SEC Nears Deals With Banks Over CDOs

Apr 15 2011 | 12:40pm ET

Shortly after a damning Senate report blasted banks' behavior in selling collateralized debt obligations, nearly a half-dozen firms are racing to strike deals with the Securities and Exchange Commission.

The regulator is in talks with Citigroup, Bank of America Merrill Lynch, JPMorgan Chase, Morgan Stanley and UBS. All five are eager to settle investigations into their CDO practices, which in some cases—such as JPMorgan's—involves allegedly secret hedge fund input.

Settlements could be struck as soon as next week, The Wall Street Journal reports, although some are likely to take months to finalize. The SEC is seeking individual deals with each bank, rather than an industry-wide agreement.

JPMorgan, for example, is being scrutinized for the $1.1 billion Squared CDO it allegedly structured and marketed on behalf of hedge fund Magnetar Capital. As in the Goldman Case, where the bank was accused of creating the CDO for Paulson & Co., JPMorgan is accused of misleading investors in the product about Magnetar's role.

Magnetar has not been accused of any wrongdoing. It denies that it had a major role in the selection of the securities that went into the Squared transaction.

According to the Journal, it is likely that none of the banks will face a fine as large as the $550 million Goldman Sachs paid to make the regulator's CDO lawsuit against it go away last year. And the deals are likely to vary greatly in size.


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