Brookstreet Securities Corp., an Irvine broker-dealer, has shut its doors, laid off 100 local employees and liquidated its assets because it is unable to meet margin calls on complex securities called collateralized mortgage obligations, the company's spokeswoman Julie Mains told Register reporter John Gittelsohn today.
An email sent to employees summed up the situation as a "Disaster."
"It's heartbreaking," Mains said.
She said the company went from $16 million in capital Friday to being $3 million underwater Wednesday because its clearing firm, National Financial Services, sold the securities, which had lost value as Wall Street confidence in Bear Stearns & Co's hedge funds of mortgage-backed securities collapsed .
A spokesman for National Financial Services said it's not his company's fault that Brookstreet ran out of capital.
Mains said some of Brookstreet's customers lost their entire investment and that the National Association of Securities Dealers ordered the company to liquidate its remaining accounts. She said Brookstreet clients should try to find another broker-dealer to take over their accounts.
Here's an email Brookstreet sent to its employees Wednesday:
"To Our Valued Brookstreet Members, Disaster, the firm may be forced to close...
Today, the pricing system used by National Financial has reduced values in all Collateralized Mortgage Obligations. Many of those accounts were on margin and have suffered horrendous markdowns and unrealized as well as realized losses.
National Financial and the regulators expect Brookstreet to pay for realized liquidated losses and take a capital charge for unrealized mark to market losses.
This firm has done a valiant if not Herculean job of managing the liquidations and capital charges to the firm's net worth and net capital. We had reduced the margin balance significantly; we had liquidated and reduced exposure by 80%.
That still left a $70,000,000 margin balance against around 85,000,000 of value. Unfortunately the pricing service used by NF revalued many CMO positions downward last night. We went from a positive net capital of 2.4 million, down from 11 million at the end of May, a negative net capital of 2.1 million. It would take a capital infusion of at least $5,000,000 to keep the company in compliance with no guarantee that additional markdowns will not be forth coming.
I cannot in good conscience request that anyone put money in the firm, I think $10,000,000 would be a minimum without consideration of the horrific customer complaints to follow.
I have told many of you that you are always in danger of not being paid on your last check when working for any broker dealer, which is why I have always paid twice per week and maintained huge net cash positions, generally in the realm of 15,000,000 on average. I will try to get enough money from our account at NFS to complete our upcoming payrolls.
Since I have been writing this letter I have received three hurried inquiries about re capitalizing the company. I will negotiate an arrangement that guarantees that everyone gets paid, to the best of my abilities. Please stay at Brookstreet at least until Friday so I may do my best for each of you. Unfortunately we are on "SELL ONLY."
I believe I will be able to reconstitute another opportunity for everyone that will result is a minimum of change and disruption. There will be disruption.
Please give a day or so for us to come up with the best strategy. This has happened to us in one day, amazing. All of our family net worth is in the firm, please give me time to present a new plan."
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