Ex-Credit Suisse Brokers Set for Trial

Two former Credit Suisse Group AG brokers accused of fraudulently selling clients subprime mortgages linked to auction-rate securities were ordered to go to trial on April 27, a U.S. judge said Sept. 26.

Julian Tzolov, 35, and Eric Butler, 36, face securities fraud and conspiracy charges. They are accused of falsely telling clients the products were backed by federally guaranteed student loans and were a safe alternative to bank deposits or money market funds, according to a federal indictment.

The scheme "foisted more than $1 billion in subprime- related securities" upon customers, the U.S. Securities and Exchange Commission said in a complaint filed Sept. 3.

The case is U.S. v. Julian Tzolov and Eric Butler, 08-CR- 370, U.S. District Court, Eastern District of New York (Brooklyn). The SEC case is Securities and Exchange Commission v. Julian Tzolov and Eric Butler, 08-CV-07699, Southern District of New York (Manhattan).

Citigroup Aquires Wachovia Banking Operations

Citigroup Inc. agreed to acquire Wachovia Corp.'s banking operations on Monday for $2.1 billion in stock and will assume another $53 billion in Wachovia debt. Federal banking regulators pushed the deal by agreeing to share a portion of future losses that Wachovia's failing mortgage portfolio could generate.

Wachovia's deal with Citigroup was pushed by federal banking regulators and welcomed by the Fed. Citi's purchase of the fabled Charlotte bank marks another deal orchestrated by the federal government, this time by the Federal Deposit Insurance Corporation, and one in which the agency could be on the hook for loan losses.

"The FDIC has agreed to provide loss protection in connection with approximately $312 billion of mortgage-related and other Wachovia assets," Citigroup said in a statement.

The Federal Reserve and Treasury Department were also part of the effort, another sign of how proactive the government has been in preventing ailing financial firms from failing and instead pushing for stronger firms to acquire some assets of the weaker companies.

Wachovia shares fell more than 90% in premarket trading, and the New York Stock Exchange did not open the shares for trading. Citigroup was off 1% at $19.95 shortly after the market opened.

Jefferson County Sues Bond Insurers

Jefferson County, Alabama, filed a counterclaim for more than $100 million against bond insurers, which seek to strip local officials of control over the sewer system that pushed the county toward bankruptcy.

Officials alleged that the insurers, Syncora Guarantee Inc. and Financial Guaranty Insurance Co., which back $2.8 billion of the system's $3.2 billion of sewer debt, didn't disclose risky investments in mortgage-backed securities. The insurers lost top-credit ratings after the investments soured, causing investors to shun the county's sewer debt and sending interest rates to as high as 10 percent.

Jefferson County bought bond insurance to boost the credit rating on its sewer bonds, lower borrowing costs and increase the marketability of the debt, a strategy thousands of U.S.

Alabama Governor Bob Riley is negotiating a restructuring plan with insurers and banks that hold the county's sewer debt. The county faces a Sept. 30 payment deadline.

Should the county renege on all of its sewer debt, it would be the largest municipal bond default in U.S. history, exceeding the Washington Public Power Supply System's $2.25 billion default in 1983 of revenue bonds sold for nuclear plants. A bankruptcy would be the largest for a U.S. local government since Orange County, California, sought protection in 1994.

JP Morgan To Buy WaMu Branches and Deposits

J.P. Morgan Chase & Co. tonight will announce it’s buying most or all of Washington Mutual Inc.'s deposits and branches, according to a source close to WaMu.

JPMorgan has scheduled a conference call with investors and analysts for 6:15 p.m. PDT.

The New York banking giant has long been rumored to be the most likely buyer of some or all of ailing WaMu, the nation’s largest thrift, with $182 billion in deposits.

The arrangement is expected to assure that the Federal Deposit Insurance Corp. won't have to take a hit on WaMu's insured deposits. A failure of WaMu, without a deal, would have been by far the biggest bank collapse in FDIC history.

JPMorgan has long coveted WaMu’s extensive branch network in California and Florida. It had offered to buy the Seattle-based thrift in spring, but WaMu instead accepted a $7 billion private equity investment from TPG, the former Texas Pacific Group.

The need for WaMu to strike a deal has become more urgent in recent days as the company’s debt rating was downgraded to deep-junk levels, and as its stock has plunged anew. The shares dived 57 cents, or 25%, to $1.69 today, the lowest since the 1980s.

JPMorgan’s conference call information, for those who want to listen in: Dial 1-877-238-4671 and give the access code 814030.

Proposed Rule Change to Amend Rule 12401 of the Customer Code and Rule 13401 of the Industry Code to Raise the Amount in Controversy Heard by a Single

The Financial Industry Regulatory Authority, Inc. (“FINRA”) (f/k/a National Association of Securities Dealers, Inc. (“NASD”)) is filing with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to amend NASD Rule 12401 of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) and NASD Rule 13401 of the Code of Arbitration Procedure for Industry Disputes (“Industry Code”) to raise the amount in controversy that will be heard by a single chair-qua lified arbitrator to $100,000.

Manulife May Purchase AIG

With American International Group now in tatters, insurers around the world are poised to bid on parts of the troubled company, including Manulife Financial.

While Dominic D'Alessandro, the company's CEO, isn't talking, it's reported that he met with financial advisors last week to discuss how to take advantage of AIG's likely dismantling.

If Manulife buys AIG, or at least large chunks of it, the insurance company would find itself on top of the global financial services industry.

It makes sense for Manulife to scoop up AIG, as it's one financial institution that wasn't affected by the worst of the credit crunch. With its business still strong, and a market value of $52 billion, the company is a in a good position to swoop in and purchase damaged American businesses.

While the insurance industry landscape could change significantly if Manulife purchases AIG, the American banking industry is almost unrecognizable today from where it was just a week ago.

SEC Seeks Recovery for Investors From California Firm That Invested in Ponzi Schemes

The Securities and Exchange Commission today charged San Francisco-area investment adviser Cornerstone Capital Management, Inc. for misrepresenting the value of its clients’ investments in what turned out to be a series of Ponzi schemes.

In an order instituting administrative proceedings against the firm and its president, Laura J. Kent of Redwood City, the SEC’s Division of Enforcement alleges that, despite knowing that certain programs in which they had invested approximately $15 million of their clients’ funds turned out to be scams, Cornerstone and Kent continued to assure their clients that the investments retained their full value.

Even after the principals behind some of those investments were convicted of criminal fraud, Kent continued to charge an assets-under-management fee based on the original cost of the failed investments, collecting more than a half-million dollars in inflated fees from her clients.

Putnam Closes Money Market Fund

For the second time in a week, a multibillion-dollar money market fund has been forced to take extraordinary steps to deal with sudden cash withdrawals by nervous institutional investors.

Putnam Investments, one of the oldest names in the mutual fund industry, announced Thursday that it was closing and liquidating its Putnam Prime Money Market Fund, a $12.3 billion fund that serves only professional investors. The action does not affect Putnam money funds that are sold to retail investors.

But the unusual step shows just how nervous investors — especially the professional ones — have suddenly become about a type of investment that was long considered to be as risk-free as a bank checking account.

The Investment Company Institute, an industry trade association, said Thursday that the funds serving institutions shrank by more than $173 billion, to $2.17 trillion, in the week that ended Wednesday — the worst decline ever among institutional money funds.

The net decline of $169 billion left a total of $3.41 trillion invested in all money funds, or 4.7 percent less than had been in those funds a week earlier, before the current tremors hit.

By contrast, retail investors appear to still see money market funds as safe havens. The money funds serving retail customers actually grew by $4.28 billion, to $1.24 trillion, over the same seven-day period.

Professional investors were clearly alarmed when the Reserve Fund, a company whose founder helped invent money funds in the mid-1970s, announced that losses on its stake in Lehman Brothers had pushed the share prices of three institutional funds lower than a dollar.

SEC Charges PIPE Promoters in $52 Million Ponzi Scheme

The Securities and Exchange Commission today charged an Irvine, Calif., attorney and two other promoters for conducting a $52.7 million Ponzi scheme in which they sold investors bogus PIPE (private investment in public equity) investments, promised unrealistic profits, and misappropriated more than $20 million of investors’ funds to function as their own personal piggy bank.

The SEC’s complaint alleges that attorney Jeanne M. Rowzee along with James R. Halstead of Santa Ana, Calif., and Robert T. Harvey of Prosper, Texas, told investors that Rowzee was an experienced securities attorney who personally screened and selected each PIPE investment after thorough due diligence. Contrary to these representations, they did not place investor funds in PIPE investments. Rowzee, Halstead, and Harvey instead used new investor funds to pay principal and returns to earlier investors, and to finance their own personal endeavors such as trips to Las Vegas, property purchases, and alimony payments.

Citibank Considers WaMu Takeover

Citigroup Inc., moving to take advantage of the turmoil that is hobbling banks throughout the U.S., is considering making a bid for Washington Mutual Inc., according to people familiar with the situation.

"People view us today as being a source of the solution, instead of part of the problem," Gary Crittenden, Citigroup's chief financial officer, said in an interview. He declined to comment specifically about WaMu.

Citigroup and several other banks are reviewing the Seattle thrift-holding company's books, which are packed with shaky mortgages, people familiar with the matter said Thursday. Other interested parties include Banco Santander SA, of Spain, and Wells Fargo & Co., of San Francisco. J.P. Morgan Chase & Co., which was spurned by WaMu earlier this year, is biding its time on a potential bid, people close to J.P. Morgan said.

Spokesmen for all those banks declined to comment.

Citigroup's interest in WaMu, which has branches across the U.S. but has struggled to build market share in many of the metropolitan areas it entered in recent years, comes just a few months after Citigroup was at the center of the credit crisis.

While the New York company has suffered tens of billions of dollars in mortgage-related write-downs in the past year, it raised more than $40 billion in capital and has deposits to fall back on as a reliable funding source.

Morgan Stanley's Search for a Buyer

Morgan Stanley topped the list of major financial firms scrambling to find a buyer, while central banks rushed in $180 billion of extra liquidity to calm panicked stock and money markets.

Morgan Stanley was in deal talks with U.S. regional banking powerhouse Wachovia Corp and the negotiations have advanced to a more formal stage, a source familiar with the firm's plan said.

The No. 2 U.S. investment bank, whose shares are down 50 percent this month, has also approached Chinese sovereign wealth fund China Investment Corp about boosting its stake in Morgan Stanley, the source said, following a $5 billion investment late last year.

HSBC Holdings was named by CNBC as another potential bidder for Morgan Stanley, but a person familiar with the matter said the bank is not interested.

Washington Mutual In Trouble

Washington Mutual Inc. is accelerating efforts to raise more capital or potentially sell itself, reaching out to potential suitors and instructing its investment bankers to step up their efforts to help the struggling thrift escape its mortgage woes.

The push got another boost Wednesday when private-equity firm TPG, which led a $7 billion infusion at WaMu in April, gave the Seattle company an important concession that will make it easier to attract additional cash. Terms of the April deal gave TPG the right to get more shares if WaMu issued fresh equity at a price of less than $8.75 a share.

Subprime Suits Surpass S&L Era Litigation

More than 600 lawsuits related to the subprime mortgage crisis were filed in U.S. federal courts since January 2007, including 310 in the first six months of this year, surpassing litigation related to the U.S. savings and loan collapse of the 1990s, according to a consulting firm report.

The Navigant Consulting Inc. study released yesterday counts cases filed by investors and borrowers as well as court complaints concerning the auction-rate securities market.

Navigant said the 310 lawsuits filed from January to June exceeded the number filed in all of 2007.

Subprime-related suits outnumber the 559 filed during the collapse of the savings and loan industry, according to the report. Lawsuits related to that crisis were filed over a six- year period ending in 1995, according to Navigant. The complaints were brought by the Resolution Trust Corp., created by the federal government to liquidate assets of failed banks in an effort to repay creditors.

The government sold or closed 747 U.S. thrift institutions, costing taxpayers about $140 billion. The RTC recovered almost $400 billion from asset sales, its acting chief executive officer, John Ryan, said when the RTC concluded its operations. The agency's remaining assets and liabilities were transferred to the Federal Deposit Insurance Corp.

In subprime litigation, a Fortune 1000 company was named as a defendant in 59 percent of the lawsuits filed during the first six months of this year, according to the report. A study published by Navigant at the end of 2007 said mortgage bankers were the most frequent plaintiffs' target.

SEC Probe of United Airlines Sudden Price Drop

US securities regulators have opened an informal investigation into the sudden drop of United Airlines’ shares following the re-publication of a six-year-old story about the carrier’s bankruptcy, people briefed on the matter said.

The inquiry, which is in its early stages, comes as the US Securities and Exchange Commission ramps up efforts to crack down on false rumours intended to manipulate share prices.

Anytime anyone spreads false information about a public company over a communication medium like the internet, its message boards, chat rooms or otherwise, that will raise questions as to whether someone is committing securities fraud,” said John Reed Stark, head of the SEC’s office of internet enforcement. But he declined to comment on the United situation.

United’s shares lost more than 75 per cent of their value on Monday before trading was halted after an investment newsletter found a 2002 Chicago Tribune article in a Google News search and, believing United had filed for bankruptcy protection for the second time this decade, published a summary of it on Bloomberg’s newswire.

The Impact of Fannie and Freddie On The Credit Crisis

Rather than marking the turning point that assures an economic recovery, the support that had to be provided to US mortgage giants Fannie Mae and Freddie Mac last weekend simply underlines the severity of the ongoing credit crisis.

The bailout will help to avoid the worst-case scenario of a complete financial meltdown, but the outlook for the housing market and the wider economy remains grim. The US government's stunning takeover of Fannie and Freddie saves the mortgage giants' lives, but fails to determine what they will look like once they unplug from life support. The job of rehabilitating America's largest housing finance companies will fall to the next US congress and the next president.

Hours after Fannie Mae and Freddie Mac were placed under federal conservatorship by treasury secretary Henry Paulson, US housing experts were predicting a struggle next year over the ultimate fate of the government-sponsored enterprises, or GSEs.

Reform scenarios for Fannie and Freddie have been debated for years, ranging from nationalisation at one extreme to privatisation at the other. Taking into account next year's political changes on Capitol Hill and in the White House, chances for radical change in the next year or two may be remote. The Democratic Party is widely expected to keep House of Representatives control next year, while possibly increasing its narrow senate advantage.

AIG Holds Nearly $600 Million in Fannie Mae and Freddie Mac Preferred Shares

American International Group Inc, the world's largest insurer, holds between $550 million and $600 million in Fannie Mae and Freddie Mac preferred shares, according to a source familiar with the investment.

Investors have been biting their nails over companies' holdings of the agencies' preferred shares, with concern that the recent government takeover of the giant home-funding companies could wipe out value.

Insurers in total own about $4 billion in Fannie Mae and Freddie Mac preferred stock, according to earlier figures compiled by rating agency A.M. Best.

Wall Street Blamed in Senate Report for Helping Foreign Hedge Funds Avoid U.S. Taxes

Wall Street megabanks, Lehman Brothers, Citigroup, Morgan Stanley, and Merrill Lynch, are all facing heavy scrutiny over some of their questionable business practices. A U.S. Senate committee investigation has revealed that several top firms are raking in millions of dollars in profits by using complex derivatives and stock schemes to help foreign hedge funds illegally avoid paying billions in U.S. taxes.

In its 77-page report, to be released Sept. 11, 2008 the Senate Permanent Subcommittee on Investigations calls the tax-avoidance schemes another example of a “privileged few” benefiting at the expense of millions of American taxpayers who are left to shoulder a disproportionate share of the tax base. The report says that $100 billion a year is lost to offshore tax abuses. The report names several hedge funds involved in the schemes, including Moore Capital, Highbridge and Maverick Capital.

Foreigners who invest in the United States are exempt from many U.S. taxes - they don’t pay taxes on interest earned on money deposited in a U.S. bank, nor do they pay taxes on capital gains. However, if they invest in a U.S. company and the stock pays a dividend, U.S. law requires them to pay a tax on the dividend. Dividends sent abroad are supposed to be taxed at a rate of 30% in most countries.

In reality, however, it’s a different story, and many non-U.S. stockholders never pay the dividend taxes that they owe. According to the Subcommittee’s report, the fault lies with U.S. financial institutions.

According to the report, each of the institutions investigated developed and marketed “dividend-dodging products” that disguised dividend payments to clients as nontaxable ones. The products involved complex equity swaps or loans that the banks described as offering a “dividend enhancement,” “yield enhancement,” or “dividend uplift.”

For the investment firms, the practice is a profitable one. The Senate investigation shows that from 2000-2007 Morgan Stanley helped clients avoid payments of U.S. dividend taxes of more than $300 million. Lehman Brothers estimated that in one year alone, it helped clients avoid U.S. dividend taxes amounting to $115 million. From 2004 to 2007, UBS enabled clients to dodge $62 million in dividend taxes.

As was seen in the FBI’s investigation of Bear Stearns’ executives Matthew Tannin and Ralph Cioffi, as well as in several other recent Wall Street scandals, emails are at the center of the Senate Committee’s probe over dividend tax dodging.

As reported Sept. 11, 2008 in The New York Times, the Committee’s report cites an internal e-mail message in which an employee from Lehman Brothers refers to Microsoft’s announcement of a special dividend as “the cash register is opening!” A senior Lehman official is then quoted as saying, “Outstanding. Let’s drain every last penny out of this [market] opportunity.”

Jefferson County At A Stand Still

Alabama's Jefferson County on Monday signed off on a stand-still agreement, clearing the way for creditors, the state's governor and other negotiators to hammer out a restructuring of $3.2 billion of county sewer debt and possibly avert bankruptcy.

A Chapter 9 municipal bankruptcy filing by Jefferson County, which is home to Alabama's most populous city, would be the biggest by a U.S. local government since Orange County, California, filed for protection in December 1994.

On Monday, the Jefferson County Commission voted by five to zero to accept a stand-still, or forbearance, agreement that will run until Sept. 30 and delay payments on debt and related interest-rate swaps.

The last forbearance against possible defaults by the county ran out Aug. 29, when the governor said creditors, insurers and others would consider a new proposal that appeared to include some elements already rejected during months of bargaining.

Last week, the Birmingham News reported the county wanted debt with lower rates and that a resolution would include no new taxes, no issuance fees and possible sewer fee hikes of as much as 2.85 percent a year.

In addition, interest-rate swap agreements that have aggravated the debts would be eliminated, according to the newspaper.

Officials have declined to comment on the newspaper report and said they expect a response soon from Wall Street on the latest restructuring proposal.

"I think this will be last forbearance," County Commissioner Bettye Fine Collins said in an interview after a special session of the council. "If Gov. Riley can't help bring negotiations to a favorable conclusion, Chapter 9 is the only option."

The county's $3.2 billion of sewer bonds is made up of about $2 billion of auction-rate securities, $850 million of variable-rate demand notes and the remainder in fixed-rate bonds, according to Standard & Poor's Ratings Services analysts. The county so far has only defaulted on the insured variable-rate debt, which is being held by liquidity providers, they said.

Investors Slammed by Fannie Mae and Freddie Mac Seizure

Anywhere from 25 to 30 regional banks who own their preferred shares will be hurt by the Treasury plan, government banking sources say. Wall Street firms say the number is larger. Big banks including JPMorgan Chase and Wells Fargo could be hurt.

Some banks could be battered hard. Losses from Fannie and Freddie preferred stock holdings at Sovereign Bancorp could wipe out up to a year’s worth of profit at the bank, analysts at CreditSights estimate.

A research note from Keefe, Bruyette & Woods identified 38 regional banks, mostly smaller outfits, potentially hurt by the plan. Goldman Sachs says up to 40 banks and financial firms will be hurt. At least eight banks had more than 10% of their capital tied up in the shares, while another six had between 5% and 9%. It’s estimated that $36 bn in preferred holdings in Fannie and Freddie sit on bank balance sheets around the country.

The Federal Deposit Insurance Corp. now has on its watch list 117 problem banks and thrifts, the highest level since the middle of 2003. That’s up from 61 in the year ago period and 90 in the first quarter. The 11th bank of the year, Silver State, failed last week.

Auction Rate Securities Update - BofA to Settle With Some Customers

Today, Massachusetts announced it reached a settlement in principle with Bank of America requiring the company to purchase approximately $4.5 billion in auction rate securities from customers.

Bank of America will offer to repurchase ARS at par from customers during the fourth quarter. The buy-back is limited to retail customers, small business customers with up to $10 million in deposits and charitable entities with up to $25 million in deposits. The settlement leaves other investors including institituional investors out in the cold.

S&P Places Lehman Bros. on Credit Watch Negative

Standard & Poor's says it placed Lehman Brothers' ratings on a negative watch.
The ratings agency cited uncertainty surrounding the investment bank's ability to raise capital amid a "precipitous" decline in its share price. Lehman shares have fallen sharply in recent days amid speculation the bank is running out of options to raise fresh capital to shore up its balance sheet.

The negative watch means there is a 50 percent chance Lehman's ratings will be cut in the next three months.

The New York-based bank carries an investment-grade long-term counterparty rating of "A." Its short-term counterparty credit rating is "A-1."

Shares of Lehman fell $4.71, or 33.3 percent, to $9.44.

Issuers Left in Debt After Auction Rate Securities Settlements

Many issuers of auction-rate bonds have been left in a bind after the collapse of the auction-rate securities market .With no buyers for auction-rate securities - and unwilling to wait for the federal government or regulators to fix the liquidity crisis - their only alternative is to exit the auction market and replace the auction-rate bonds with lower cost and less volatile debt.

And that can be a pricey endeavor. From Indiana to California to New York, issuers of auction bonds are encountering sky-high costs and countless headaches as they try to put the auction-rate securities debacle behind them. In total, issuers have had to pay an extra $2 billion in interest costs following the collapse of the auction market in February.

Making matters even worse: These same borrowers may be on the hook for billions of more dollars in refinancing fees to convert their auction-rate bonds - money that in most cases will go to the very same Wall Street institutions that caused all of their problems in the first place by pulling out of the auction-rate market in April of 2008.

As reported Sept. 9, 2008 on Bloomberg.com, the biggest state issuer of auction rate debt is New York State, with $4 billion in auction-rate bonds. To date, that state has spent $138 million to rid itself of the securities. One of its unexpected costs in dumping the auction bonds was $101 million to repay borrowings by the state Dormitory Authority on behalf of the City University of New York. Those are funds that could have gone toward providing preschool classes for more than 30,000 children, according to the article.

But that’s just the beginning. Total expenses for New York to covert its auction bonds into other forms of financing will climb to $340 million or more, according the Bloomberg article.

Based on Bloomberg data, states, cities, hospitals, and other municipal borrowers have now refinanced or plan to refinance approximately $104 billion of their $166 billion in auction-rate debt, which amounts to 62% of all auction-rate bonds.

When all is said and done, the final bill for replacing the $166 billion in auction rate debt could reach upwards of $7 billion, which does not include extra interest costs, according to Bloomberg.

As of August 2008, eight Wall Street banks - Citigroup, Morgan Stanley, JPMorgan Chase, Wachovia, Deutsche Bank AG, Merrill Lynch, Bank of America and Goldman Sachs - have agreed to buy back more than $50 billion of auction-rate securities from retail investors and settle claims of misleading investors about the liquidity risks of the securities. As part of the settlements, issuers of the auction bonds will be reimbursed refinancing fees on bonds sold after Aug. 1, 2007 and replaced after Feb. 11. 2008 That covers only about 1 percent of public-sector borrowings, according to Bloomberg.

Even more disturbing to issuers: When they do pay a bank refinancing fees for converting their auction-rate bonds, they simultaneously reduce that institution’s losses on the very securities that state regulators forced them to buy back. In the end, replacing auction-rate debt has become an expensive, unpleasant and arduous process for many issuers of auction-rate bonds. Not only is it creating financial havoc on already strained state budgets for some public-sector borrowers, but it also means numerous worthwhile and needed public projects must be placed on the backburner for years to come.

Auction-rate securities are now planned to take center stage at a hearing held by the U.S. House Financial Services Committee On Sept. 18, 2009. The Committee plans to examine the actions of regulators and investment banks and their possible connection to the collapse of the $330 billion auction-rate securities market in February of 2008.

Fannie Mae and Freddie Mac Seizure Triggers Massive Credit Default Swap Default

One of the largest defaults in the history of the $62,000bn credit derivatives market has been triggered by the US government’s seizure of Fannie Mae and Freddie Mac, raising questions about how dealers will unwind billions of dollars worth of contracts.

Although the $1,600bn of debt issued by the troubled mortgage groups is regarded as safe after the US government’s move to take control of the companies, their move into “conservatorship” counts as the equivalent of a bankruptcy in the credit
derivatives market.

This triggers a default on credit default swaps – instruments that provide a form of insurance on fixed-income assets. Dealers in the market are now working to settle these contracts.

The exact amount of CDS on Fannie Mae and Freddie Mac are not known, reflecting the private nature of the market, but they are part of widely traded indices and the amounts are likely to be significant. Analysts at Lehman Brothers said: “There is likely to be a considerable amount of notional protection outstanding.”

The industry body, International Swaps and Derivatives Association, said on Monday it would launch a protocol to facilitate settlement of credit derivative trades involving Fannie Mae and Freddie Mac and would publish further details in due course.

Class Action Filed Against Fannie Mae After Government Seizure

Fannie Mae Chairman Stephen Ashley, ex-Chief Executive Officer Daniel Mudd and two other former executives were accused in a shareholder lawsuit of misleading investors about the mortgage company's finances.

The suit, which was filed yesterday in Manhattan federal court by investor John Genovese, seeks class-action, or group, status and unspecified damages. It alleges securities fraud violations.

The U.S. government seized control of Fannie Mae and Freddie Mac Sept. 7, after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market. Fannie tumbled 90 percent to its lowest since 1982 in New York Stock Exchange composite trading yesterday.

Genovese claims in the lawsuit the executives misled investors from November 2007 to Sept. 5 about whether Fannie had adequate capital. The lawsuit doesn't name the Washington-based company.

"Defendants failed to properly account for the company's impaired investments, as doing so would have negatively affected Fannie Mae's net worth," according to the complaint.

The other defendants are former Chief Financial Officer Stephen Swad and ex-Chief Business Officer Robert J. Levin. Mudd was replaced as part of Paulson's plan and will remain as a consultant in the transition period.

The government takeovers bring Fannie, formed after the Great Depression and spun off in 1968, and Freddie, created in 1970, back under the government's fold. It's the biggest step yet in officials' efforts to grapple with a yearlong credit crisis that has caused more than $500 billion of losses and writedowns.

Washington Mutual CEO Terminated

Washington Mutual, the country’s biggest savings and loan, said Monday morning that Alan H. Fishman has been appointed chief executive, succeeding Kerry K. Killinger, who had been forced out after leading the company for 18 years.

Until 2007, Mr. Fishman, 62, was president and chief operating officer of Sovereign Bank. He joined Sovereign through its 2006 acquisition of Independence Community Bank, which served the New York area, where he had been president and chief executive since 2001. He was widely praised for getting a top-dollar price for Independence.

Mr. Killinger had built Washington Mutual into one of the nation’s biggest financial institutions through a series of acquisitions. But his failure to properly integrate those deals and manage the growing losses from subprime mortgages and credit card loans proved to be his undoing.

Auction Rate Securities Mess Continues

Some investments need a plain- language warning sticker that you find on a stepladder or a crib.

Caution was lacking for auction-rate securities, complex vehicles that were sold by brokers to institutions and individuals. They were bonds or preferred stocks that had interest rates periodically reset through auctions, which failed after the subprime-market meltdown.

Why did individual investors get the idea that these securities were liquid cash equivalents like money-market funds? The disclosure from brokers wasn't adequate.
The $330 billion auction market for these securities collapsed late last year and investors couldn't cash out.

What went wrong and how did these troubled investments end up in the hands of individuals? Which regulator neglected to check that folks like Dibbell were fully informed of the risks of these securities? Clearly there wasn't enough disclosure since retail investors bought about $165 billion of these vehicles.

"Based on the hundreds of complaints received, investors were not informed of the liquidity risks and received little disclosure," said Karen Tyler, president of the North American Securities Administrators Association, a state regulators group. "They were marketed as a safe, money-market cash equivalent."

Now regulators, led by de facto federal securities cops, New York Attorney General Andrew Cuomo and state agencies, are inspecting about 40 brokerage firms to see if they gave ample warning to their clients on auction-rate risks.

So far, state and federal regulators have reached settlements with eight major banks and broker-dealers to buy back more than $35 billion of the securities from investors.

The firms have been fined more than $522 million, paling in comparison with the $5 billion in penalties for the mutual-fund late-trading scandal in 2003.

Small investors seemed to be the last to find out about auction-rate pitfalls even though it was known that there were significant conflicts with these securities five years ago.

The Securities and Exchange Commission cited problems in this market going back to 2003. After a probe, the agency fined 15 firms more than $13 million combined in May 2006, and issued cease-and-desist orders, citing ``violative practices.''

JPMorgan Sued Over Alabama County Sewer-Debt Woes

JPMorgan Chase & Co. and 11 other firms involved in the sale of $3.2 billion in bonds and derivatives were sued by a group alleging that corruption led to transactions that forced Jefferson County, Alabama, to the brink of bankruptcy.

The lawsuit is at least the second filed by Alabama residents since interest rates on the county's sewer debt soared this year, creating a fiscal crisis that may force higher taxes and fees.

Citizens for Sewer Accountability and two county residents filed the action on behalf of the state of Alabama on Aug. 28 in Circuit Court in Birmingham, the Jefferson County seat, according to a press release from Law One Group, representing the plaintiffs. The suit alleges Larry Langford, the former commission president and current Birmingham mayor, received payments to ensure that the bond sales would occur.

Jefferson County commissioners last week voted to prepare a bankruptcy filing should they fail to reach agreement with JPMorgan and other creditors to refinance the debt.

Spiraling interest bills have boosted the cost of running the sewer system to $460 million a year, more than twice the $190 million it collects in revenue, and county officials say they can't raise sewer rates enough to cover the bills.

The crisis arose because more than $3 billion of the obligations, including $2.2 billion of so-called auction-rate debt, have interest rates that reset frequently, a strategy intended to hold down costs. That backfired when fallout from the worldwide credit crisis pushed the county's rates as high as 10 percent. More than $5 billion of interest-rate swaps also prevented the county from refinancing without paying fees to cancel the arrangement.

Creditors on Aug. 29 agreed to give the county a month to develop a plan to avoid bankruptcy.

Auction Rate Securities Probe Leads Bank of America to Cut

In addition to Citigroup, other banks including UBS, JPMorgan have agreed to cut deals with state and federal regulators and resolve investigations into the alleged mishandling of auction rate securities sales. Now it seems that Bank of America may be following suit.

On Sept. 3, 2008 Massachusetts Secretary of State William Galvin said Bank of America, the nation’s second-largest bank, must either reach an agreement with state regulators or be prepared to face legal action. On Sept. 4, 2008 New York Attorney General Andrew Cuomo followed up on Galvin’s edict, serving subpoenas to eight Bank of America executives as part of his six-month investigation on how Wall Street’s biggest banks sold auction rate securities to investors.

So far, eight Wall Street heavyweights - UBS, Morgan Stanley, Citigroup, JPMorgan Chase, Wachovia, Merrill Lynch, Goldman Sachs and Deutsche Bank - have agreed to settle claims that they marketed auction rate securities as cash-like alternatives to investors. In addition to buying back nearly $50 billion of the securities from retail investors, the banks also must pay fines totaling more than $500 million to state and federal regulators.

However, the New York attorney general says any settlements agreed to thus far do not cover any possible misconduct by individual brokers. Meanwhile, two former Credit Suisse Group AG brokers were formally charged with violating securities laws and fraudulently selling subprime mortgages connected to auction rate securities to corporate clients.

Following the New York attorney general’s statement, Bloomberg.com on September 5, 2008 reported that Julian Tzolov and Eric Butler were charged on for falsely representing various securities to investors as backed by federally guaranteed student loans and safe alternatives to cash or money market funds.

Credit Suisse Brokers Chard in Subprime Fraud Case

In an indictment unsealed in federal court in Brooklyn, N.Y., the two former Credit Suisse Securities brokers were charged with deceiving customers in a bid to pump up their sales commissions. The charges against Julian Tzolov, 35, and Eric Butler, 36, were announced by U.S. Attorney Benton Campbell in Brooklyn.

They are charged with securities fraud, wire fraud and conspiracy, carrying maximum total sentences of 25 years and up to $5.25 million in criminal fines.

The Securities and Exchange Commission filed a related civil lawsuit in federal court in Manhattan, alleging that Tzolov and Butler led corporate customers to believe that auction-rate securities being purchased in their accounts were backed by federally-guaranteed student loans and were safe like cash. The SEC is seeking unspecified restitution and civil fines against the brokers, who were suspended by Credit Suisse last year.

The securities actually were backed by subprime mortgages, collateralized debt obligations and other high-risk investments, the authorities said. Because of their higher risk, they brought a higher yield and much larger commissions for the brokers.