NEW YORK Space Coast CU agreed last week to dismiss its lawsuit against Barclays Capital and State Street Corp. claiming that Barclays packed a collateralized debt obligation, or CDO, it sold to Eastern Financial Florida CU with junk, hastening the demise of the one-time $2.4 billion credit union--the biggest natural person CU failure ever.
David Bishop, an attorney at New York’s Kirby McInerney LLP who represents Space Coast CU, acknowledged that Barclays agreed to pay a small settlement to dismiss this case. "We resolved the case and we know that our client is pleased with the result," Mr. Bishop said.
The suit is one of two brought by the Melbourne, Fla., credit union over CDOs sold to Eastern Financial, which Space Coast CU acquired, along with all legal claims, in a 2009 purchase and assumption agreement. Another much larger CDO suit naming a half dozen banks as well as Standard & Poor’s and Moody’s as defendants, is hanging by a thread, having been reworded after a federal court in Miami dismissed most of claims earlier this year.
Space Coast CU claimed that Barclays designed the Markov CDO I--a $400 million security backed by $2 billion of mortgage and other debt--to fail by stuffing it with risky assets that it then bet against. Eastern Financial had purchased a $10 million slice of Markov that was worthless soon after.
Space Coast claims Barclays misled Eastern Financial when they said State Street Bank would be choosing the collateral for the CDO, when it was actually Barclays that was choosing the collateral they thought was likely to fail.
Barclays and State Street did not return phone calls seeking comment.
Eastern Financial, the one-time credit union for employees of Eastern Airlines, bought a total of $150 million of CDOs that went sour within months after their purchase, causing the credit union to charge off almost the entire investment.
Barclays has played a prominent role in the litigation over the corporate credit union bailout. It is being sued in federal court by NCUA over mortgage-backed securities it sold to U.S. Central FCU and WesCorp FCU—long before it was hired by NCUA to underwrite $36 billion in NCUA Guaranteed Notes that financed the corporate bailout.
Space Coast says the Markov CDO was intended to fail and did so within six months, all the while earning Barclays tens of millions of dollars because it bought insurance betting the CDOs would fail.
Space Coast called the Eastern Financial CDO “materially similar” to the controversial CDO sold by Goldman Sachs in 2007 called Abacus. Goldman agreed to pay $550 million to settle SEC charges that it sold the bonds, then bet for it to fail.
Space Coast acquired all legal rights in the case after it acquired Eastern Financial in a purchase and assumption agreement in June 2009. The deal turned Space Coast, based at the Kennedy Space Center, into one of the biggest credit unions in the nation with $3.3 billion in assets.
