THE SECURITIES and Exchange Commission (SEC) is examining a series of loss-making investments into collateralised debt which were funded by Dublin-based Depfa Bank.
Five school districts in Wisconsin in the US borrowed $165 million (€135 million) from Depfa in 2006 to buy collateralised debt obligations (CDOs) to fund future health benefits for retiring teachers.
The Washington DC-based SEC is examining the investments which led to losses of $190 million. The districts put $35 million in cash into the deals.
Depfa is now looking for crippling payments from the districts.
Each district has received an SEC letter seeking documents related to the investments in the CDOs, said their attorney, Robert Kantas, in Houston. “We’re going to give them everything they asked for,” Mr Kantas said.
The districts sued units of Royal Bank of Canada and Stifel Financial, the banks that sold them the investments, in September 2008, seeking to recover their losses.
Trusts set up by each district to pay retirement benefits to teachers borrowed from Depfa to invest in the CDOs.
CDOs are asset-backed securities that bundle debt, including subprime mortgages. The districts must decide whether to include repaying Depfa in their fiscal 2011 budgets, Moody’s Investors Service said yesterday in a report.
The credit-rating company put the issuers on review for possible downgrades in March, citing the question of whether their budgets had been compromised by the Depfa debt.
Moody’s said it planned to resolve the ratings as the districts began their next budget cycle. Each signed “moral obligation agreements” in 2006, promising to appropriate funds to maintain the value of the CDOs, Moody’s said.
When the investments soured in 2008, the districts did not act to raise more cash, and Depfa called for repayment in March.
One district’s budget board, in Waukesha, voted on June 7th not to include an appropriation for the $47.5 million owed to Depfa by its benefits trust, Moody’s said. That amount would have taken almost 35 per cent of the district’s budget and “could not be reasonably appropriated,” Moody’s said.
“The lack of a workable plan for the district to address the liability still poses negative credit pressure,” Moody’s said.
The school districts claim in their lawsuit that Stifel Nicolaus and Co, a unit of St Louis-based Stifel Financial, and Toronto-based RBC’s Royal Bank of Canada Europe and RBC Capital Markets, committed fraud, according to an amended complaint filed in April.
The districts also claim the banks failed to explain the investment risks of derivatives and that it was illegal to sell “unregistered” securities to them. Derivatives usually trade over the counter.
Stifel Nicolaus and Royal Bank of Canada have defended their actions. “We did everything absolutely above board,” Ronald Kruszewski, Stifel’s chief executive officer, said on CNBC in February, according to a transcript.
There was no comment from Depfa, which is owned by Hypo Real Estate Holding, which is in turn owned by the German government. – (Bloomberg)
