In Time To Break Up The Credit Rating Cartel I noted that the Teamsters Union was suing Moody’s over credit ratings.
In response, my friend Heinz pinged me with this idea: “European banks, are likely preparing their suits as we speak. They would be fools not to try to sue, so they will most definitely sue. that way they can get at least some of their money back. Also, it’s practically a certainty from a socioeconomic standpoint as well – both that they will sue and that they will actually win those suits, or at least win settlements.“
So far there have been no announcements from Europe, however, this headline is interesting: Prudential Sues State Street Over Losses.
A unit of Prudential Financial Inc. sued State Street Corp. subsidiaries over $80 million in losses ascribed to “undisclosed, highly leveraged” investments by State Street that included subprime mortgages. Prudential, a big insurer based in Newark, N.J., said it would reimburse its clients for the $80 million they lost.
[Mish comment: I have to credit Prudential here for eating an $80 million loss on behalf of their clients. ]
Prudential said it had placed its clients in two State Street funds — the Intermediate Bond Fund and the Government Credit Bond Fund — that the Boston money manager had marketed as investments that would provide “stable, predictable returns” in line with an index of U.S. government and corporate bonds.
Instead, it said State Street changed its investment strategy over the summer without notification and devoted a large portion of the funds’ investments into financial instruments that included “asset-based securities that overwhelmingly derived their value” from home-equity loans, mortgage-backed securities swaps, derivatives and other exotic fare. The suit said the bank recently informed Prudential it held a position in “a synthetic index whose returns are linked to 20 subprime U.S. mortgage pools.”
[Mish comment: I am not a lawyer but if State Street changed its investment strategy Prudential would seem to have a good case.]
Top-Line Banking Observations
Minyan Peter was writing about banks again today in Top-Line Banking Observations with a look at Washington Mutual (WM), Barclay’s (BCS), Bear Stearns (BSC), Moody’s (MCO), and the Bank of America (BAC). Here is a snip:
By my count we have hit at least $20 billion in preannounced write-offs. At 10:1 leverage this suggests that at the margin industry loan capacity has fallen by $200 billion – at a time when actual balance sheet growth has increased $300 billion. That’s a $50 billion capital squeeze that will need to be addressed.
And to that point, an early reminder to investors eyeing bank stocks because of their dividend yields. At the end of the day the bank regulators, not management, determine whether a bank can dividend capital up to its bank holding company to fund quarterly dividends. Not saying it’s today or tomorrow, but file this away.
Here’s something else to file away. This is just the beginning of preannounced write-offs, not the end. With that in mind, expect more lawsuits along the lines of Prudential (PRU) suing State Street (STT) and everyone suing the rating agencies.
Mike Shedlock / Mish/