By Edward Attwood
ABCD cites 'misleading information' over investments in shadow banking system
UAE lender Abu Dhabi Commercial Bank (ADCB) is suing several finance firms - including Credit Suisse – in a New York court after claiming that the bank was misled when it bought into an emergency restructuring transaction in the US during 2007.
ADCB initially invested in a structured investment vehicle (SIV) known as Stanfield Victoria in 2005. However, when that vehicle faced liquidity issues, the bank said it was “induced to enter into an transaction, Farmington, based on false and misleading information”.
The UAE lender is claiming that Farmington appeared to have positive valuations and prospects, backed up by a strong rating from Standard & Poor’s (S&P), which is also subject to the same lawsuit.
Furthermore, ADCB says that it was required to enter an unfunded credit default swap (CDS) to protect Credit Suisse’s loan exposure to Farmington. The lender is arguing that Credit Suisse and the other defendants had led ADCB to believe that the CDS was relatively safe and carried minimal risk.
However, the bank’s CEO claimed that he did not see any material impact on the bank’s earnings as a result of this transaction, and that ADCB was fully provisioned over its initial exposure to Stanfield Victoria.
“We have also taken all steps necessary to recover the Bank’s exposures; this has included legal action. This latest action is brought with the aim of protecting the Bank from potential losses,” said Ala’a Eraiqat, ADCB’s CEO.
“Whilst we don’t anticipate a material impact on our earnings as a result of the disputed exposure, we believe, for the benefit of all our key stakeholders, it is appropriate to take action against parties who we believe misled ADCB.”
Eraiqat added that that the exposure was unfunded, and that ADCB had not paid out any cash on the investment to date.
SIVs were a key part of the ‘shadow banking’ system which helped channel billions of dollars from short-term debt markets into the finance industry.
They worked by borrowing money by issuing short-term securities and then lending that money by buying longer-term securities – such as residential mortgage backed securities (RMBS) – with the difference in rates going to investors as profit.
The concept was founded by Citigroup in 1998, and at one point the industry had as much as $400bn under management.
However, the sub-prime mortgage crisis proved fatal to SIVs due a widespread liquidity crunch. Towards the end of 2008, the last SIV, Sigma Finance, entered liquidation.
ADCB is one of many banks to have been exposed to SIVs. The UK’s Northern Rock was nationalized in 2008 after exposure to the sub-prime crisis forced a run on the bank.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.