Citigroup Sues Morgan Stanley for $245 million over CDS

Citigroup (NYSE: C) Sues Morgan Stanley (NYSE: MS) for $245 million over Credit-Default Swap Agreement

September 28th, 2009

Citigroup (NYSE: C) filed a suit against Morgan Stanley Inc. (NYSE: MS) on Friday for allegedly breaching an agreement related to credit-default swaps. The suit contends that Morgan Stanley owes more than $245 million to Citi.

The lawsuit was filed in the U.S. District Court in Manhattan. The suit alleges that Morgan Stanley &Co. International PLC failed to meet its obligations in regards to a 2006 credit-default swap agreement. The agreement was designed to hedge against potential losses that Citibank might suffer in regards to a $366 million revolving credit facility that Citibank entered into with a collateralized debt obligation titled “Capmark VI”, according to the suit.

Citibank provided $750,000 in quarterly payments to Morgan Stanley for the risk protection in the CDS agreement. The collateralized debt obligation was scheduled to mature in 2038, but the performance of the loan declined significantly after July 2006 because of the global financial crisis.

According to the suit, The CDO suffered a default in August of 2008 and was liquidated earlier this year. The proceeds from the liquidation did not meet the $366 million outstanding in the credit facility, leading to a $245 million shortfall.

Morgan Stanley believes that the suit is baseless. In a statement made on Friday by a Morgan Stanley spokeswoman, the company stated, “We believe this suit is without merit and we intend to fully defend our position.”