This is from issuer ABN AMRO's draft marketing materials cited in the Australian court's judgment:
What is the CPDO?
The Floating Rate Notes were issued in the amount of Aus $45 million. The notes are not backed by ABN AMRO or any other institution. ABN AMRO sold the Notes to its client, an Australian workers' compensation fund.
According to the issuer,
"The CPDO is suitable for investors who:
Let's start by saying that ABN AMRO should not have marketed this product to its customer in any case. The prospectus should have had much more meaningful and transparent risk disclosures. Standard and Poors didn't seem to have any reasonable basis for rating these securities AAA. Even though in the court document, there is a convoluted battle among experts on what an AAA rating means (better than AA relatively) or doesn't mean (the highest absolute rating or lowest risk), there is a pretty telling statement in the prospectus which says,
"The probability of receiving the rated coupons and principal at maturity is benchmarked to the default probability of an S&P bond with the same rating and tenor."On this definition, and given all of the email exchanges and witness testimony, a rating of AAA seems beyond reason.
However, it also seems clear that the client probably violated their own statutory investment policy guidelines for selecting and evaluating this investment. So Floyd Norris' comment below is equally unreasonable:
"But the buyers of C.P.D.O.’s did not understand what they were doing. It appears that those investors, including an agency that managed investments for Australian local governments, and some of those governments themselves, did not bother to go into details."The investment process laid out in the judgment has steps and particular measures which should disallow investing inappropriately, i.e. without understanding the investment's suitability and risk profile. To suggest that they "did not go into details" is a failure in their duty of loyalty. Investors should not be protected by the government for being lazy, or for failing to exercise due care and diligence in accordance with their own published, statutory guidelines.
We've written about the failure of the rating agencies during the 2004-2006 runup to our own credit crisis. Nothing was done to hold them accountable. The investment banks have moved on to sunnier earnings and increasing management compensation after drinking at the public trough.
The investors should be compensated if the investments were (1) not suitable for their clients, (2) marketed with incomplete, misleading or false claims about their risk-return profiles, and (3) the expected performance of the Notes under reasonable scenarios did not warrant a AAA rating, according to SandP's own internal standards.
Institutional investors should not, however, receive government help to generate recoveries for their own greed, laziness or stupidity.