SLCG Issues "Collateralized Loan Obligations, Warehousing and Banc of America's Undisclosed Losses"

WASHINGTON, Jan. 31, 2012 /PRNewswire/ -- Securities Litigation and Consulting Group, Inc. ("SLCG") has issued a study into collateralized loan obligations ("CLOs") issued in July and August 2007.  The report's primary authors are Tim Husson, Craig McCann and Olivia Wang.  Dr. McCann is Principal of SLCG and Dr. Husson and Dr. Wang are Senior Financial Economists. 

The SLCG study identifies conflicts of interest created when investment banks accumulate loans for potential securitization prior to the issuance of a CLO through a practice known as "warehousing."  The study concludes that banks could use warehousing as part of a trade allocation scheme, and that warehousing appears to have resulted in some CLO trusts issuing securities without disclosing to investors that the securities had lost almost all their value because the CLO trust was committed to paying substantially more than the market value of the warehoused loans. The study's authors provide two examples of such CLO offerings – LCM VII and Bryn Mawr II - in which Banc of America appears to have transferred at least $35 million of losses to investors in July 2007 and which ultimately led to approximately $150 million in losses in just these two CLOs.

Dr. Husson explains that Banc of America had bought or financed leveraged loans between November 2006 and June 2007 at slightly above par and then sold them to investors in the LCM VII and Bryn Mawr II trusts in late July and early August despite the fact that the loans had lost 5% of their value in July 2007.  These losses occurred before the two CLOs closed and were not disclosed to investors in the marketing materials or private placement memorandums. Later in August 2007, Banc of America, starting with Symphony IV, began disclosing losses which occurred during the warehousing period prior to the closing of the CLOs.

Dr. Wang points out that the problem is more widespread than Banc of America – Citigroup issued a similar CLO, Bridgeport II, at the end of July 2007 without disclosing the losses which had already occurred in the loan portfolio. She also notes that the problem is broader than CLOs – CDOs backed by warehoused CDO tranches which had declined in value in early 2007 appear to have been securitized with embedded and undisclosed losses.

This study and other working papers are available at http://www.slcg.com/research.php.

Securities Litigation and Consulting Group, Inc. ("SLCG") is a financial economics consulting firm based in the Virginia suburbs of Washington, DC. SLCG provides consulting services and expert witnesses to law firms, publicly-traded corporations, banks, brokerage firms and individuals involved in complex litigation throughout the United States. SLCG's staff includes PhD, MA and BA level professionals with academic, industry and government experience. Its experts have testified in state and federal court and various arbitration forums.

For further information about SLCG or its research, please contact Dr. Husson at 703-890-0743 or [email protected], Dr. McCann at 703-246-9381 or [email protected] or Dr. Wang at 703-539-6770 or [email protected] or visit us at http://www.slcg.com.

SOURCE Securities Litigation and Consulting Group, Inc.

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