Subprime Issues for
D&O:
The Meltdown of the
Subprime Mortgage
Market
CAS Spring Meeting
June 17, 2008
Copyright 2008, Advisen Ltd
Copyright 2008, Advisen Ltd.
Subprime Overview
FIRST TIER
SECOND TIER
THIRD TIER
Bond Insurer
Banks
B
O
R
R
O
W
E
R
S
Lender
Transaction
vehicle
(SPV)
Investors
Insurance
companies
Investment
Professionals
Hedge
Funds/
SIVS
Broker
Transfer of
Ownership/Risk in
pool of assets
Issue
Commercial
Paper
• Fund manager
(offering
memorandum/side
letter)
High net
worth
individuals/
companies
• Custodian (Bank)
• Rating agencies
• Lender
• Asset Manager (Bank)
• Arranger (Bank)
• Collateral
Agent/Trustee (Bank)
• Lawyers
• Lawyers
• Accountants
• Accountants
Copyright 2008, Advisen Ltd
• Lawyers
• Accountants
Sophisticated
investors
edward.smerdon@rpc.co.uk
What Happened?
• Rapid growth in subprime sector
• “Exotic” mortgages to subprime
borrowers
• U.S. home real estate slump
• Borrowers can’t refinance, default on
mortgages
• Lenders can’t fulfill buyback provisions
• Writedowns of CDOs and other
investments
• Global credit crunch
Copyright 2008, Advisen Ltd
Subprime Mortgage
Originations
Source: Hammond Associates
Copyright 2008, Advisen Ltd
Subprime Mortgages First
Reset Date
% Outstanding Mortgages
35%
30%
25%
20%
15 %
10 %
5%
0%
2004 &
E a rlie r
Source: FitchRatings
Copyright 2008, Advisen Ltd
2005
2006
2007
2008
2009
Writedowns
• More than $500 billion in
writedowns reported to date
– Financial institutions worldwide
– CDOs, investments in lenders, etc.,
credit default swaps
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Litigation Targets
(D&O and E&O)
•
•
•
•
•
•
•
•
•
•
Sub-prime mortgage lenders and brokers
Investment banks
Rating agencies
Bond insurers
Asset managers/hedge funds
REITs
Lawyers and auditors
Trustees of pension funds exposed to asset deterioration
Homebuilders
Ds & Os of companies heavily invested in CDOs and
other securities backed by residential mortgages
Copyright 2008, Advisen Ltd
Current Regulatory Action
• Investigations
• SEC opened “at least” 36 investigations.
• Investigations by attorneys general of NY,
CA, IL, MA, CT, OH.
• FBI investigating 19 firms.
• 1,300 cases
• EU announced investigation into rating
agencies.
• Investigations by authorities in UK,
Germany, Switzerland, France, Japan, South
Korea and Singapore
Copyright 2008, Advisen Ltd