The credit crunch is a global problem, but that does not mean every country has responded in the same way. Anthony Maton gives an overview of the main cases to date

For 10 years or so, the global economy grew. Lenders were free with their funds, especially in the US, where billions of dollars worth of mortgages were sold to people with weak credit ratings.

The US banking sector packaged these subprime home loans into mortgage-backed securities known as collateralised debt obligations (CDOs), which were sold on to hedge funds and investment banks around the world. When borrowers started to default on their loans, the value of these investments plummeted, resulting in huge losses for banks globally.

In particular, many UK banks had invested large sums in subprime-backed investments and have had to write off billions of pounds in losses. Many of the banks had been using the investment markets to fund large chunks of their mortgage business (a process known as securitisation). As fear spread, it became impossible to sell these investments, which brought about: the credit crunch.

A global problem

The credit crunch started in the US in 2007 when New Century Financial, the second largest subprime lender in the US, filed for Chapter 11 bankruptcy and subprime losses forced UBS to close its high-profile hedge fund, Dillon Reed Capital Management.

In September 2007, the credit crisis came to the UK with the collapse and subsequent nationalisation of Northern Rock. In 2008, the crisis became global when Bear Stearns was sold to JP Morgan Chase for just $240m (£146m) and Lehman Brothers filed for Chapter 11 bankruptcy protection. The extent of UK involvement was revealed when Lloyds TSB announced it was to take over HBOS and the mortgage lender Bradford & Bingley was nationalised. The crisis spread as the Icelandic Government took control of the country's third-largest bank and Glitnir and Dexia became the latest European bank to be bailed out, this time by the Belgian, French and Luxembourg governments.

Crunch-related litigation

It is clear that what we have seen in the last two years is a crisis in the global banking system unparalleled in our lifetimes, affecting almost every jurisdiction in the globe. The ripple effect of events occurring in one part of the world and spread to another with no one event limited to any one jurisdiction. The crisis is global – but is the litigation response?

The United States

You would expect to see more litigation more quickly in the US. It has the culture and process to allow this to occur. And, indeed, cases relating to the credit crisis began more quickly in the US. Consultants NERA estimate that credit crisis cases made up approximately one-fifth of all new US securities litigations in 2007, but in 2008 jumped to almost half of all filings. Another source reports that from January 2007 to 12 March, 2009 some 866 subprime-related litigations were started, including securities, bankruptcy and employment (Securities Law 360, 12 March, 2009 edition).

Not only is there more litigation but it is wider in scope. Claimants are not simply large groups of small investors, but rather institutional investors. Defendants are not simply banks, but various market participants including mortgage lenders, investment banks and credit rating agencies.

The State of Michigan asserts claims under the Securities Exchange Act of 1934 against Bear Stearns, its auditor Deloitte & Touche and certain of Bear Stearns' former directors and officers. The allegation is that false and misleading statements were made concerning Bear Stearns's exposure to risk in the housing market and the value of its assets.

In May 2009, the Mississippi and Massachusetts Pensions Trusts sued the Royal Bank of Scotland (RBS) and others In re Royal Bank of Scotland Group Securities Litigation.

The allegation is that the RBS defendants falsely reassured investors that RBS was well capitalised when, in fact, the company was effectively insolvent as a result of impaired assets, bad loans, and a disastrous partial acquisition of ABN Amro.

Again, the New York City Pension Funds are bringing action in re Countrywide Securities Litigation, asserting claims under the Securities Act 1933 and the Securities Exchange Act 1934 against Countrywide, certain of its current and former directors and officers, outside accountants and underwriters of public offerings of Countrywide securities.

It is alleged that the defendants made false and misleading statements concerning Countrywide's business as an issuer of residential mortgages and regarding the creditworthiness of borrowers, underwriting and loan origination practices.

The UK

The picture in the UK is very different. There has been much talk about credit crunch litigation. In September 2008, the former Lord Chancellor, Lord Falconer, predicted an explosion of 'mega-litigation' in the aftermath of the collapse of Lehman Brothers. A month later his former government colleague Lord Goldsmith stated "there is an urgency about some of the issues, which means that litigation is inevitable".

Notwithstanding this, and with the sole exception of litigation in respect of Icelandic banks, there has to date only been a limited amount of UK credit crunch litigation.

RBS – A retired Scottish QC Ian Hamilton started proceedings against RBS in the small claims court in Scotland. Hamilton had bought shares in RBS's April 2008 rights issue. His argument was that the bank should have known about the true state of its finances when it offered the shares for sale. RBS issued an application asking for the case to be transferred to a higher court. Proceedings in the small claims court have no adverse costs risk. In contrast, in the higher court, the amount of costs that a party can be awarded to pay is unlimited. Faced by the court's decision to transfer the matter to the higher court, Hamilton withdrew his claim. No other RBS litigation is pending in the UK.

HSH Nordbank vs UBS – Described as the "first true bank-on-bank dispute to hit the UK as a result of the credit crunch", HSH Nordbank is trying to recover losses on a $500m (£304m) portfolio of CDOs linked to the US mortgage market, which were structured and sold by UBS.

Northern Rock shareholders vs Government (Judicial Review) – As is well known, Northern Rock shareholders launched a judicial review for improved compensation from the Government following the bank's nationalisation. The action was unsuccessful.

AIG Enhanced Bond – A number of actions have been threatened and at least one started in relation to the sale by a number of banks, including Barclays, Coutts and UBS, of the AIG Enhanced Bond. Further action can be expected in this area.

Perhaps a better example of the speed of reaction in the UK is JPMorgan Chase vs Springwell, often cited in this context, in which JPMorgan was cleared of allegations of mis-selling. The sting is that the case arose as a result of the Russian debt crisis in 1998 – so perhaps in 2017 we will see credit crunch litigation making law in London.

Litigation elsewhere

Iceland

The largest amount of credit crunch litigation in Europe to date has been in relation to the Icelandic banks. But, ironically, this has not been litigation in Iceland, but in London. There are proceedings afoot in the UK against Landsbanki, Kaupthing and Glitnir. Some of the cases involve syndicates of banks, others individual, if significant, shareholders. All are significant claims and most involve foreign claimants – so London is set to be the scene for global litigation.

Europe

Notwithstanding the affect of the credit crunch in Germany, France and the Netherlands, it is fair to say that the banking industry was not as badly hit on the continent as it was in London and, at present, there is very little European litigation relating to the credit crunch.

In Germany, the Deutsche Telecom litigation still moves on, but this is a test of process on a claim from another era. In the Netherlands, the court continues to ponder whether it will approve the Shell settlement but again this relates to different problems other than the recent economic turmoil. In France, the search for an effective Societe Generale action continues, and in Italy, Parmalat continues to unfurl. All of these actions show the continuing difficulty bringing effective shareholder litigation in European jurisdictions.

A global approach?

There is a marked contrast between the action taken by aggrieved shareholders in the US and that in Europe. Because access to law is easy in the US, there are many more law suits, started much more quickly.

In contrast,