From the Pages of The Pomerantz Monitor: The Next Frontier: The Subprime Mess Spreads to Europe

As Murielle Steven Walsh reports in the current issue of The Pomerantz Monitor, international investors have been wondering how deep the impact of the US subprime distress will be in Europe; and what, if anything, will be done about it.

Back in August 2007, Standard & Poor's forecast that the U.S. subprime debacle would have a "limited" effect on Europe. But since then, several large European banks have been hit with considerable losses stemming from their exposure to U.S. subprime debt.  British bank Northern Rock was one of the first victims of this crisis, announcing last September that it had sought and received liquidity support from the Bank of England. Just two months ago, Northern Rock was nationalized by the British government after two failed attempts at a private takeover of the institution.

French bank Société Général  made headlines when it shut down billions of dollars of funds because it was unable to value the underlying subprime securities. And a few weeks ago, Swiss-based UBS AG announced a $19 billion writedown of its assets for the first quarter. Deutsche Bank has announced its own $4 billion hit.

The IMF recently issued a much starker report for Europe, warning that the American subprime crisis could adversely impact the European economy as a whole, and even stall economic expansion on the Continent.

European banks, like their American counterparts, will likely face intense regulatory scrutiny and a wave of litigation. The UK's securities watchdog has already performed a review of the subprime markets in Britain, and taken action against some smaller mortgage lenders. UBS and SocGén both face class actions in the U.S. over their subprime writedowns. And Crédit Suisse has been sued by Bankers Life Insurance on allegations that it had failed to disclose known risks, and that it withheld information concerning bond ratings.

A key issue in any class action against a foreign issuer is whether foreign investors will be allowed to take part in the case. So far, U.S. caselaw has shown mixed results. In a high profile case against Royal Dutch Shell, a New Jersey district court dismissed the claim of a foreign investor who sued the company over purchases on a foreign exchange. By contrast, the district court for the southern district of New York appointed a Luxembourg-based foreign investor as lead plaintiff in another class action. Heavily weighted factors in these types of cases include whether the shares at issue were purchased on a foreign exchange, and whether the foreign investors' native country would recognize a U.S. judgment.

If a U.S. court bars foreign investors from suing here, their only recourse would be to sue the banks on their own home turf. Europe has historically been hostile to litigation in general, and class actions in particular. Nonetheless, the severity of the subprime impact and resultant losses could prompt otherwise hesitant investors to take action.

Reports are that London-based law firms are gearing up for an onslaught of litigation between banks and other banks, hedge funds and pension funds. Moreover, as reported in an article by Jeremy Lieberman in the current issue of The Pomerantz Monitor, Europe is moving towards more shareholder friendly litigation procedures.