Monday, May 11, 2009

it can be difficult to prove who was to blame, whether it was the rating agencies, the underwriter or the originator of the assets

TO BE NOTED: From the FT:

Ambac expects more subprime suits against banks

By Aline van Duyn in New York

Published: May 11 2009 23:28 | Last updated: May 11 2009 23:28

Ambac, the bond insurer whose finances have been hit by guarantees on billions of dollars of securities linked to risky mortgages, expects growing numbers of lawsuits against the banks that acted as underwriters and managers of these securities.

Last week, a British subsidiary of Ambac Financial filed court papers seeking $1bn in damages from JPMorgan Investment Management. As the investment manager for $1.65bn of assets in the name of Ballantyne, Ambac said JPMorgan had placed the assets in “inappropriate securities”, including risky mortgage-backed securities.

MBIA, the largest bond insurer which, like Ambac, has lost its triple A credit ratings, recently sued Merrill Lynch, now owned by Bank of America, to avoid pay-outs on $5.7bn of collateralised debt obligations linked to mortgages.

“It will be surprising to me if you didn’t see more of these sorts of cases potentially from ourselves and others,” said Douglas Renfield-Miller, executive vice-president at Ambac.

The lawsuits come as the losses on securities backed by mortgages continue to increase. As well as subprime mortgages, the other source of significant losses are so-called “Alt A” mortgages.

Ambac said it was now assuming that the losses on such Alt A mortgages, which were long considered to be relatively high quality, would be similar to subprime mortgages. Accordingly, Ambac took an $830m charge to reflect a decline in the value of Alt A securities. It also set aside $740m for further losses on mortgage loans it has guaranteed.

Its net loss fell to $392m in first quarter compared with $1.66bn in the first quarter of last year. The bond insurer expects further declines in US house prices. The lawsuits reflect broader concerns among holders of mortgage-backed assets.

It is clear that many of the assumptions underlying hundreds of billions of bonds backed by mortgages – which were assigned triple A credit ratings – were wrong. Many of the transactions were complex collateralised debt obligations that included the use of credit default swaps, which have contributed to hundreds of billions of dollars of write-downs at banks.

“These questions are being faced by many investors in structured assets,” said Joel Telpner, partner at Mayer Brown. “If there really was a problem, it can be difficult to prove who was to blame, whether it was the rating agencies, the underwriter or the originator of the assets.”

A spokeswoman said JPMorgan had received a court summons from Ambac but no formal complaint. “We believe that we managed Ballantyne’s account appropriately and thus intend to contest vigorously any allegations that we did not,” she said."

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