In an odd but all too familiar tale, somebody is suing a firm over losses stemming from derivatives.
Except in this case, that somebody is the State of California’s Earthquake Authority. And the firm is Wells Fargo investment management subsidiary Wachovia Global Securities Lending, formerly known as MetWest several years ago.
We’ll refer to the entity as WGSL for typing purposes.
The report states that California purchased $62.6 million in commercial paper from WGSL in August of 2007. Two weeks later? The underlying assets of the commercial paper had been frozen and ratings downgraded. As a result, the California Earthquake Authority nearly lost all of its money it had originally invested.
But it doesn’t end there. Here’s where it gets crazy.
The issuer of the CDO, London-based Solent Capital, wasn’t a state-approved seller of commercial paper in California. And even worse, WGSL invested the Earthquake Authority’s capital knowing full well that the credit crisis was in full swing.
The CDO, known as Mainsail 2, has since been liquidated and incurred extremely heavy losses, which has brought on multiple lawsuits.
So remember: at the end of the day, Wells Fargo robbed the State of California in full daylight.
Update: Wells Fargo comments that they deny the allegations and will vigorously defend the case.