Barclays ready for subprime fight
By Peter Thal Larsen and Megan MurphyPublished: December 21 2007 03:44 | Last updated: December 21 2007 03:44
Barclays lawsuit against Bear Stearns is not the first claim to emerge from the wreckage of the US subprime mortgage market. However, the fact that a large UK bank is prepared to go public with its case against a Wall Street securities house suggests that some epic legal battles might arise from the past six months of market turmoil.
The lawsuit, filed in New York on Wednesday night, comes after Barclays was a victim of the collapse of a Bear Stearns-managed hedge fund that invested heavily in complex subprime securities.
Bear Stearns, which said the Barclays lawsuit was unjustified, already faces a variety of claims from investors in its hedge funds. Other banks face lawsuits from shareholders claiming they might have understated their losses related to subprime investments.
Many lawyers believe the legal fallout from the credit squeeze could be on a similar scale to the aftermath of the stock market boom, when banks such as Citigroup and JPMorgan Chase paid out billions of dollars to settle claims from shareholders that they played a role in the collapse of Enron.
After the dotcom bubble burst, 496 federal securities fraud class-action lawsuits were filed in the US in 2001, a high for the past decade, according to a survey by Stanford Law School's Class Action Clearinghouse.
However, these were just the lawsuits that made it to court. Behind the scenes, there was an equal number of commercial disputes between banks and their clients. Many were settled quietly.
In the UK, banks including Barclays and Bank of America were sued for selling complex structured products after a credit cycle downturn in 2003 by investors who claimed they did not fully appreciate the market risks.
Germany's HSH Nordbank and Italy's Banca Popolare di Intra were two banks that alleged they had been miss-sold sophisticated credit derivatives. Both cases were eventually settled without either bank admitting fault.
Given the enormous growth in demand for complex fixed-income products during the credit boom, it seems probable that the credit squeeze will prompt similar growth in potential litigation.
Tim House, a partner at law firm Allen & Overy, said the credit squeeze would trigger a flurry of similar litigation in the US and the UK. Hedge funds, pension groups and other investors would probably claim they did not understand the complexity of structured products sold by top-tier banks, or they did not match their own portfolios appetite for risk.
Many cases might rest on whether the unprecedented contraction in liquidity this year was something that should have been foreseen, Mr House said.
He added:
Big banks, which do business with one another on many different levels, often try to resolve their disputes behind closed doors.
Barclays is understood to have spent several months in high-level discussions with Bear Stearns before deciding to press ahead with its claim. Given the scale of losses suffered by banks and investors as a result of the subprime collapse, the Barclays lawsuit may well be the first of many.
The lawsuit, filed in New York on Wednesday night, comes after Barclays was a victim of the collapse of a Bear Stearns-managed hedge fund that invested heavily in complex subprime securities.
Bear Stearns, which said the Barclays lawsuit was unjustified, already faces a variety of claims from investors in its hedge funds. Other banks face lawsuits from shareholders claiming they might have understated their losses related to subprime investments.
Many lawyers believe the legal fallout from the credit squeeze could be on a similar scale to the aftermath of the stock market boom, when banks such as Citigroup and JPMorgan Chase paid out billions of dollars to settle claims from shareholders that they played a role in the collapse of Enron.
After the dotcom bubble burst, 496 federal securities fraud class-action lawsuits were filed in the US in 2001, a high for the past decade, according to a survey by Stanford Law School's Class Action Clearinghouse.
However, these were just the lawsuits that made it to court. Behind the scenes, there was an equal number of commercial disputes between banks and their clients. Many were settled quietly.
In the UK, banks including Barclays and Bank of America were sued for selling complex structured products after a credit cycle downturn in 2003 by investors who claimed they did not fully appreciate the market risks.
Germany's HSH Nordbank and Italy's Banca Popolare di Intra were two banks that alleged they had been miss-sold sophisticated credit derivatives. Both cases were eventually settled without either bank admitting fault.
Given the enormous growth in demand for complex fixed-income products during the credit boom, it seems probable that the credit squeeze will prompt similar growth in potential litigation.
Tim House, a partner at law firm Allen & Overy, said the credit squeeze would trigger a flurry of similar litigation in the US and the UK. Hedge funds, pension groups and other investors would probably claim they did not understand the complexity of structured products sold by top-tier banks, or they did not match their own portfolios appetite for risk.
Many cases might rest on whether the unprecedented contraction in liquidity this year was something that should have been foreseen, Mr House said.
He added:
"The cases will be made to look ugly but what's really gone on in the credit market is something that will be difficult to pin on the banks."
Big banks, which do business with one another on many different levels, often try to resolve their disputes behind closed doors.
Barclays is understood to have spent several months in high-level discussions with Bear Stearns before deciding to press ahead with its claim. Given the scale of losses suffered by banks and investors as a result of the subprime collapse, the Barclays lawsuit may well be the first of many.
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