One of the biggest pending CDS disputes is between Citigroup and Morgan Stanley. Last fall, Citigroup alleged in a Manhattan federal district court complaint that Morgan Stanley failed to pay Citi more than $245 million it owed under a 2006 credit default swap agreement. (Under the three-year deal, Citi alleged, Morgan Stanley agreed to pay Citi for “credit event” losses on a $366 million revolving credit facility Citi had provided to an issuer of collateralized debt obligations.)
Both sides are now asking Judge Shira Scheindlin for judgment on their pleadings. Citigroup filed its 22-page brief last month; on Friday, Morgan Stanley filed its 26-page response. Citigroup alleges that after the CDO issuer defaulted in August 2008, Citi suffered more than $250 million in losses, which it says should be paid by Morgan Stanley. But in its response, Morgan Stanley argues that Citigroup “engineered a premature payment default” on the $366 million loan to the CDO issuer, breaching its obligations under the CDS agreement by authorizing a liquidation and attempting to pass its losses on to Morgan Stanley, which only made $750,000 on the swap agreement.
