipe out” its investment.
These entities included Lehman Brothers Holdings Inc (LEHMQ.PK), Washington Mutual Inc (WAMUQ.PK) and two Icelandic banks, among others, the lawsuit said.
Ouch.
Germany’s Landesbanks were of course, infamous investors in subprime CDOs. This particular CDO was a synthetic issue, issued in late 2006, that went by the name of Aladdin Synthetic CDO II. The deal originally had 100 reference entities, which you can view here, but those could change at the portfolio manager’s discretion.
What the Reuters summary leaves out, incidentally, is the accusation that Aladdin Capital made the reference entity portfolio much worse than its initial iteration. For instance, by increasing exposure to US mortgage-related firms as late as November 2007. Or even doubling down on exposure to Icelandic banks in 2008.
From the complaint:
For example, the initial Reference Portfolio contained as a Reference Entity one Icelandic bank, Kaupthing hf. Rather than act defensively, as it had represented it would do as portfolio manager, and maintain a limited exposure to the Icelandic banking industry, Defendant tripled down and added two additional Icelandic banks to the Reference Portfolio. In early 2008 Defendant added Glitnir Banki hf and Landsbanki hf to the Reference Portfolio. To make room for these two additional Icelandic banks, Defendant traded out of defensive and conservative Reference Entities. Also in early 2008, Defendant increased the weight of Kaupthing hf in the Reference Portfolio.
Needless to say, all three of those banks failed just months later.
Not quite a Disney ending, eh?
Related link:
Bayerische Landesbank complaint against Aladdin Capital – The Long Room