Vol 5 (2008) - Issue 4

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Forecasting the Subprime Storm

Britons are once again facing a gathering storm, though this one is powered by economic winds. We are referring specifically to the legal fallout in the US from the subprime credit crunch and the extent to which these claims might serve as a harbinger for the UK.

Recent research from Navigant Consulting indicates that subprime mortgage and related civil litigation filed in US federal courts during 2007 and the first quarter of 2008 is on pace to eclipse the landslide of lawsuits seen in the wake of the US banking crisis of the early 1990s. For those of us who require a refresher on that earlier credit crunch, it was driven by lax underwriting standards, ultimately required a US tax payer bailout to the tune of USD 160 billion, and produced 559 lawsuits that were handled by the US government entity charged with overseeing the clean-up. This historic comparison brings the scale of the legal fallout from the current subprime situation into sharper focus and also underscores implications for the UK and other participants in the global economy.

According to the Navigant study, one hundred and seventy new cases were filed in federal courts during the first three months of 2008, an 85 percent increase over the previous busiest quarter. Moreover, the pace of filings throughout the quarter was unrelenting. The three months comprising the March 2008 quarter now stand as the first, second and fourth highest monthly totals yet observed. August 2007, previously the most active month, fell to third. Two hundred and seventy-eight subprime mortgage and related civil litigation cases were filed in the US federal courts in 2007.

At least one Fortune 1000 company was named as a defendant in 57 percent of 170 cases filed during the first quarter of 2008. Fortune 500, 100 and 50 companies were names in 52, 33 and 22 percent of the lawsuits, respectively. At least one Fortune Global 500 company was named as a defendant in 42 percent of the 448 cases filed to date. Ten percent of the 448 cases include at least one non-US Global 500 company as a named defendant; UK firms account for approximately half of this total.

The study provides a comprehensive analysis of the types of cases filed, the parties involved, jurisdictions, case status and claims alleged. Notably, the 448 cases have been filed over the 15 months ended 31 March, 2008 will soon surpass the 559 cases arising from the US banking crisis of the early 1990s, even though those earlier cases accumulated over a period of more than five years. Moreover, as the deterioration in the credit markets gained speed during the second half of 2007 and into the first quarter of 2008, so did the pace of US subprime litigation. The number of subprime-related cases filed in the US nearly doubled during the second half of 2007, from 97 during the first six months to 181 during the latter half of the year. Given the explosion of subprime litigation during the first quarter, there appears to be no let-up in sight for 2008.

Where there are losses, there is likely to follow litigation. And the estimated losses stemming from the subprime exposure are staggering. The International Monetary Fund recently pegged losses from the credit crunch (not limited to subprime mortgages) at nearly USD 1 trillion. The magnitude of the situation suggests the pain from the subprime fallout will be felt for years to come, including protracted legal disputes and regulatory investigations. While the origins of the credit crunch center on mortgages originated in the United States, the effects have been widespread and the implications global in nature.