Citigroup sues Morgan Stanley over credit-default swap agreement

Posted Sep 26th 2009 5:40PM by Trey Thoelcke
Filed under: Law, Citigroup Inc. (C), Morgan Stanley (MS)

On Friday, Citigroup Inc. (NYSE: C) filed suit in U.S. District Court in Manhattan against rival Morgan Stanley (NYSE: MS) for allegedly breaching a credit-default swap agreement. The suit seeks unspecified damages.

The complaint alleges that Morgan Stanley, which recently announced that its CEO will step down, failed to live up to its obligations regarding the 2006 agreement. Citigroup's Citibank unit says it entered into CDS with Morgan Stanley to protect the bank against losses from a revolving credit line that it entered into with a collateralized debt obligation known as Capmark VI. The CDO was scheduled to mature in 2038, but its performance declined substantially after July 2006 as a result of the global financial crisis.

Capmark defaulted in August 2008 and was liquidated earlier this year. The liquidation proceeds didn't cover the $366 million outstanding under the credit line, leaving a shortfall of more than $245 million. Citibank exercised its right under the CDS to have Morgan Stanley make up for the shortfall, but it refused, according to the suit.

"We believe this suit is without merit," said a Morgan Stanley spokesperson Friday, "and we intend to fully defend our position."

Citigroup also announced last week that it will reduce the number of its retail outlets and limit its lending mainly to wealthy customers.

Tags: Capmark VI, Citibank, Citigroup, collateralized debt obligation, credit-default swap, inthenews, Morgan Stanley, MS