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January 20, 2009
After Sure-Bet Investment Fails, a Bank Contends It Was Duped
The New York Times
by Vikas Bajaj
Nearly two years ago, on a Tuesday in February 2007, a Wall Street salesman pitched an investment that sounded almost magical. It was called Gemstone VII. A shiny amalgam of financial instruments, it promised attractive returns — with virtually no risk.
If that sounds too good to be true, that is because it was. Like so many investments that Wall Street concocted in recent years, Gemstone was fashioned from subprime dross. The M&T Bank Corporation, which got the sales talk and subsequently bought into the investment, lost $80 million.
At issue now is who should bear responsibility for those losses. Should it be Gemstone’s creator, Deutsche Bank, which had sold mortgage investments to customers like M&T Bank while encouraging others to bet against them? Or should it be M&T, which had invested in Gemstone, an instrument known as a collateralized debt obligation, and taken the risks? The two banks are arguing over these questions in a lawsuit in upstate New York.
M&T Bank says it was duped. Deutsche Bank representatives portrayed Gemstone as safe — “fully rock solid,” and “a layup,” M&T contends in its complaint.
What's this have to do with Atlantic Yards? Robert Wilmers, the bank's CEO, was named chairman of the Empire State Development Corporation in 2008. The ESDC is the sponsoring agency for the floundering Brooklyn megadevelopment project.
While M&T’s losses on Gemstone and similar securities were relatively small, amounting to less than 2 percent of the bank’s investment portfolio, M&T’s chief executive, Robert G. Wilmers, wrote about them at length in his bank’s 2007 annual report.
He lamented the decision to trust others, and said that the fact that some C.D.O.’s paid just 0.25 of a point more than traditional mortgage securities “makes one rue the choice all the more.”
Will it be a case of "once burned, twice shy" for Wilmer? Or will he buy the fantastic — and increasingly fanciful — promises of Atlantic Yards jobs, tax revenues and affordable housing? Remember, if it sounds too good to be true, it probably is.
Posted by eric at January 20, 2009 10:41 PM