Moody's Corp. directors and officers were sued by shareholders and accused of deliberately overrating asset-backed securities at the world's second-largest credit-rating company.
The Louisiana Municipal Police Employees Retirement System filed the so-called derivative suit yesterday in New York on behalf of the company, naming Moody's as a nominal defendant
The pension system claimed that, as a result of misconduct, "trillions of dollars of highly risky securities were sold to investors that should never have seen the light of day."
U.S. House investigators last week released e-mails saying Moody's employees told executives that issuing dubious ratings to mortgage-backed securities made it appear they were incompetent or "sold our soul to the devil for revenue."
Friday, October 31, 2008
Thursday, October 30, 2008
BofA Sues Bear Stearns For Hedge Fund Blow Up
Bank of America Corp on Wednesday sued Bear Stearns and two former hedge fund managers who were indicted in June in the first major federal case stemming from the subprime mortgage crisis.
The lawsuit in U.S. District Court in Manhattan accused Bear Stearns, which was sold in March to JPMorgan Chase & Co., and three of its officers of "egregious misconduct" in a $4 billion transaction structured and marketed by Bank of America and other financing transactions in 2007.
It named Ralph Cioffi and Matthew Tannin, the former managers who were charged on June 19 with conspiracy and securities fraud related to the demise of their two funds. The pair were also charged by the Securities and Exchange Commission.
In May 2007, Bank of America, at the request of Bear Stearns Asset Management, structured and marketed a $4 billion transaction known as a "CDO-squared", the suit said. A CDO is a collateralized debt obligation, and the transaction involved mortgage-backed assets pooled and structured to support the sale of certain securities.
The lawsuit said that over several months Bear Stearns and its employees, including the three named in the complaint, concealed substantial withdrawal requests from Bank of America, hedge fund investors and other creditors.
The lawsuit in U.S. District Court in Manhattan accused Bear Stearns, which was sold in March to JPMorgan Chase & Co., and three of its officers of "egregious misconduct" in a $4 billion transaction structured and marketed by Bank of America and other financing transactions in 2007.
It named Ralph Cioffi and Matthew Tannin, the former managers who were charged on June 19 with conspiracy and securities fraud related to the demise of their two funds. The pair were also charged by the Securities and Exchange Commission.
In May 2007, Bank of America, at the request of Bear Stearns Asset Management, structured and marketed a $4 billion transaction known as a "CDO-squared", the suit said. A CDO is a collateralized debt obligation, and the transaction involved mortgage-backed assets pooled and structured to support the sale of certain securities.
The lawsuit said that over several months Bear Stearns and its employees, including the three named in the complaint, concealed substantial withdrawal requests from Bank of America, hedge fund investors and other creditors.
Wednesday, October 29, 2008
Bayou Hedge Fund Founder Sentencing Delayed
A plea hearing for Samuel Israel, the convicted founder of hedge-fund firm Bayou Group LLC charged with bail jumping, was delayed until next year while he undergoes 90 days of medical and psychological evaluation, the U.S. said.
Israel is accused of faking his suicide and fleeing the day he was to begin a 20-year sentence for his federal conviction in a $400 million fraud. His last plea hearing on Sept. 16 was delayed so he could continue treatment for drug abuse.
"The judge ordered 90 days of medical evaluation rather than him pleading today," said Herb Hadad, a spokesman for Manhattan U.S. Attorney Michael Garcia in White Plains, New York, federal court. Last month, U.S. District Judge Kenneth Karas barred Israel from entering a plea for the second time. In August, the judge said Israel couldn't enter a plea after the hedge fund manager claimed his addiction to methadone may have impaired his judgment. Israel said at the time his ability to understand the proceedings was "60 to 70 percent."
Israel is accused of faking his suicide and fleeing the day he was to begin a 20-year sentence for his federal conviction in a $400 million fraud. His last plea hearing on Sept. 16 was delayed so he could continue treatment for drug abuse.
"The judge ordered 90 days of medical evaluation rather than him pleading today," said Herb Hadad, a spokesman for Manhattan U.S. Attorney Michael Garcia in White Plains, New York, federal court. Last month, U.S. District Judge Kenneth Karas barred Israel from entering a plea for the second time. In August, the judge said Israel couldn't enter a plea after the hedge fund manager claimed his addiction to methadone may have impaired his judgment. Israel said at the time his ability to understand the proceedings was "60 to 70 percent."
Friday, October 24, 2008
Schwab Yield Plus and Other Toxic Cash Funds
Funds that have stumbled badly:
Schwab YieldPlus
lost a staggering 33.7% of its value
Fidelity Ultra-Short Bond
fell 10.5%
SSgA YieldPlus and Evergreen Ultra Short Opportunities have been liquidated, and more are expected to close.
In an effort to boost yields many of these portfolios invested in securities that were backed by subprime mortgages. And when the subprime market imploded last year, the funds began sinking into the red.
Schwab YieldPlus
lost a staggering 33.7% of its value
Fidelity Ultra-Short Bond
fell 10.5%
SSgA YieldPlus and Evergreen Ultra Short Opportunities have been liquidated, and more are expected to close.
In an effort to boost yields many of these portfolios invested in securities that were backed by subprime mortgages. And when the subprime market imploded last year, the funds began sinking into the red.
Thursday, October 23, 2008
TD Ameritrate - Reserve Yield Plus Frozen
TD Ameritrade, which reports fourth-quarter results Oct. 23, also faces nervous investors.
The broker's decision to use its own money to prop up the Reserve Primary Fund is rippling through the rest of the sector as clients of other firms worry about money-market redemptions. Some brokers may take similar steps if clients' funds in outside money-market funds are threatened.
In the meantime, investors in Reserve Yield Plus, another money-market fund run by Reserve Management, have been unable to withdraw money due to solvency issues. TD Ameritrade customers hold a large portion of Yield Plus shares. And TD Ameritrade is yet to cover the losses in this fund as it did for the larger Primary Fund.
The company said in June that a rate cut would hurt profit. Shares fell 7% on Thursday after the Fed and six other world banks cut rates to encourage lending. For the moment, the Treasury Department's recent move to insure money-market funds is helping allay investor fears, says Zecco's Dalporto.
The broker's decision to use its own money to prop up the Reserve Primary Fund is rippling through the rest of the sector as clients of other firms worry about money-market redemptions. Some brokers may take similar steps if clients' funds in outside money-market funds are threatened.
In the meantime, investors in Reserve Yield Plus, another money-market fund run by Reserve Management, have been unable to withdraw money due to solvency issues. TD Ameritrade customers hold a large portion of Yield Plus shares. And TD Ameritrade is yet to cover the losses in this fund as it did for the larger Primary Fund.
The company said in June that a rate cut would hurt profit. Shares fell 7% on Thursday after the Fed and six other world banks cut rates to encourage lending. For the moment, the Treasury Department's recent move to insure money-market funds is helping allay investor fears, says Zecco's Dalporto.
Wednesday, October 22, 2008
Ex-Bear Stearns Manager Interfered With Probe, Prosecutor Says
The implosion of New York-based Bear Stearns helped trigger the credit crunch and the eventual collapse and sale of the investment bank to JPMorgan Chase & Co. The government has been investigating possible fraud by banks and mortgage firms whose investments in subprime loans and securities plunged in value, causing losses that now total almost $450 billion.
At a court hearing Friday in Brooklyn, New York, for the former managers of Bear Stearns, Ralph Cioffi, 52, and Matthew Tannin, 46, Assistant U.S. Attorney Patrick Sinclair said prosecutors were “aware of instances where the defendant here has attempted to influence the statements of potential witnesses in the course of the Bear Stearns internal investigation.” Sinclair wouldn't identify which of the two former managers he was referring to, when asked after the hearing.
Sinclair argued for postponing the SEC case, saying it could hamper prosecutors and investigators in the criminal proceeding. He repeated the government's intention to file additional criminal charges by December.
“We know how much of a diversion of time that can be,” Sinclair said, referring to disputes over evidence in civil cases. He said this case is especially complicated because it involves “discovery from some of the largest financial institutions undergoing the most major crisis that they have ever faced before.”
Lawyers for both men yesterday urged U.S. District Court Judge Block to let the civil case go forward. They noted that no trial date has been set in the criminal case. “The SEC has chosen to bring its case, which should mean that it's prepared to go forward,” Susan Brune, one of Tannin’s lawyers, told Block. “The government has been investigating this case for a year. They have had a massive ability to get unilateral access to all of the witnesses.”
Marc Weinstein, a lawyer for Cioffi, said the government hasn't turned over any evidence related to Barclays PLC, the London-based bank referenced anonymously in SEC charging documents as a victim of the defendants' scheme. “There are allegations in here that our clients hoodwinked a major financial global institution, yet they don't have a single page to turn over directly from their file,” he said.
Barclays, the U.K.'s third-biggest bank, claimed in a lawsuit it filed last year in federal court in New York that it was misled by Cioffi and Tannin about the health of Bear Stearns's so-called enhanced fund managed.
Cioffi, now with Tenafly, New Jersey-based RCAM Capital LP, left Bear Stearns amid inquiries by prosecutors and the SEC into whether he withdrew $2 million from the funds four months before their collapse in July while at the same time persuading Barclays to double its stake.
The former hedge-fund manager was charged with one count of insider trading based on the $2 million redemption, prosecutors said. Both he and Tannin, who have pleaded not guilty, face as long as 20 years in prison if convicted of conspiracy. Cioffi faces an additional 20-year term if found guilty of insider trading. Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer.
The funds, which put most of their assets in subprime mortgage-related securities, failed in June 2007 when prices for collateralized-debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt.
In March, three months after Cioffi left Bear Stearns, the 85-year-old firm was purchased by New York-based JPMorgan for about $1.4 billion in stock. Bear Stearns, worth almost $25 billion in January 2007, was pushed to the brink of insolvency when speculation about a cash-shortage prompted customers and lenders to flee.
At a court hearing Friday in Brooklyn, New York, for the former managers of Bear Stearns, Ralph Cioffi, 52, and Matthew Tannin, 46, Assistant U.S. Attorney Patrick Sinclair said prosecutors were “aware of instances where the defendant here has attempted to influence the statements of potential witnesses in the course of the Bear Stearns internal investigation.” Sinclair wouldn't identify which of the two former managers he was referring to, when asked after the hearing.
Sinclair argued for postponing the SEC case, saying it could hamper prosecutors and investigators in the criminal proceeding. He repeated the government's intention to file additional criminal charges by December.
“We know how much of a diversion of time that can be,” Sinclair said, referring to disputes over evidence in civil cases. He said this case is especially complicated because it involves “discovery from some of the largest financial institutions undergoing the most major crisis that they have ever faced before.”
Lawyers for both men yesterday urged U.S. District Court Judge Block to let the civil case go forward. They noted that no trial date has been set in the criminal case. “The SEC has chosen to bring its case, which should mean that it's prepared to go forward,” Susan Brune, one of Tannin’s lawyers, told Block. “The government has been investigating this case for a year. They have had a massive ability to get unilateral access to all of the witnesses.”
Marc Weinstein, a lawyer for Cioffi, said the government hasn't turned over any evidence related to Barclays PLC, the London-based bank referenced anonymously in SEC charging documents as a victim of the defendants' scheme. “There are allegations in here that our clients hoodwinked a major financial global institution, yet they don't have a single page to turn over directly from their file,” he said.
Barclays, the U.K.'s third-biggest bank, claimed in a lawsuit it filed last year in federal court in New York that it was misled by Cioffi and Tannin about the health of Bear Stearns's so-called enhanced fund managed.
Cioffi, now with Tenafly, New Jersey-based RCAM Capital LP, left Bear Stearns amid inquiries by prosecutors and the SEC into whether he withdrew $2 million from the funds four months before their collapse in July while at the same time persuading Barclays to double its stake.
The former hedge-fund manager was charged with one count of insider trading based on the $2 million redemption, prosecutors said. Both he and Tannin, who have pleaded not guilty, face as long as 20 years in prison if convicted of conspiracy. Cioffi faces an additional 20-year term if found guilty of insider trading. Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer.
The funds, which put most of their assets in subprime mortgage-related securities, failed in June 2007 when prices for collateralized-debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt.
In March, three months after Cioffi left Bear Stearns, the 85-year-old firm was purchased by New York-based JPMorgan for about $1.4 billion in stock. Bear Stearns, worth almost $25 billion in January 2007, was pushed to the brink of insolvency when speculation about a cash-shortage prompted customers and lenders to flee.
Schwab Yield Plus: Charles Schwab Stumbles
Charles Schwab Corp's (SCHW.O) third-quarter profit beat expectations, but shares of the largest U.S. online brokerage slipped in a tumbling market on Wednesday as investors worried about a declining stable of assets under management.
The revenue Schwab derives from assets was hit by recent market turmoil. However, the company still managed to add new client assets, and the market turmoil also boosted a key trading measure in September.
The company's stock was down 1 percent, outperforming its two closest peers. The shares dropped 10 percent on Tuesday.
Because Schwab's business model relies more heavily than its rivals on asset management, worries persist that its managed assets will drop further along with the market.
The results also included an $8 million charge related to a lawsuit centered on its ultra-short YieldPlus bond funds. The suit, filed this year, claims the company misled investors or omitted information in marketing the funds, which were exposed to subprime mortgages.
The revenue Schwab derives from assets was hit by recent market turmoil. However, the company still managed to add new client assets, and the market turmoil also boosted a key trading measure in September.
The company's stock was down 1 percent, outperforming its two closest peers. The shares dropped 10 percent on Tuesday.
Because Schwab's business model relies more heavily than its rivals on asset management, worries persist that its managed assets will drop further along with the market.
The results also included an $8 million charge related to a lawsuit centered on its ultra-short YieldPlus bond funds. The suit, filed this year, claims the company misled investors or omitted information in marketing the funds, which were exposed to subprime mortgages.
Tuesday, October 21, 2008
Lehman Class Action Filed for Series J Preferred Investors
According to the Complaint, the Prospectus for the Lehman Preferred Stock J contained material misstatements and omissions. Specifically, it is alleged that the representations made in Lehman's Prospectus were materially false and misleading because at the time of the Offering, Lehman was already laboring under several negative factors that were not properly disclosed in the Prospectus, including the failure to set aside adequate allowances to cover Lehman's steadily increasing portfolio of underperforming subprime related products, and to adequately write-down residential and commercial mortgage and real estate assets. At the time, these factors were already causing a material adverse affect on Lehman's operations and led directly to the firm's announcement of September 15, 2008, that it would be seeking protection under the Federal Bankruptcy Code. Lehman would eventually be credited for initiating the largest bankruptcy filing in U.S. history.
The Complaint further alleges that Citigroup and other Defendants could have, and should have, discovered the misstatements and omissions in Lehman's Prospectus prior to its filing with the SEC and distribution to the investing public. As a result of an inadequate due diligence investigation on the part of Citigroup and other Defendants, the underwriters failed to discover the misstatements and omissions in Lehman's Prospectus on the Preferred Stock J.
On September 15, 2008, pursuant to Chapter 11 of the Federal Bankruptcy Code for the Southern District of New York, Lehman voluntarily filed a petition to reorganize the Company. Lehman's bankruptcy became the largest bankruptcy filing in history and essentially wiped out the investment interests of investors of Lehman Preferred Stock J. Due to the issuance of various false and misleading statements, the market price of Lehman Preferred Stock J was artificially inflated.
The Complaint further alleges that Citigroup and other Defendants could have, and should have, discovered the misstatements and omissions in Lehman's Prospectus prior to its filing with the SEC and distribution to the investing public. As a result of an inadequate due diligence investigation on the part of Citigroup and other Defendants, the underwriters failed to discover the misstatements and omissions in Lehman's Prospectus on the Preferred Stock J.
On September 15, 2008, pursuant to Chapter 11 of the Federal Bankruptcy Code for the Southern District of New York, Lehman voluntarily filed a petition to reorganize the Company. Lehman's bankruptcy became the largest bankruptcy filing in history and essentially wiped out the investment interests of investors of Lehman Preferred Stock J. Due to the issuance of various false and misleading statements, the market price of Lehman Preferred Stock J was artificially inflated.
Constant Proportion Debt Obligation - CPDOs
Ratings firms Standard & Poor's and Moody's have already downgraded several synthetic-CDO deals containing or related to Lehman, Washington Mutual and U.S. mortgage companies Fannie Mae and Freddie Mac.
The problems with synthetic CDOs stem in part from the way they were made. In many cases, the banks that created the CDOs stuffed them with companies, such as Lehman and Iceland's Glitnir, that paid the highest possible return for their top-notch credit ratings. That made the CDOs more attractive, but also riskier, because they contained companies that the market perceived as more likely to get into trouble.
Perhaps the weakest link in the market are specialized funds, known as "constant-proportion debt obligations," that work much like synthetic CDOs but with one important difference: They use borrowed money, or leverage, to boost the returns they can provide for investors, a strategy that also magnifies losses.
CPDOs, for example, typically borrowed about $15 for every dollar their investors put in. They also contain safety triggers that force them to get out of their investments if their losses reach a certain level. Analysts estimate that most CPDOs reach those triggers when the cost of default insurance hits about the level where it is now.
Three CPDO funds launched in 2006 by Dutch bank ABN Amro Holding NV have already been forced to liquidate after credit insurance costs spiked and they were downgraded by S&P.
The problems with synthetic CDOs stem in part from the way they were made. In many cases, the banks that created the CDOs stuffed them with companies, such as Lehman and Iceland's Glitnir, that paid the highest possible return for their top-notch credit ratings. That made the CDOs more attractive, but also riskier, because they contained companies that the market perceived as more likely to get into trouble.
Perhaps the weakest link in the market are specialized funds, known as "constant-proportion debt obligations," that work much like synthetic CDOs but with one important difference: They use borrowed money, or leverage, to boost the returns they can provide for investors, a strategy that also magnifies losses.
CPDOs, for example, typically borrowed about $15 for every dollar their investors put in. They also contain safety triggers that force them to get out of their investments if their losses reach a certain level. Analysts estimate that most CPDOs reach those triggers when the cost of default insurance hits about the level where it is now.
Three CPDO funds launched in 2006 by Dutch bank ABN Amro Holding NV have already been forced to liquidate after credit insurance costs spiked and they were downgraded by S&P.
Monday, October 20, 2008
Swiss National Bank to Assist UBS With Subprime Exposure
UBS announced an agreement with the Swiss National Bank (SNB) today to transfer up to $60 billion of currently illiquid securities and other assets from its balance sheet to a separate fund entity.
These assets include $31 billion of primarily cash securities made up of US subprime, US Alt-A, US prime, US commercial mortgage-backed securities and residential mortgage-backed securities, US student loan auction rate certificates and other securities backed by student loans, and US reference-linked note programs.
Here is how the deal will work: UBS will transfer up to $60 billion of assets to a newly-created fund entity and will capitalize the fund with equity of up to $6 billion.
In order to fund its equity contribution, and maintain a strong capital position, UBS can raise CHF 6 billion of new capital in the form of mandatory convertible notes (MCN). The MCN have been fully placed with the Swiss Confederation.
The SNB will finance the fund with a loan of up to $54 billion, secured by the assets of the fund. The SNB will also take over control and ownership of the entity by purchasing the equity for $1. The loan will be non-recourse to UBS, based on no change of control of UBS and will be priced at Libor plus 250 basis points. It will mature in eight years, but the maturity may be extended to 10 or 12 years.
At completion of the transaction, UBS' net exposure in these risk categories will be reduced to nearly zero, according to the bank. The bank will hold residual long positions in these asset classes hedged through existing short positions.
These assets include $31 billion of primarily cash securities made up of US subprime, US Alt-A, US prime, US commercial mortgage-backed securities and residential mortgage-backed securities, US student loan auction rate certificates and other securities backed by student loans, and US reference-linked note programs.
Here is how the deal will work: UBS will transfer up to $60 billion of assets to a newly-created fund entity and will capitalize the fund with equity of up to $6 billion.
In order to fund its equity contribution, and maintain a strong capital position, UBS can raise CHF 6 billion of new capital in the form of mandatory convertible notes (MCN). The MCN have been fully placed with the Swiss Confederation.
The SNB will finance the fund with a loan of up to $54 billion, secured by the assets of the fund. The SNB will also take over control and ownership of the entity by purchasing the equity for $1. The loan will be non-recourse to UBS, based on no change of control of UBS and will be priced at Libor plus 250 basis points. It will mature in eight years, but the maturity may be extended to 10 or 12 years.
At completion of the transaction, UBS' net exposure in these risk categories will be reduced to nearly zero, according to the bank. The bank will hold residual long positions in these asset classes hedged through existing short positions.
FINRA's Single Arbitrator Rule Filing
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-qualified arbitrator to $100,000.
For the text of the rule, click here.
For the text of the rule, click here.
Saturday, October 18, 2008
Lehman Bros. Principal Protected Notes
A brochure pitching $1.84 million of Lehman Brothers Principal Protected Noes sold in August 20078, a month before the firm failed, promised "100 percent principal protection."
Buyers had "uncapped appreciation potential" pegged to gains in the Standard & Poor's 500 Index, the brochure said. In the worst case, they would get back their $1,000-per-note investment in three years. Only the last in a list of 15 risk factors mentioned the biggest danger: "An investment in the notes will be subject to the credit risk of Lehman Brothers."
Lehman's Sept. 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money. The collapse has rattled Wall Street's $114 billion structured-notes business, which Lehman, Merrill Lynch & Co., Morgan Stanley and Goldman Sachs Group Inc., all based in New York, used to raise cheaper funding as the credit crisis drove bond yields higher. About three-fifths of the $68.1 billion sold this year were bought by individual investors, according to data compiled by mtn-i, a London-based firm that tracks the market.
Buyers had "uncapped appreciation potential" pegged to gains in the Standard & Poor's 500 Index, the brochure said. In the worst case, they would get back their $1,000-per-note investment in three years. Only the last in a list of 15 risk factors mentioned the biggest danger: "An investment in the notes will be subject to the credit risk of Lehman Brothers."
Lehman's Sept. 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money. The collapse has rattled Wall Street's $114 billion structured-notes business, which Lehman, Merrill Lynch & Co., Morgan Stanley and Goldman Sachs Group Inc., all based in New York, used to raise cheaper funding as the credit crisis drove bond yields higher. About three-fifths of the $68.1 billion sold this year were bought by individual investors, according to data compiled by mtn-i, a London-based firm that tracks the market.
Friday, October 17, 2008
Reserve Fund Looks to Liquidate
Reserve Management Co. plans to liquidate 14 municipal money-market funds as well as its Reserve Yield Plus Fund, and has applied for some of its funds to participate in the government's guarantee program.
The New York asset manager, which shook the financial world in September with news of its money-market fund loss, said Thursday it would liquidate the assets of Yield Plus, a short-term debt fund designed to act as a complement to money funds as well as those of 14 money-market funds.
Some investors in Yield Plus had complained that they weren't able to withdraw money from the fund.
In a statement Thursday, Reserve Management said it had requested that investors in 21 of its funds be eligible to take part in the Treasury's guarantee program, which aims to support money funds whose shares fall below the hallowed $1-a-share net asset value.
The list included its flagship Primary Fund, which caused a run on money-market funds with the news last month that it had "broken the buck" -- that is, fallen below the industry's $1-a-share standard, largely because of its investments in debt of Lehman Brothers Holdings Inc., which has filed for bankruptcy protection.
The New York asset manager, which shook the financial world in September with news of its money-market fund loss, said Thursday it would liquidate the assets of Yield Plus, a short-term debt fund designed to act as a complement to money funds as well as those of 14 money-market funds.
Some investors in Yield Plus had complained that they weren't able to withdraw money from the fund.
In a statement Thursday, Reserve Management said it had requested that investors in 21 of its funds be eligible to take part in the Treasury's guarantee program, which aims to support money funds whose shares fall below the hallowed $1-a-share net asset value.
The list included its flagship Primary Fund, which caused a run on money-market funds with the news last month that it had "broken the buck" -- that is, fallen below the industry's $1-a-share standard, largely because of its investments in debt of Lehman Brothers Holdings Inc., which has filed for bankruptcy protection.
Thursday, October 16, 2008
$2.8 Billion Third-Quarter Loss for Citigroup
The nation’s second-largest bank by assets, Citigroup announced its 2008 third-quarter net loss of nearly $3 billion. The New York-based bank continues to struggle from exposure to derivatives and bad bets on mortgage-related securities. It is Citigroup’s fourth consecutive quarterly loss.
The banking giant’s latest earnings results pale in comparison to its financial standing for the same period one year ago when it earned $2.2 billion. In addition to its poor third-quarter performance, Citigroup has eliminated 11,000 jobs between the current quarter and the previous one, bringing the total number of layoffs to 23,000 so far this year. On the company’s earnings call Oct. 16, 2008 Gary Crittenden, Citigroup’s chief financial officer, referred to the latest round of layoffs as “right-sizing.”
Citigroup’s dismal earnings follow another recent setback for the bank when it failed to beat out Wells Fargo for ownership of Wachovia Corp. With financial assistance from the Federal Deposit Insurance Corp. (FDIC), Citigroup initially wanted to put up $2 billion, or $1 a share, for Wachovia’s banking operations, with the FDIC taking on some $270 billion of Wachovia’s most troubled assets.
The deal was thwarted, however, when Wells Fargo upped the ante and agreed to buy all of Wachovia’s operations for $15 billion, or $7 a share, and without help from the FDIC. The deal was confirmed by the Federal Reserve on Oct. 14, 2008.
As is the case for the majority of financial institutions, 2008 has been a rocky year for Citigroup:
• Citigroup’s losses over the past 12 months have surpassed $20 billion.
• The company has written down the value of investments tied to bad mortgages and other toxic debt by more than $50 billion;
• In May, Citigroup’s CEO announced that the company must rid itself of at least $500 billion in assets in order to get out of businesses tied to risky mortgages and other low-quality debt;
• In August, Citigroup - which is the largest underwriter of auction-rate securities - agreed to buy back roughly $7.5 billion worth of the securities it sold to some 40,000 retail investors. The bank also paid a $50 million civil penalty to the State of New York and a $50 million penalty to the North American Securities Administrators Association; and
• Legal issues continue to heat up from angry investors in Citigroup’s ASTA and MAT Funds. Both the ASTA Fund and MAT Fund were highly leveraged
municipal bond funds that borrowed approximately $8 for every $1 raised.
Ultimately, the funds suffered massive losses, with both funds losing approximately 90% of their original value. Investors, meanwhile, were repeatedly told by Citigroup that the funds would rebound. Among other things, investors claim Citigroup did not disclose accurate and true information about the funds and their potential risks and failed to institute appropriate risk management practices to prevent the funds’ management from investing in risky and highly speculative investments.
Citigroup has a long road to haul before its financial issues turn the corner. The newly announced plan by the federal government to inject capital into U.S. banks may help. Citigroup - as well as JPMorgan Chase, Bank of America Corp. and Wells Fargo - is set to receive $25 billion.
The banking giant’s latest earnings results pale in comparison to its financial standing for the same period one year ago when it earned $2.2 billion. In addition to its poor third-quarter performance, Citigroup has eliminated 11,000 jobs between the current quarter and the previous one, bringing the total number of layoffs to 23,000 so far this year. On the company’s earnings call Oct. 16, 2008 Gary Crittenden, Citigroup’s chief financial officer, referred to the latest round of layoffs as “right-sizing.”
Citigroup’s dismal earnings follow another recent setback for the bank when it failed to beat out Wells Fargo for ownership of Wachovia Corp. With financial assistance from the Federal Deposit Insurance Corp. (FDIC), Citigroup initially wanted to put up $2 billion, or $1 a share, for Wachovia’s banking operations, with the FDIC taking on some $270 billion of Wachovia’s most troubled assets.
The deal was thwarted, however, when Wells Fargo upped the ante and agreed to buy all of Wachovia’s operations for $15 billion, or $7 a share, and without help from the FDIC. The deal was confirmed by the Federal Reserve on Oct. 14, 2008.
As is the case for the majority of financial institutions, 2008 has been a rocky year for Citigroup:
• Citigroup’s losses over the past 12 months have surpassed $20 billion.
• The company has written down the value of investments tied to bad mortgages and other toxic debt by more than $50 billion;
• In May, Citigroup’s CEO announced that the company must rid itself of at least $500 billion in assets in order to get out of businesses tied to risky mortgages and other low-quality debt;
• In August, Citigroup - which is the largest underwriter of auction-rate securities - agreed to buy back roughly $7.5 billion worth of the securities it sold to some 40,000 retail investors. The bank also paid a $50 million civil penalty to the State of New York and a $50 million penalty to the North American Securities Administrators Association; and
• Legal issues continue to heat up from angry investors in Citigroup’s ASTA and MAT Funds. Both the ASTA Fund and MAT Fund were highly leveraged
municipal bond funds that borrowed approximately $8 for every $1 raised.
Ultimately, the funds suffered massive losses, with both funds losing approximately 90% of their original value. Investors, meanwhile, were repeatedly told by Citigroup that the funds would rebound. Among other things, investors claim Citigroup did not disclose accurate and true information about the funds and their potential risks and failed to institute appropriate risk management practices to prevent the funds’ management from investing in risky and highly speculative investments.
Citigroup has a long road to haul before its financial issues turn the corner. The newly announced plan by the federal government to inject capital into U.S. banks may help. Citigroup - as well as JPMorgan Chase, Bank of America Corp. and Wells Fargo - is set to receive $25 billion.
ARS Settlements too Complex for Investors ?
Just when investors thought financial relief was on the way over their auctionrate securities (ARS) nightmares, yet another headache may be right around the corner. Case in point: A recent filing by UBS with the Securities and Exchange Commission (SEC), which sheds light on the convoluted and highly technical process attached to the settlement offers made by brokerage and financial firms with ARS investors.
As background, UBS is one of the two largest participants in the auction-rate securities market. In late April 2008, the Swiss-based banking giant became the focus of an investigation by the Securities and Exchange Commission (SEC), as well as state securities regulators over its marketing and sales of auction-rate securities. During the course of the investigations, evidence was uncovered showing UBS intentionally made material misrepresentations and omissions to customers in connection to auction-rate securities.
The SEC’s investigation also revealed that until the auction-rate market seized up in February 2008, UBS marketed auction-rate securities to clients as safe and highly liquid investments, characterizing the instruments as similar to money-market funds. UBS further described auction-rate securities as “cash alternatives.”
At the same time, UBS kept investors in the dark about the liquidity and investment risks of auction-rate securities, as well as neglected to warn them that those risks would increase significantly when UBS and other firms decided to no longer support the auction market in late 2007 and early 2008.
On Aug. 8, 2008 the SEC’s Enforcement Division, the New York Attorney General and Massachusetts and Texas securities authorities announced settlements-inprinciple with UBS, in which the firm agreed to purchase $19.4 billion of the controversial bonds from retail customers, small businesses, and charitable organizations at 100 cents on the dollar. Under the terms of the settlement, UBS customers with less than $1 million in auction-rate securities would get their money back by Oct. 31, while others were to receive refunds by the end of the year. The firm also was fined $150 million.
For investors who had been misled by UBS about the financial risks of auctionrate securities - and who subsequently lost their life savings because of that product misrepresentation - the buy-back news appeared to be a win for them. Now, however, it seems their headaches may be just beginning. On Oct. 7, 2008, UBS filed what’s known as a “Form F-3 Registration Statement” with the SEC as part of the legal process in connection with its auction-rate securities settlement with investors. According to the filing, each auction-rate securities investor will receive a prospectus from UBS outlining the mechanism in which the settlements are to be implemented.
According to the prospectus - which is overly complicated and written in legalese - auction-rate securities investors will have the opportunity to exchange their auction-rate securities for one or more of seven series of auction-rate securities rights, each of which has its own terms and conditions. Some of the terms in UBS’ auction-rate securities settlement will come as a surprise to investors. For instance:
• Perhaps most important, the prospectus clearly states that any settlement with investors is contingent on UBS’ financial resources and that, “UBS AG may not have sufficient financial resources to satisfy its obligations under the ARSrights.”
• In many cases, investors will not receive immediate payment for their auctionrate securities. Instead, they will receive “auction-rate securities rights.” These auction-rate securities rights expire between early Jan. 2011 and early July 2012 (depending on the series). Based on information in the prospectus, investors will receive a payment at par when UBS sells or disposes of the auction-rate securities received from the investor. Apparently this will happen periodically over the next two-plus years.
• If a holder purchased auction-rate securities from UBS between Oct. 1, 2007, to Feb. 13, 2008 but transferred those auction-rate securities to another firm before Feb. 13, 2008, the investor must then transfer the auction-rate securities back to the investor’s original UBS account in order to accept the offer and become eligible to receive auction-rate securities rights.
• Investors will have approximately 30 days to review the prospectus from UBS and decide whether to accept its offer.
• Accepting the offer will require investors to effectively forego any legal claims against UBS, except for claims regarding consequential damages that are subject to a special arbitration process.
• Investors may be offered auction-rate securities rights in different series, which means they will be required to complete a whole new set of forms in order to receive any settlement from UBS.
The bottom line: Investors who have been sold auction-rate securities by UBS in the past and who now agree to the company’s terms for a settlement may be in for a long and tedious process in trying to collect their money.
For them and other ARS investors, this summer’s news of ARS settlements by Wall Street banks over their mishandling of auction-rate securities is by no means an end to investors’ financial turmoil.
As background, UBS is one of the two largest participants in the auction-rate securities market. In late April 2008, the Swiss-based banking giant became the focus of an investigation by the Securities and Exchange Commission (SEC), as well as state securities regulators over its marketing and sales of auction-rate securities. During the course of the investigations, evidence was uncovered showing UBS intentionally made material misrepresentations and omissions to customers in connection to auction-rate securities.
The SEC’s investigation also revealed that until the auction-rate market seized up in February 2008, UBS marketed auction-rate securities to clients as safe and highly liquid investments, characterizing the instruments as similar to money-market funds. UBS further described auction-rate securities as “cash alternatives.”
At the same time, UBS kept investors in the dark about the liquidity and investment risks of auction-rate securities, as well as neglected to warn them that those risks would increase significantly when UBS and other firms decided to no longer support the auction market in late 2007 and early 2008.
On Aug. 8, 2008 the SEC’s Enforcement Division, the New York Attorney General and Massachusetts and Texas securities authorities announced settlements-inprinciple with UBS, in which the firm agreed to purchase $19.4 billion of the controversial bonds from retail customers, small businesses, and charitable organizations at 100 cents on the dollar. Under the terms of the settlement, UBS customers with less than $1 million in auction-rate securities would get their money back by Oct. 31, while others were to receive refunds by the end of the year. The firm also was fined $150 million.
For investors who had been misled by UBS about the financial risks of auctionrate securities - and who subsequently lost their life savings because of that product misrepresentation - the buy-back news appeared to be a win for them. Now, however, it seems their headaches may be just beginning. On Oct. 7, 2008, UBS filed what’s known as a “Form F-3 Registration Statement” with the SEC as part of the legal process in connection with its auction-rate securities settlement with investors. According to the filing, each auction-rate securities investor will receive a prospectus from UBS outlining the mechanism in which the settlements are to be implemented.
According to the prospectus - which is overly complicated and written in legalese - auction-rate securities investors will have the opportunity to exchange their auction-rate securities for one or more of seven series of auction-rate securities rights, each of which has its own terms and conditions. Some of the terms in UBS’ auction-rate securities settlement will come as a surprise to investors. For instance:
• Perhaps most important, the prospectus clearly states that any settlement with investors is contingent on UBS’ financial resources and that, “UBS AG may not have sufficient financial resources to satisfy its obligations under the ARSrights.”
• In many cases, investors will not receive immediate payment for their auctionrate securities. Instead, they will receive “auction-rate securities rights.” These auction-rate securities rights expire between early Jan. 2011 and early July 2012 (depending on the series). Based on information in the prospectus, investors will receive a payment at par when UBS sells or disposes of the auction-rate securities received from the investor. Apparently this will happen periodically over the next two-plus years.
• If a holder purchased auction-rate securities from UBS between Oct. 1, 2007, to Feb. 13, 2008 but transferred those auction-rate securities to another firm before Feb. 13, 2008, the investor must then transfer the auction-rate securities back to the investor’s original UBS account in order to accept the offer and become eligible to receive auction-rate securities rights.
• Investors will have approximately 30 days to review the prospectus from UBS and decide whether to accept its offer.
• Accepting the offer will require investors to effectively forego any legal claims against UBS, except for claims regarding consequential damages that are subject to a special arbitration process.
• Investors may be offered auction-rate securities rights in different series, which means they will be required to complete a whole new set of forms in order to receive any settlement from UBS.
The bottom line: Investors who have been sold auction-rate securities by UBS in the past and who now agree to the company’s terms for a settlement may be in for a long and tedious process in trying to collect their money.
For them and other ARS investors, this summer’s news of ARS settlements by Wall Street banks over their mishandling of auction-rate securities is by no means an end to investors’ financial turmoil.
Wednesday, October 15, 2008
FINRA Arbitration Filings Climb 46% in 2008 vs. 2007
Summary Arbitration Statistics September 2008
New Case Filings through September:
2006 -- 3,703
2007 -- 2,382
2008 -- 3,469
2008 vs. 2007 46%
Turnaround Time* (in months) through September:
2006 -- 13.9
2007 -- 13.8
2008 -- 13.0
2008 vs. 2007 -6%
For more information, click here.
New Case Filings through September:
2006 -- 3,703
2007 -- 2,382
2008 -- 3,469
2008 vs. 2007 46%
Turnaround Time* (in months) through September:
2006 -- 13.9
2007 -- 13.8
2008 -- 13.0
2008 vs. 2007 -6%
For more information, click here.
Monday, October 13, 2008
Charles Schwab Found Liable For Yield Plus Sale To Customer
On Oct. 2, an arbitration panel of the Financial Industry Regulatory Authority Inc. of New York and Washington ruled that San Francisco-based Schwab and one of its representatives were liable for $542,340 in an investor claim against them.
The investor, Jeffrey Nielson, alleged that Schwab and the rep, Darin Beckering, duped him when he bought the Schwab YieldPlus Fund by not disclosing its exposure to the subprime-mortgage market and the fact that it was a proprietary fund.
YieldPlus is an ultrashort-bond fund that offered high yields.
At its peak last year, it had more than $13 billion in assets.
On Friday, the fund had $432 million in assets.
There are many individual arbitration claims as well as class actions against Schwab due to the fund, which has dropped more than 30% for the year.
Schwab recorded a $16 million charge this year for “individual client complaints and arbitration claims” stemming from the YieldPlus Fund.
A search of the Finra arbitration award database showed that Schwab had lost one other claim this year over the YieldPlus Fund, but that was a much smaller awa rd of $18,425.
The investor, Jeffrey Nielson, alleged that Schwab and the rep, Darin Beckering, duped him when he bought the Schwab YieldPlus Fund by not disclosing its exposure to the subprime-mortgage market and the fact that it was a proprietary fund.
YieldPlus is an ultrashort-bond fund that offered high yields.
At its peak last year, it had more than $13 billion in assets.
On Friday, the fund had $432 million in assets.
There are many individual arbitration claims as well as class actions against Schwab due to the fund, which has dropped more than 30% for the year.
Schwab recorded a $16 million charge this year for “individual client complaints and arbitration claims” stemming from the YieldPlus Fund.
A search of the Finra arbitration award database showed that Schwab had lost one other claim this year over the YieldPlus Fund, but that was a much smaller awa rd of $18,425.
Friday, October 10, 2008
Crash is Biggest Fall Since 1987
The US stock market suffered its largest loss since the crash of 1987 on Thursday amid panic over General Motors, Morgan Stanley and several big insurance companies.
The market collapse heightened speculation that the US would unveil a bank recapitalisation plan in the coming days.
Share prices in the US, which had opened higher, plunged in a catastrophic final hour of frenzied trading, with the S&P 500 index closing down 7.6 per cent at 909.92, while the Dow Jones Industrial Average lost 7.3 per cent to 8,579.19, closing below 9,000 for the first time since 2003.
In Japan, the Nikkei average tumbled 10.6 per cent to 8183.37 by the end of the morning session on Friday.
The market collapse heightened speculation that the US would unveil a bank recapitalisation plan in the coming days.
Share prices in the US, which had opened higher, plunged in a catastrophic final hour of frenzied trading, with the S&P 500 index closing down 7.6 per cent at 909.92, while the Dow Jones Industrial Average lost 7.3 per cent to 8,579.19, closing below 9,000 for the first time since 2003.
In Japan, the Nikkei average tumbled 10.6 per cent to 8183.37 by the end of the morning session on Friday.
Thursday, October 9, 2008
SEC commences study of fair-value accounting
The Securities and Exchange Commission has begun a study of mark-to-market accounting, which will look at the standard’s effects on bank failures.
The study, authorized by the Emergency Economic Stabilization Act of 2008, which President Bush signed into law last Friday, will examine the impact of mark-to-market accounting on financial institutions’ balance sheets and on the quality of financial information available to investors, the SEC said today.
The agency will also focus on the process the Financial Accounting Standards Board uses in developing accounting standards and look at alternative accounting standards to those provided in Financial Accounting Statement 157 on fair value.
The study, authorized by the Emergency Economic Stabilization Act of 2008, which President Bush signed into law last Friday, will examine the impact of mark-to-market accounting on financial institutions’ balance sheets and on the quality of financial information available to investors, the SEC said today.
The agency will also focus on the process the Financial Accounting Standards Board uses in developing accounting standards and look at alternative accounting standards to those provided in Financial Accounting Statement 157 on fair value.
Thursday, October 2, 2008
Reserve Money Market Fund Frozen
Money-market fund Reserve Primary Fund, which "broke the buck" two weeks ago and helped set off the financial crisis, said it will return at least one-third of investors' money soon -- an offer that has done little to soothe some shareholders who are filing lawsuits.
The fund said it would redeem $20 billion to investors in the fund as of Sept. 15. As part of a liquidation of Reserve Primary, this move would reimburse investors for 30% to 40% of their original investments. The reason the outlay is $20 billion, a Reserve spokeswoman said, is that this sum is what is "currently available at the fund at this time."
The partial distribution is expected to occur on or about Oct. 13, and will be made pro rata in proportion to the number of shares each investor held as of the close of business Sept. 15. Shares that were tendered for redemption Sept. 15 but weren't paid off will be included in determining shares held by an investor. The fund will repay shareholders in cash, not in its underlying assets, short-term debt holdings.
It isn't clear, however, how much money they will get back for the remaining two-thirds portion -- or how the parent company will pay for this. The reimbursement for the rest may be 97% of the unpaid balance, or less.
The latest casualty from the fund's problems emerged Tuesday with the liquidation of a small Florida health-maintenance organization with 16,000 members. The HMO's money was frozen inside Reserve Primary.
The fund said it would redeem $20 billion to investors in the fund as of Sept. 15. As part of a liquidation of Reserve Primary, this move would reimburse investors for 30% to 40% of their original investments. The reason the outlay is $20 billion, a Reserve spokeswoman said, is that this sum is what is "currently available at the fund at this time."
The partial distribution is expected to occur on or about Oct. 13, and will be made pro rata in proportion to the number of shares each investor held as of the close of business Sept. 15. Shares that were tendered for redemption Sept. 15 but weren't paid off will be included in determining shares held by an investor. The fund will repay shareholders in cash, not in its underlying assets, short-term debt holdings.
It isn't clear, however, how much money they will get back for the remaining two-thirds portion -- or how the parent company will pay for this. The reimbursement for the rest may be 97% of the unpaid balance, or less.
The latest casualty from the fund's problems emerged Tuesday with the liquidation of a small Florida health-maintenance organization with 16,000 members. The HMO's money was frozen inside Reserve Primary.
Wednesday, October 1, 2008
Jefferson County To Miss Bond Payment
Alabama's most populous county was unable to make an $83.5 million interest payment on its enormous sewer debt Tuesday and could decide within days whether to file what would be the largest municipal bankruptcy in U.S. history.
The president of the Jefferson County Commission, Betty Fine Collins, said the county lacked the cash to make the payment. Talks continued between Gov. Bob Riley's office and Wall Street lenders, who previously extended a deadline for the payment.
Barring a last-minute deal with creditors or more extensions, Collins said the failure would put the county in default on the interest payment and, most likely, a step closer to filing bankruptcy.
A decision on whether to file for Chapter 9 bankruptcy could come soon, she said, but it won't be immediate since the five-member commission must vote on such a move.
The president of the Jefferson County Commission, Betty Fine Collins, said the county lacked the cash to make the payment. Talks continued between Gov. Bob Riley's office and Wall Street lenders, who previously extended a deadline for the payment.
Barring a last-minute deal with creditors or more extensions, Collins said the failure would put the county in default on the interest payment and, most likely, a step closer to filing bankruptcy.
A decision on whether to file for Chapter 9 bankruptcy could come soon, she said, but it won't be immediate since the five-member commission must vote on such a move.
Lehman Bankruptcy Filing
Creditors in Lehman Brothers Holdings Inc.'s bankruptcy case, the biggest ever, urged a judge to reject a loan for the collapsed bank, arguing that proceeds from asset sales are enough to fund its day-to-day operations.
U.S. Bankruptcy Judge James Peck in Manhattan gave interim approval for New York-based Lehman to borrow an initial $200 million from Barclays Plc on Sept. 17. Peck had said he would hold a hearing on whether to approve an additional $250 million for the debtor-in-possession loan, which was tied to an agreement by London-based Barclays to purchase most of Lehman's North American business
Now that Barclays, the U.K.'s third-biggest bank, has completed its purchase, Lehman has access to proceeds of more than $1 billion, creditors said in court papers filed Sept. 29.
U.S. Bankruptcy Judge James Peck in Manhattan gave interim approval for New York-based Lehman to borrow an initial $200 million from Barclays Plc on Sept. 17. Peck had said he would hold a hearing on whether to approve an additional $250 million for the debtor-in-possession loan, which was tied to an agreement by London-based Barclays to purchase most of Lehman's North American business
Now that Barclays, the U.K.'s third-biggest bank, has completed its purchase, Lehman has access to proceeds of more than $1 billion, creditors said in court papers filed Sept. 29.
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