Local councils eye $40m as liquidators sue Fitch over toxic Lehman products

The liquidators to collapsed Wall Steet bank Lehman Brothers are suing credit agency Fitch over misrepresenting the risk of toxic investment products that were sold to Australian councils, charities and church groups.

The liquidator is suing Fitch for $40 million alleging the ratings agency relied on a “hidden” system to give low-risk ratings on toxic investment products that were then sold to the local councils.

Ernst & Young’s Marcus Ayres, the liquidator to Lehman Brothers Australia, has filed Federal Court action in recent days to try to get more returns for the creditors to Lehman brothers, which are mainly made up of the purchasers of the toxic products it sold known as synthetic collateralised debt obligations or CDOs.

The film The Big Short brought fame to CDOs.
The film The Big Short brought fame to CDOs.Credit:Jaap Buitendijk

CDOs are an exotic financial product in which loans are wrapped up into parcels and then securitised. A synthetic CDOs is a product that is effectively a bet on the outcome of the CDOs – ie, whether they will default or be successfully paid out.


The packaging and sale of synthetic CDOs and the subsequent unravelling of these products are widely linked to the global financial crisis and the collapse of Lehman Brothers itself, including its Australian arm. The products featured in the hit film The Big Short. 

Scores of local councils from around Australia including Wingecarribee Shire Council in NSW’s Southern Highlands and Swan in Western Australia purchased the products, as did charitable organisations and church groups.

The local groups purchased the synthetic CDOs believing they were rated highly by top ratings agencies including Fitch, with many products carrying AAA ratings – the highest possible rating indicating the lowest possible risk to the councils and other groups buying the products.

Fitch rated these products based on their capacity to pay out coupons to customer investors and the rate of default on loans parcelled up to make the CDOs.

There was (allegedly) a hidden and password protected table within the ratings model.

The basic proposition is that there was a hidden and password protected table within the ratings model.

Liquidator to Lehman Brothers Australia, Marcus Ayres partner of Ernst & Young

Lawyers for the liquidators argue that Fitch used a “hidden table” that deliberately recalibrated the risk of default on the loans.

Fitch is yet to be served with the claim but a spokesman said it would vigorously defend any claim brought against it.

The collapse of Lehman Brothers in September 2008 has sparked a bevy of lawsuits in Australia including class actions.

It’s not the first time the liquidators have tried to recoup money from Fitch by joining them to class actions brought against Lehman Brothers Australia on behalf of local councils including one that uncovered the alleged hidden table.

However, it is now hoped the fresh allegations that Fitch was using a hidden process to dupe investors might allow for the liquidators to recoup some cash from Fitch to pay out investors.

Mr Ayres said he filed action now to ensure the liquidators avoided a potential procedural issue involving statute of limitations on the claims.

“The basic proposition is that there was a hidden and password protected table within the ratings model,” he said.

Mr Ayres said the table allegedly had the effect of inflating ratings contrary to representations made by Fitch.

“In turn, this meant that the products actually did not have Fitch’s represented risk of default. In other words, the products were more risky than represented,” he said.

Mr Ayres said that while the liquidation was nearing conclusion, the creditors of Lehman are still owed substantial amounts and the Fitch claim was estimated at $40 million.

“The recovery of an amount in respect of the harm caused would make a substantial contribution against the losses suffered by the councils, charities and mum and dad investors who were sold these products to begin with.”

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Source: Thanks smh.com