Space Coast CU Sues Wall Street Over Eastern Financial Florida CU Failure
WALL STREET – Space Coast CU on Tuesday filed suit against several Wall Street brokerages, claiming they sold risky investments to Eastern Financial Florida CU they knew were bound to fail, the first time the big credit union failures of the past few years have been brought to the doors of Wall Street.
Space Coast, which took over one-time $2.4 billion Eastern Financial CU after its 2009 failure, claims that Barclays Capital intentionally packed a $2 billion collateralized debt obligation, known as a CDO, with risky investments, then bet on those investments to fail.
The CDO, known as the Markov CDO, did fail, costing Eastern Financial a loss of $150 million and precipitating the biggest credit union failure ever, outside the corporates.
Space Coast, based in Melbourne, Fla., acquired the remnants of the failed Miami-area credit union giant, creating one of the biggest credit unions in the country with some $3.3 billion in assets.
Space Coast also named as a defendant in the suit State Street Corp., which co-wrote the CDO offering.
In the suit, 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 claims the underwriters misled officials at Eastern Financial when they said State Street would be choosing the collateral for the CDO, when actually it was Barclays – the same firm that is underwriting NCUA’s $30 billion offering or corporate bailout bonds – that was choosing the collateral the company thought was likely to fail.
“The facts ‘lay to rest any notions of chance and instead evince deliberate – indeed, malevolent – design,’ Space Coast said in the suit. “Barclays chose riskier synthetic assets so as to win its bets against them, and chose safer cash assets to ensure that its bet would actually pay off.”