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CDO banks face last-minute court crapshoot

Total losses from the credit crisis amount to $1.8 trillion, much of that suffered by buyers of supposedly low risk structured credit securitizations that turned out to be garbage. Yet very few have won any recompense through the courts from the creators of these toxic securities. Litigants have to prove not only that these were terrible investments but also that misrepresentation through fraudulent underwriting and sloppy due diligence were key contributors to investors’ losses. That’s been tough to establish and banks are beginning to hope they’ve escaped the worst. A three-year statute of limitations is looming.

But before they breathe easy, the banks might consider that recent government and regulatory enforcement actions such as the SEC’s investigation into the Goldman Abacus deal give a fresh impetus to private actions against banks. They have also thrown up a mass of evidence from banks’ internal emails suggesting that the creators of these transaction knew damn well that they were selling their clients “shitty” deals, filled with “crap” and “vomit”.

For most people, July 11 2007 was probably just like any other day. But for Robert Morelli, then head of the syndicate desk at UBS in New York, it was the beginning of the end of his industry. "Put today in your calendar," he emailed his colleagues after rating agency Moody’s had put 184 CDO tranches on review for possible downgrade, explaining later that he sent the email because "today was essentially the beginning of the end of the CDO business...

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