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Bank of America Merrill Lynch Faces High Risk of CDO Litigation

Strategic Insights

— 1 min read

Bank of America Merrill Lynch is exposed to higher litigation risks from clients who invested in collateralized debt obligations (CDOs) due to its large market share in constructing CDOs between 2005 and 2008. The bank's involvement in this market, particularly in 2007, makes it a prime target for lawsuits similar to the ones faced by Goldman Sachs. Credit Suisse's analysis has shed light on the bank's vulnerability, which is further compounded by the similarities between its CDOs and those of Goldman Sachs.

Key Takeaways:

  • Bank of America Merrill Lynch constructed $16.8 billion of CDOs between 2005 and 2008, making it the largest underwriter of this type of investment product.
  • The bank's exposure to litigation risk is high due to its involvement in the market, particularly in 2007, when it arranged $4.4 billion of CDOs.
  • Similarities between Bank of America's CDOs and Goldman Sachs' Abacus CDO make it more vulnerable to lawsuits.
  • Litigation risk tends to increase over time and can lead to significant financial losses, with private litigation costs being nearly twice as high as regulatory settlements.

Statistics:

  • Bank of America Merrill Lynch constructed $16.8 billion of CDOs between 2005 and 2008 (Credit Suisse).
  • UBS was the second-largest underwriter of CDOs, arranging $15.8 billion (Credit Suisse).
  • Goldman Sachs was only the ninth-largest underwriter of CDOs, with $2.2 billion of CDOs under its name (Credit Suisse).
  • Bank of America Merrill Lynch arranged $4.4 billion of CDOs in 2007, making it one of the most active banks in the market (Credit Suisse).
  • IKB Bank, a German bank, lost $150 million as a result of Bank of America's CDO arrangements (Goldman Sachs).
  • Total cost of resolution for similar financial crises in the past has been nearly eight times the initial provision (Credit Suisse).

Sources:

  • Credit Suisse analysts
  • Goldman Sachs Press Release
  • Bank of America Merrill Lynch Press Release
  • UBS Press Release
  • IKB Bank Press Release
  • Royal Bank of Scotland Press Release
  • Barclays Press Release

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