HSH Nordbank files first law suit for sub-prime losses in Europe

25 February 2008 / by Rachael Stiles
The first law suit by a European bank has been brought against its asset manager for selling risky mortgages to an investor, which could unleash a barrage of claims from others which have lost a great deal in the sub prime mortgage crisis. As much as $400 billion is thought to have been lost worldwide.

One of Germany's biggest banks, HSH Nordbank, is suing UBS, the largest Swiss bank, for the $500 million (£254 million) in debt obligations it holds as a result of being sold risky American mortgages instead of low-risk assets, which HSH says is a breach of its contractual agreement and responsibilities.

HSH says that it agreed to be sold loans which had a 70 per cent exposure to high-grade corporate debt and 30 per cent exposure to the US property market, but it claims that UBS's management of the assets was contrary to those agreed and to the bank's interests, and that it was given much higher exposure to the US sub prime market, which took a nose dive last year when large numbers of homeowners started defaulting on their mortgages and their homes started being repossessed.

Similar court cases have been brought about in America, but this is thought to be the first case of its kind in Europe. Some lawyers are sceptical about HSH's ignorance of their exposure to sub prime credit, but Bernhard Blohm, spokesman for HSH Nordbank, said that UBS Investment acted completely against its interests and that it sees "a blatant mismatch between the contractual obligations and the actual management of the portfolio by UBS."

Elsewhere in the realm of the credit crisis, Royal Bank of Scotland is expected to announce a £1b billion write-down as a result of sub prime investments, compared to the £950 million that the bank predicted in December. Along with Citigroup, UBS, Barclays, and various other banks, RBS is thought to be in talks with financial group Ambac in order to protect its AAA credit rating.

Northern Rock, which has been hardest hit by the collapse of the sub prime market, is generating suspicion from the British Banker's Association which is concerned that it will hold an unfair advantage over its competitors now that it has been nationalised. The BBA is currently forming proposals in preparation for a meeting with the Treasury where it will discuss how, in light of recent events, "we can all work in a fair, open and competitive market".

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