Merrill Lynch To Exit Subprime Structured Credit Business

Merrill Lynch & Co., the world’s largest brokerage, annouced today that it plans to exit the business of underwriting collateralized debt obligations and other structured credit products after the securities led to a record loss.

“We are not going to be in the CDO and structured-credit types of business,” new Chief Executive Officer John Thain said today at an investor conference in New York. He wasn’t more specific.

Merrill posted its largest-ever loss last year after writing down the value of its CDOs and other assets related to subprime mortgages by more than $24 billion. The New York-based bank was the biggest underwriter of CDOs from 2004 through 2006, and got stuck with some of the products as investor demand declined.

The market for CDOs, which repackage assets into new securities with varying degrees of risk, has been frozen since last July when two Bear Stearns Cos. funds that invested in them collapsed. Merrill Lynch will focus on improving its rankings on stock and bond underwriting league tables instead, Thain said.

Subprime Pain Continues to Haunt Wall Street Banks

The Wall Street Journal reported today that UBS AG had accumulated more than $100 billion in mortgage related losses over recent months and would write down an additional $4 billion in capital.

Those concerns were in the spotlight yesterday as Oppenheimer & Co analyst Meredith Whitney warned that Wall Street faces at least $40 billion in losses if the insurers see their credit ratings cut or file for bankruptcy protection. On top of this, Standard & Poor's predicted yesterday that the carnage might spread to a wider range of financial institutions, with total losses potentially exceeding $265 billion.

Citigroup and Merrill Lynch were the leading issuers of complex investment vehicles called collateralized debt obligations, whose values have deteriorated as more borrowers defaulted on mortgages. Together, Citigroup and Merrill already have absorbed a total of nearly $45 billion in losses on exposure to CDOs, leading each to replace its chief executive and seek multibillion-dollar cash infusions from investors around the world.

But the banks are hardly immune to further erosion. They each have billions of dollars in remaining exposure to CDOs, pools of debt sliced up according to levels of risk. Their values are expected to continue dropping, and yesterday S&P took negative action on nearly 2,000 CDOs backed by mortgages.

Still, with interest rates falling, the share prices of some financial institutions had gained nearly 20% recently. "A lot of investors want to believe [the fourth-quarter losses] were the end," said Joseph Mason, a finance professor at Drexel University's business school. "We're definitely not done here."

FBI Investigates Subprime Losses

The Federal Bureau of Investigation said that it is investigating 14 companies for possible insider trading or fraud in connection with subprime loans made to risky borrowers and subprime related investments.

The FBI did not identify the companies under investigation but it is widely believed that the probe involves companies in all sectors including mortgage lenders to Wall Street banks that securities and sold subprime related investments to the investing public.

The FBI is also working with the Securities and Exchange Commission.

Morgan Keegan bond mutual fund class action deadline looms

The law firm of Aidikoff, Uhl & Bakhtiari reminds investors of the February 4, 2008 deadline to file a motion for appointment as lead plaintiff in the class action lawsuits brought on behalf of purchasers of shares of certain mutual funds offered by Morgan Keegan Select Fund Inc. or shares of RMK Multi-Sector High Income Fund (collectively, the “Funds”) pursuant and/or traceable to the Funds’ registration statements and prospectuses since December 6, 2004.

The Funds and their respective symbols are as follows:

Regions Morgan Keegan Select Intermediate Bond Fund (MKIBX; RIBCX; and RIBIX)
Regions Morgan Keegan Select High Income Fund (MKHIX; RHICX; RHIIX)
Regions Morgan Keegan Select Short Term Bond Fund (MSBIX; RSTCX; and MSTBX)
RMK Multi-Sector High Income Fund (RHY)

If you purchased shares of the Funds pursuant and/or traceable to the Funds’ registration statement and prospectuses since December 6, 2004, you should contact an attorney to investigate your claims and discuss your options.

Moody's CEO -- "A lot of things could have been done better..."

RAYMOND MCDANIEL, CHAIRMAN AND CEO, MOODY'S:

"A lot of things could have been done better - some are the responsibility of rating agencies, some of other participants in the market.

"In hindsight it is pretty clear to us there was a failure in some key assumptions supporting our analytics and our models. The key assumptions failed in part because the information policy - completeness and veracity - feeding the work agencies were doing, was deteriorating.

"The history demonstrates that investment grade structured products have demonstrated lower average loss than similarly rated corporate loss. But loss distribution for structured products has been different.

"We are currently regulated by the US SEC. We are also subject to reviews on a voluntary basis and various national regulatory authorities around the world.

"The defence (to accusations of opacity) is we publish our models - people can agree, disagree, disregard the assumptions in those models. The transparency is there and is publicly available.

"Some of the losses or writedowns are a recognition of a problem in the model."A downgrade, while it causes...a trading loss to someone selling on the secondary market, does not affect underlying quality.

"You may see large amounts of writeups as the market stabilises.

"By analogy, if rating agencies were rating houses, we would be rating structural soundness of the house -- but many other things go into the value of the house; We are only measuring its structural soundness.

"I want the institutional investor community to use our ratings, but if the only choice is to look to rating agencies, it makes us more necessary and less effective."

1031 Tax Owner Backing Out of Deal to Repay Investors

Miami businessman Edward Okun promised last October to allow a court-appointed trustee of his failed real estate company to sells his assets in order to repay $150 million to investors who lost their life savings when 1031 Tax Group went bankrupt. Now, Okun wants to back out of the deal, alleging his trustee, Gerald McHale, hasn’t held up his end of the deal which was supposed to allow Okun to keep two multimillion dollar homes and two automobiles.

McHale has been selling off Okun's luxury items including a 132-foot yacht for $9 million, several jets and more than a dozen exotic cars (some of which Okun refused to hand over) to pay back creditors of Okun's failed tax shelter. Okun now claims McHale breached their deal when he failed to block one creditor from trying to seize the houses and cars and the deal has entered Okun and his family into “indentured servitude for the rest of our lives with no house or living budget.”

Okun has been accused of fraud in operating 1031 Tax Group, a real estate tax shelter. It allowed investors to sell investment properties and defer capital-gains taxes if they re-invest the proceeds in similar-type properties within 180 days. The investors can’t touch the money from the sale and the money must be used for the purchase of new property.

1031 Tax Group collapsed after Okun was accused of taking $150 million of his investors’ money to pay for real estate transactions at Investment Properties of American LLC, a separate company also owned by Okun. About 300 investors nationwide were owed $150 million when 1031TG filed for Chapter 11 protection in May last year which listed assets of $154.6 million and debts of $152.1 million.

The U.S. Attorney's Office in Richmond, Va., and the U.S. Postal Inspection Service are also investigating Okun’s dealings and the conversion of funds from creditors.

Countrywide Underwriters Sued For Fraud

Bloomberg News reported today that three New York agencies sued Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and 23 more underwriters for allegedly helping Countrywide Financial Corp. to defraud investors.

New York's city and state comptrollers and their pension funds added the securities firms, two accounting firms and Countrywide officers and directors as defendants in a federal securities-fraud lawsuit filed against the home lender in August.

Falling home prices and rising defaults pushed Countrywide down 85 percent in the past year and Chief Executive Officer Angelo Mozilo has called the housing market the worse since the Great Depression. That view contrasts with his view during the previous three years that Countrywide's superior risk management disciplines set it apart from other lenders, according to the lawsuit.

The state and city pension funds' combined losses from Countrywide's declining stock price were as much as $100 million, City Comptroller William Thompson Jr. said Nov. 30. Countrywide's market value, which peaked at $25.9 billion last January, is now $3.5 billion.

A CMO (Collateralized Mortgage Obligation) Primer

Collateralized Mortgage Obligations (CMOs) – also known as Real Estate Mortgage Investment Conduits (REMICs) are sold by financial institutions as fixed income investments offering regular payments, safety of principal and yield advantages over other fixed income securities of comparable credit quality.

The creation of a CMO begins with a mortgage loan to finance a borrower’s home or other real estate. The homeowner usually pays the mortgage loan in monthly installments made up of principal and interest payments on the loan. Mortgage lenders typically pool groups of loans with similar characteristics to create securities which can be sold. Pools of mortgage loans are commonly known as mortgage backed securities. These investments represent a direct ownership interest in a pool of mortgage loans. As real estate owners make their monthly payments the principal and interest collected are distributed to the investors.

Some CMOs are guaranteed by the Government National Mortgage Association (GNMA or Ginnie Mae), and agency of the U.S. government or by U.S. government sponsored enterprises such as the Federal National Mortgage Association (FNMA or Fannie Mae) or the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). These are known as agency CMOs.
Some private institutions such as subsidiaries of investment banks, financial institutions and home builders also issue mortgage backed securities. “Private label” CMOs issued by financial institutions are often collateralized with specialized types of loans, loan pools, letters of credit or credit enhancements. Private label CMOs are assigned credit ratings by independent credit agencies based on their structure, issuer, collateral and any guarantees or outside factors.

Factors such as prepayments, credit risk, fluctuating interest rates can effect the overall risk to the purchaser of a CMO. When interest rates rise, the market price or value of most types of CMO tranches drop in proportion to the time remaining to maturity. Rising rates may extend the life of CMOs and cause investor’s principal to be committed for a longer period of time than anticipated.

Merrill Lynch's Subprime Mess

Merrill Lynch & Co Inc reported about $16 billion in mortgage-related write-downs and adjustments on Thursday in the worst quarter of the company's history.

Shares of the world's largest brokerage fell more than 8 percent as investors worried about more write-downs and exposure to capital-strapped bond insurers.

The stock's 48 percent decline over the past year has slashed nearly $42 billion from Merrill's peak market capitalization of $84.7 billion in late January 2007.

The start of a booming year for investment banking fees and big bets on subprime mortgages ended in dismal fashion. Merrill's fourth-quarter net loss was $9.8 billion, or $12.01 a share, compared with year-earlier profit of $2.3 billion, or $2.41 a share.

The Subprime Crisis Continues

Recent turmoil in the credit markets has begun to expose the lack of disclosure and in some cases misleading sales presentations made by brokerage firms to their customer regarding the sale of Mortgage Backed Securities (MBS) or Asset Backed Securities (ABS).

In June 2007, Orange County based Brookstreet Securities was wiped out and forced to close its doors after its clearing firm National Financial reduced values in Collateralized Mortgage Obligations (CMOs) which caused accounts on margin to suffer markdowns and significant losses in customer accounts.

The lack of transparency in MBS, ABS and CMO securities has created a confidence crisis. Mortgage rating agencies including, Moody’s, S&P and Fitch have recently moved to cut credit ratings exposing certain problems with MBS and ABS investments. On October 3, 2007 Fitch cut the credit ratings of $18.4 billion of bonds backed by subprime mortgages issued last year, citing an increased risk of default after an "unprecedented" slump in home prices.
The downgrades of the 1,003 bond classes represent 11 percent of the entire $173 billion of securities from 2006 that were rated by Fitch, the company said today in a statement. Fitch reduced ratings on $6.6 billion of bonds backed by second-lien subprime mortgages.

Fitch, a unit of Paris-based Fimalac SA, began a review in July of every transaction containing mortgages to borrowers with poor credit after investors criticized ratings companies for failing to act quickly enough as home-loan delinquencies rose.

Defaults reached record highs and some securities dropped by more than 50 cents on the dollar. Fitch is the first of the three largest credit-rating services to review all securities with debt arranged last year.

U.S. senators in Washington last week faulted credit ratings companies for grading subprime-mortgage securities too highly. The U.S. Securities and Exchange Commission said it is probing whether the firms were "unduly" pressured by Wall Street and a shareholder filed suit in New York accusing Moody's of not revealing it gave out inflated ratings.

Moody's Investors Service has downgraded or placed on review 496 bonds backed by first mortgages issued last year, or 3 percent of the total, including $5.3 billion of bonds backed by subprime loans.

Moody's said last month it expects to downgrade more subprime-mortgage securities, and will assume its ratings for many such bonds issued since July 2005 are too high in assessing new collateralized debt obligations. CDOs package pools of mortgage securities and slice them into pieces with varying degrees of risk, from AAA to unrated portions.

Through Sept. 21, 2007, Standard & Poor's had cut ratings on 433 of the securities issued last year and backed by subprime loans, or 9.1 percent of the total.

Fitch said it was "most concerned" about second-lien loans, which rank behind the first-mortgages in terms of payment.

Bear Stearns Closes Another Hedge Fund

Bloomberg reported that Bear Stearns is a closing a hedge fund invested in asset-backed securities after the fund dropped 39 precent last year.

The Bear Stearns Asset Backed Securities fund, which in August held about $900 million of investments backed by assets including home mortgages, dropped 21.4 percent in November alone, the New York-based company told investors in a Dec. 20 letter obtained by Bloomberg News. The fund lost more than $300 million between August and the end of November.
Bear Stearns said it would return $90 million in cash to investors immediately. The fund's remaining assets, which the company valued at about $500 million as of Nov. 30, will be sold and the proceeds refunded over an unspecified period of time, according to the letter. Bear Stearns spokeswoman Jane Slater confirmed the letter's contents.

``Based on continued market deterioration, we believe that a furtherance of the strategy, even under a longer lock-up, would not be in the best interests of investors,'' Bear Stearns said in the letter. The fund's 39 percent decline last year through November could be revised ``given the difficult market conditions that continue to exist,'' according to the letter.

The closure adds to the list of hedge fund casualties at Bear Stearns, which shut down two others in July as the value of their mortgage-backed securities sank. Their failure helped trigger the collapse of the subprime mortgage market, as investors stopped buying securities linked to home loans made to borrowers with poor credit histories.

August Statement
Bear Stearns's decision to shut down the Asset Backed Securities fund was a change from its statement in August, when it said it would keep the funds open after blocking withdrawals by investors.

``This says that Bear Stearns is still not being honest and forthright with clients whose assets have been entrusted to them,'' said Steven Caruso, a New York-based partner with law firm Maddox Hargett & Caruso PC whose clients include investors in the Bear Stearns hedge funds. Those investors include hedge funds, institutional money managers and wealthy individuals.

Investors who've lost more than $75,000 should consider all options

The collapse of Morgan Keegan bond mutual funds has led to investor claims and a continuing investigation of Regions Financial Corp. (NYSE: RF), according to a four-law firm legal team with nationally recognized securities law experience.

But the brokers who sold the bond funds are not targets of investor claims, according to the investors’ legal team.

Investors in numerous Morgan Keegan bond mutual funds have experienced losses in net asset value of more than 50 percent since the beginning of 2007, with large losses sustained over the last five months. Recent news reports indicate that mortgage-backed securities and CDOs may constitute significant portions of Morgan Keegan bond fund portfolios.

The law firms are investigating the following funds that have been adversely impacted by the collapse of the mortgage markets and subprime crisis:

Regions Morgan Keegan Select High Income-A, (Sym: MKHIX), Year to Date Return a/o (12/31/07) –59.74 percent
Regions Morgan Keegan Select High Income-C, (Sym: RHICX), Year to Date Return a/o (12/31/07) –59.95 percent
Regions Morgan Keegan Select High Income-I, (Sym: RHIIX), Year to Date Return a/o (12/31/07) –59.64 percent
RMK High Income Fund, (NYSE: RMH), Year to Date Return a/o (12/31/07) –65.53 percent
RMK Strategic Income Fund, (NYSE: RSF), Year to Date Return a/o (12/31/07) –66.92 percent
Regions Morgan Keegan Select Intermediate Bond Fund-A, (Sym: MKIBX), Year to Date Return a/o (12/31/07) –50.30 percent
Regions Morgan Keegan Select Intermediate Bond Fund-C, (Sym: RIBCX), Year to Date Return a/o (12/31/07) –50.54 percent
Regions Morgan Keegan Select Intermediate Bond Fund-I, (Sym: RIBIX), Year to Date Return a/o (12/31/07) –50.07 percent
RMK Multi-Sector High Income, (Sym: RHY), Year to Date Return a/o (12/31/2007) -65.09
RMK Advantage Income, (Sym: RMA), Year to Date Return a/o (12/31/2007) -66.68

A class action lawsuit was filed against Morgan Keegan in the United States District Court for the Western District of Tennessee, Atkinson et al. v. Morgan Asset Management, Inc., et al, Case No. 2007cv02784. If you are an investor that lost more than $75,000, you should consider all legal options.

Securities arbitration vs. class actions

Before retaining an attorney, an aggrieved investor should consider carefully whether their rights are better pursued through a class action lawsuit or securities arbitration before the Financial Industry Regulatory Authority (FINRA).

Class actions are typically filed by attorneys seeking to represent all investors who have suffered a common wrong or purchased the same investment.

A group of attorneys or a law firm will represent all parties regardless of the particular requirements of the individual investor. Often classes are represented by the investor with the largest claim at stake. Today, this usually means that state pension funds or intuitional investors have the most clout in choosing the attorneys and working on the strategy of the case. On the other hand, arbitration before FINRA is done on an individual basis with the investor having input in the selection of counsel and participating in the litigation of the case. Individual representation is also a better method of ensuring that conflicts of interest do not exist between multiple clients that a law firm represents and that individual investors receive specific counsel relative to their claims.

Class actions also create hurdles to recovery for most individual investor claimants which include depositions and motion practice which are not permitted in securities disputes decided before FINRA.

Class action representation may be attractive where individual losses are small so that one investor may not have an economic interest in pursuing the case. However, investors that have lost more than $50,000 should strongly consider pursuing their rights on an individual basis.

Often class claims are settled for cents on the dollar whereas individual securities arbitration claims are pursued to make the investor whole. Securities arbitration is a superior forum to seek damages that exceed out of pocket losses, interest and attorneys fees.

At times the aggregation of consumer claims may promote efficiency in the legal process and lower the cost of litigation. Thus for investors with claims that share a common question of fact or law and who have small losses a class action lawsuit may be a viable option. Contrariwise, a group of investors with significant losses sustained at a common brokerage firm broker may be better situated by filing a group claim with FINRA.

Prosecutors To Meet With Bear Stearns

Bear Stearns officials are expected to meet shortly with U.S. prosecutors to discuss the failure of two hedge funds.  The funds are the High Grade Structured Credit Strategies Fund and the High Grade Structured Credit Strategies Enhanced Leverage Fund.

This summer the funds filed for bankruptcy protection after catastrophic losses from subprime related collateralized debit obligations.  

Regions Financial Reserves For Morgan Keegan Subprime Losses

In the latest blow to the beleaguered financial sector, Regions Financial Corp. (RF) said it would set aside $360 million in the fourth quarter to cover loan charge-offs in its residential builder loan portfolio and other non-performing assets. Its shares, which have already lost more than 38% over the past year, were indicated about 4% lower in pre-market activity following the news.

Regions joins a growing list of financial institutions to report pressure from the downturn in the U.S. housing market and weakening credit conditions due to the fall-out in subprime mortgage lending.

Regions is the parent of Morgan Keegan whose bond fund clients who suffered investment losses in the open ended Morgan Keegan Select Intermediate Bond Fund, Regions Morgan Keegan Select High Income Fund and closed end funds RMK Multi Sector High Income Fund (RHY), RMK Strategic Income Fund (RSF), RMK Advantage Income Fund (RMA) and the RMK High Income Fund (RMH).

Morgan Keegan Settles With Indiana Charity for Undisclosed Amount

ANDY MEEK The Daily News

The Memphis brokerage firm that oversees a group of struggling mutual funds has settled an arbitration claim filed against one of them. The RMK funds saw much of their value wiped out in 2007’s credit crisis.

Terms of the settlement between Morgan Keegan & Co. and the Indiana Children’s Wish Fund, a group that grants wishes to children with terminal illnesses, include a payment by the firm to the charity. That payment, the amount of which remains private, was made a little more than a week ago.

The Indiana charity, which lost almost $50,000 investing in the Regions Morgan Keegan Select Intermediate Bond Fund, was one of the first investors in the group of bloodied RMK funds to file a claim or lawsuit recently saying the funds’ volatility had not been fully disclosed.
Morgan Keegan spokeswoman Kathy Ridley could not be reached for comment.

Other investors in the various RMK funds followed soon after the Indiana charity. Two separate lawsuits were filed in U.S. District Court for the Western District of Tennessee in December alone, both making claims similar to the charity’s.

For its part, Morgan Keegan denied the notion it glossed over risks associated with the charity’s investment in an October letter sent to the group’s executive director. That letter also included an offer to settle the claim for a little less than $15,000.

The 23-year-old, wish-granting charity turned that offer down but now has agreed to a new deal.

“I’m informed that the parties have agreed to settlement terms including confidentiality,” said Ryan Bakhtiari, a partner at the Aidikoff, Uhl & Bakhtiari law firm in Beverly Hills, Calif.
A loose affiliation of lawyers from across the country, including Bakhtiari, is currently investigating the performance and management of the six RMK funds whose values plummeted this year partly as a result of the mortgage market meltdown. More suits and investor claims are expected to be filed soon.

By way of highlighting the effect of the RMK losses for investors on an individual level, Bakhtiari said the nearly $50,000 loss the Indiana charity took from its mutual fund investment could have funded about 10 wishes of children the group serves.

Update on Bear Stearns Hedge Fund Collapse

The multi-billion dollar collapse of two Cayman Islands hedge funds managed by investment giant Bear Stearns is set to continue to make headlines into the New Year.

As 2007 drew to a close, news was released that the US Attorney’s Office and the Securities and Exchange Commission (SEC) were looking at whether one of Bear Stearns’ senior managing directors, Ralph Cioffi, continued to promote the now-bankrupt funds while removing US$2 million of his own investments from them. The allegation being that this act amounted to insider trading.

Banking giants Barclays have now also joined the chase, filing claims for over CI$400 million, which allege Bear Stearns sold bad debt before they would have to be written down as a loss. Barclays alleges fraud, conspiracy and a breach of fiduciary duty.

Other groups are filing arbitration claims, a course they regard as more straightforward, quicker and not subject to complex appeal processes or legal delaying tactics, in order to recover lost investments.

The major complaint being pursued against Bear Stearns appears to be that the failed hedge funds were being sold to investors as low risk options when, according to one noted expert in the field and reported in BusinessWeek, more than 60 percent of the net assets in one of the funds, “were so illiquid or obscure that management randomly assigned their value.”

In the meantime, Massachusetts Secretary of State William F. Galvin is continuing his assault on Bear Stearns, who he has charged with engaging in inappropriate trading. An allegation he says is based on records, which apparently show the company traded from its own account with the hedge funds without the making required notifications to the funds’ Cayman Islands-based independent directors.

Other reports complain that the US$500,000 allocated to the accountants entrusted with the hedge funds’ liquidation is inadequate to ensure that the necessary work is conducted properly.
Mr Cioffi is now reported to have quietly left the firm and at least one media outlet in the USA is suggesting that Bear Stern’s CEO Jimmy Cayne may soon follow him. Mr Cayne is also reported to have just cashed in 172,621 Bear Stearns shares, accumulated under their annual profit and dividends programme, netting himself US$15.4 million.