Mary Childs, Bloomberg
In just six months, Standard & Poor’s AAA blessing for a slice of a $1.5 billion collateralized debt obligation cost Citigroup Inc. its $15 million investment.
The Vertical ABS 2007-1, a mezzanine cash flow structure built with asset-backed securities underwritten by UBS AG, is one of dozens of deals listed in the Justice Department’s Feb. 4 lawsuit against S&P and its parent McGraw-Hill Cos. that received the ratings firm’s highest AAA grade. Internal UBS e- mails referred to CDOs “as ‘crap’ at the same time that the bank was selling them,” Senator Carl Levin said in an April 2010 subcommittee hearing on the causes and consequences of the financial crisis.
Federally insured Citigroup’s Citibank unit bought into what was supposed to be the safest portion of the CDO, relying in part on S&P’s assessment of the securities, according to the complaint. It lost the entire investment when the CDO defaulted on Oct. 19, 2007.