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In 2002 a German bank in the backwater of Kiel, on the shores of the Baltic Sea, sought to boost its returns by investing in a synthetic credit default obligation (CDO) issued by the Swiss megabank UBS AG. The investment was a disaster: a near-total loss of $500 million. When the German investor, now called HSH Nordbank AG, sued in February 2008, it became the first non–U.S. party to bring a significant credit default case, and made UBS the first non–U.S. bank on the receiving end of one. This case between two European financial institutions is at the forefront of financial crisis claims on two continents—but mostly, ironically, in the United States.

HSH Nordbank accuses UBS of exploiting its dual role as the CDO’s arranger and collateral manager by knowingly selling securities with embedded losses, lying about it, and mismanaging the structure for its own profit while keeping two sets of books: one with inflated values for HSH’s consumption and one for internal accounting. In HSH’s analysis, the portfolio was already $150 million in the red at closing.

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