Advisen Report: “The Subprime Mortgage Meltdown, the Global Credit Crisis and the D&O Market”

Advisen Ltd. has produced an interesting new report entitled “The Subprime Mortgage Meltdown, the Global Credit Crisis and the D&O Market.”  The report raises Advisen’s forecast of insured losses to D&O insurers as a result of the meltdown of the subprime mortgage market and the ensuing credit crisis to $5.9 billion.  Its prior forecast in February 2008 had been $3.6 billion.

The revised forecast reflects an increase in securities class action suits, securities fraud suits brought by regulators and law enforcement agencies, losses under Side A policies from bankruptcies, and shareholder derivative suits. It also includes defense costs associated with dismissed suits.

The report also finds that “while there has been an increase in securities class action suits as a result of the subprime mortgage meltdown and the ensuing credit crisis, the tsunami of claims predicted by some analysts has not yet materialized: the total number of securities class action suits filed in 2008 is almost certain to be below the 1997-2005 (excl. 2001) annual average.”

Advisen writes that the total number of securities class actions filed in 2008 looks as if it will fall far below the 1997-2006 (excl. 2001) annual average of 234 suits, and states that “securities class action suits spawned by the subprime crisis and its aftermath have not yet pushed the annual number of suits filed to pre-2005 levels.” (See Advisen chart below). Advisen suggests that “one reason why the number of subprime-related cases has not been higher may be that plaintiffs’ attorneys are concerned that market cap losses are more likely to be charged to a global and systemic stock drop instead of an individual company’s malfeasance.”

Advisen also provides some interesting data on subprime-related investigations by regulatory and law enforcement agencies.  It identifies the following investigations:

• More than 48 investigations by the US Securities and Exchange Commission;
• Investigations by attorneys general of New York, California, Illinois, Massachusetts,
  Connecticut, Ohio and other states;
• The FBI’s Subprime Mortgage Industry Fraud Initiative, which has resulted in
  investigations into 21 firms involved in the subprime mortgage industry;
• Examinations of nearly 40 brokerages by the Financial Industry Regulatory Authority
  to determine whether the firms were aware of the problems in the auction rate
  securities market and adequately warned customers about the risks;
• European Commission investigation into rating agencies;
• An investigation by the UK Financial Services Authority into the UK subprime
  market, which referred five firms for enforcement actions; and
• Investigations by authorities in Germany, Switzerland, France, Japan, South Korea
  and Singapore.

Read the Advisen Special Report: “The Subprime Mortgage Meltdown, the Global Credit Crisis and the D&O Market” (via Kraut in the City)