The credit union has agreed to dismiss claims that Barclays filled the CDO with junk, hastening the demise of the one-time $2.4 billion credit union in the biggest natural person CU failure ever.
David Bishop, an attorney at New York’s Kirby McInerney LLP who represents Space Coast CU, acknowledges that Barclays agreed to pay a small settlement to dismiss this case. "We resolved the case and we know that our client is pleased with the result," Mr. Bishop said.
The suit is one of two brought by the Melbourne, Fla., credit union over CDOs sold to Eastern Financial, which Space Coast CU acquired, along with all legal claims, in a 2009 purchase and assumption agreement. Another much larger CDO suit naming a half dozen banks as well as Standard & Poor’s and Moody’s as defendants, is hanging by a thread, having been reworded after a federal court in Miami dismissed most of claims earlier this year.
Space Coast CU claimed that Barclays designed the Markov CDO I, a $400 million security backed by $2 billion of mortgage and other debt, to fail by stuffing it with risky assets that it then bet against. Eastern Financial had purchased a $10 million slice of Markov that was worthless soon after.
Space Coast claims Barclays misled Eastern Financial when they said State Street Bank would be choosing the collateral for the CDO, when it was actually Barclays that was choosing the collateral they thought was likely to fail.
Barclays and State Street did not return phone calls seeking comment.
Eastern Financial, the one-time credit union for employees of Eastern Airlines, bought a total of $150 million of CDOs that went sour within months after their purchase, causing the credit union to charge off almost the entire investment.
Barclays has played a prominent role in the litigation over the corporate credit union bailout. It is being sued in federal court by NCUA over mortgage-backed securities it sold to U.S. Central FCU and WesCorp FCU, long before it was hired by NCUA to underwrite $36 billion in NCUA Guaranteed Notes that financed the corporate bailout.
Space Coast says the Markov CDO was intended to fail and did so within six months, all the while earning Barclays tens of millions of dollars because it bought insurance, effectively betting the CDOs would fail.