UBS, the beleaguered Swiss bank, dumped more than half a billion dollars of toxic sub-prime mortgage securities on an unsuspecting client, simply to get them off its books before they went sour last year, it was alleged in a New York court filing.
The German regional bank HSH Nordbank made the allegation in a lawsuit yesterday, which claimed it had lost at least $275m in a fraudulent mortgage-derivatives scheme cooked up by UBS in 2002.
From the start of the investment, whose complex structure netted UBS a $120m profit on day one, to its ignominious collapse in value when the credit crisis began last summer, UBS had put its own interests over those of HSH, it was claimed.
The suit is the latest legal action stemming from complex mortgage-backed investments called collateralised debt obligations (CDOs), whose value collapsed when Americans began defaulting on the underlying mortgages in record numbers.
HSH says in the lawsuit that it hired UBS to suggest a conservative investment in international mortgage-related bonds, "but UBS exploited the structure for its own ends, at HSH's expense".
UBS told the German bank it had invested its $500m in assets whose collateral was a pool of mortgages with "no foreseeable credit problems". But, through a related transaction, UBS would in fact profit if the mortgages began to default, the suit claims. In particular, in February 2007, $555m of highly-rated bonds were taken out and replaced by sub-prime assets.
A UBS spokesman said it had filed a counter-suit in London. "HSH is a professional and knowledgeable German bank. We executed all of our contractual obligations and the transaction is not in default. We greatly regret that the client has decided to attempt to apply media pressure."