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Home > Cases > ABS & CDO Investment Losses > ABS & CDO Investment Losses Overview

Asset Backed Securities & Collateralized Debt Obligations

On January 1, 2007, Thompson Financial categorized trusts containing first mortgage liens with credit score greater than 675 as Mortgage Backed Securities (“MBS”). Trusts containing first mortgage liens with credit scores less than 675 are characterized as Asset Backed Securities (“ABS”). All Alt-A (loans without documentation generally required by FNMA and FHLMC), subprime and second lien mortgages pools are categorized as asset backed securities. Obviously, the collateral utilized in structuring asset backed securities carries more risk of default and foreclosure than the collateral utilized in structuring mortgage backed securities. Mortgage backed securities and asset backed securities are often times referred to as structure financial products or structured securities.

As reported by Thompson Financial in its Fourth Quarter 2006 report, $1.223 trillion in Asset Backed Securities were created in 2006. The top 10 Underwriters for ABS underwrote $829 Billion in 2006. The top 10 Underwriters were:

  • Citigroup - $121 Billion
  • Merrill Lynch - $99 Billion
  • Deutch Bank A.G. - $89 Billion
  • Lehman Brothers - $87 Billion
  • Royal Bank of Scotland - $78 Billion
  • JP Morgan - $76 Billion
  • Credit Suisse - $75 Billion
  • Bank of America Securities, LLC - $70 Billion
  • Morgan Stanley - $68 Billion
  • Countrywide Securities Corp - $66 Billion

These underwriters comprised 67.9% of the market, underwriting 1,497 separate deals. Ironically, seven of these underwriters entered into a highly publicized December, 2002 settlement with the former New York Attorney General, Elliott Spitzer, and others relative to corruption of their research analysts by their investment banking departments.

In Wall Street's zest to create Structured Securities, pipelines were created, through funding made available by Wall Street Underwriters, to finance the loans used to create asset backed securities, mortgage backed securities and collateralized debt obligations (“CDO”). These pipelines effectively sustained the subprime loan boom over the last several years. Understanding this pipeline and the close relationship between the Wall Street Underwriters and the Rating Agencies is necessary to appropriately access culpability.

Structured investment vehicles became very popular as insurance companies and pension funds became large purchasers of these investments in late 1990s and early 2000s. That, in turn, encouraged the historic increase in Structured investment vehicles from 2000 to 2007. However, in order to sustain the sale of these Structured Securities, it was essential that substantial portions of these Structured Securities receive ratings as “investment grade” securities. If substantial portions of these Structured Securities were not rated as “investment grade” by the Rating Agencies, the pipeline which made these loans available to individual homeowners, often times through independent mortgage brokers, would not have existed, nor would today's financial crisis.

The popular press has widely reported on the travesties of individual homeowners being placed in mortgages that were inappropriate for their life's circumstances. Unfortunately, it appears that thousands of American homeowners will lose their homes because of inappropriate lending practices. These homeowner defaults will, in turn, result in billions of dollars of losses to investors.

An unfortunate factor in this developing problem is the huge number of adjustable rate subprime mortgages that were originated and ultimately included in many Structured investment vehicles. As interest rates begin to rise, adjustments will take place and many borrowers may not afford their higher payments. This has led, and will continue to lead, to greater delinquencies and ultimately to far more defaults. This process is just beginning to impact the investment markets as huge numbers of loans will adjust upward throughout 2008.

In evaluating potential liability to investors by Wall Street Underwriters and/or Rating Agencies, it appears that the most viable claims to be asserted would focus on: (a) the adequacy of the disclosures that were provided to investors; (b) the adequacy of the ratings, by the Rating Agencies, on the investment created by subprime, exotic and high risk loans; (c) the valuations and appraisals, and systems therefore, of the underlying mortgages by the investment banks and/or the rating agencies during the “due diligence” and structuring phases of the investment; (d) the conflicted position of the Rating Agencies and the evaluation models that were utilized for both the initial formulation of their ratings and the subsequent monitoring of the same; (e) the business practices and procedures implemented by the Wall Street Underwriters, and reviewed by the Rating Agencies, in creating the pipeline for the subprime and high risk collateral utilized in creating Structured investment vehicles.

In the summer of 2007, our group, who individually and collectively have extensive experience in representing investors against Wall Street, formed an affiliation. Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses. Contact us.


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