The National Australia Bank (ASX: NAB) has filed an arbitration claim that alleges Wall Street investment bank Goldman Sachs (NYSE: GS) misled the Aussie bank into purchasing Collateralised Debt Obligations (CDOs).
Some believe that CDOs, which are essentially pooled debt that has an asset secured to it, was a major reason the GFC hit financial markets as hard as it did. They were structured, marketed and sold as high-return, low-risk investments that bet with or against the underlying asset, in NAB's case it was the US housing market.
The particular CDO that is alleged to have lost millions of insurers' and investment companies' dollars, called 'Hudson 1', was sold to investors by Goldman, but the company didn't disclose that the firm was also betting against the market. NAB claims that the investment bank's actions were essentially common-law fraud. It added that many individuals are to blame for implementing the offer of CDOs, but addressed its claim to Goldman in general.
One of the four men who have appeared numerously in similar court cases was quoted as saying "during the early summer of 2006 it was clear that the market fundamentals in subprime and the highly levered nature of CDOs [were] going to have a very unhappy ending".
NAB's claim is expected to be resolved within 18 months as others have been before. To date, three similar cases have been filed against the investment bank, two have been thrown out by judges and one was settled for a payout of $550 million.
Foolish takeaway
Goldman Sachs is in a position similar to many other investment banks that have survived the GFC. NAB obviously sees an opportunity to redeem some lost capital, however, investors should remember that the company is valued at approximately $67 billion and the outcome will not affect the company's balance sheets in the long term. With a stable 6.4% dividend, NAB is still very attractive for income-seeking investors.
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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
