Bear Stearns, Fannie Mae and Freddie Mac, American Insurance Group and Lehman Brothers are all example of where the opposite proved to be true. Failing to live up to the “too big to fail” Wall Street theme, many of these companies were forced to resort to government rescues in the form of multibillion-dollar bailouts to prevent them from going under. Now Citigroup, once the nation’s largest financial institution, is joining the ranks, as well, after succumbing to more than $65 billion in losses.
The government’s plans to prop up Citigroup were revealed on Sunday, Nov. 23, and include an additional $20 billion of taxpayer money for the bank, along with a guarantee on more than $300 billion of the firm’s most risky assets. In exchange for the guarantee, Citigroup will issue $7 billion in preferred stock to the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC). So how did things get so bad for one of the country’s premiere financial services firms? In three words: reckless business bets.
Over the years, Citigroup created a multibillion-dollar business in mortgage backed securities and collateralized debt obligations (CDOs). As profits grew, Citigroup got bolder, taking more and more risks. At the same time, the company employed tricky accounting practices that allowed it to move troubled assets into off-balance-sheet trusts that could then market the debts to other institutions. Once the assets had been moved off Citigroup’s balance sheets, it made it appear the bank was carrying less risk.
Citigroup has suffered four quarters of consecutive multibilliondollar losses. It still holds $20 billion of mortgage-linked securities on its books, the majority of which have been marked down to between 21 cents and 41 cents on the dollar, according to a Nov. 22 article in the New York Times. But the worst may be yet to come. Citigroup has another $1.2 trillion that is held “off balance sheet.” When it begins to move those questionable assets back onto its books, get ready for a whole new firestorm of losses to ignite.
Tuesday, November 25, 2008
Sunday, November 23, 2008
Morgan Keegan Bond Arbitration Cases Mount
Over 1,000 investors have filed FINRA arbitration cases against Morgan Keegan to recover losses suffered in a number of bond funds managed by the regional brokerage firm, some of which have lost up to 95% of their value since mid-2007. According to Investment News, Morgan Keegan could ultimately end up paying over $200 million to resolve these cases.
The Morgan Keegan arbitration claims allege that investors were not properly informed about the risk associated with the firm’s bond funds, and the extent to which the funds were invested in risky mortgage backed securities, primarily involving the subprime mortgage market which began to collapse in late 2007.
The Morgan Keegan bond funds, such as RMK Select High Income Fund, RMK Select Intermediate Bond Fund, RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Advantage Income Fund and RMK Strategic Income Fund, were sold to investors as relatively conservative investment options. However, the arbitration claims allege that the fund managers violated the objectives outlined in the prospectuses, and exposed investors to a level of risk which they would not have agreed to accept if they had been fully informed of the circumstances surrounding the assets held by the funds.
Although several Morgan Keegan class action lawsuits have been filed on behalf of all investors who purchased or acquired shares in the mutual funds, most investors are electing to pursue their claims as individual arbitration claims through the Financial Industry Regulatory Authority (FINRA). In most cases, lawyers expect these Morgan Keegan arbitration claims to be heard within 12 to 18 months, while the class action lawsuits could take years to resolve.
FINRA oversees nearly 5,000 brokerage firms throughout the United States, and most broker agreements require that individual disputes between investors and their brokers be resolved through FINRA arbitration. The securities arbitration panels are generally comprised of attorneys, accountants, retired judges, bankers, brokers and other professionals, but usually one one of them is considered an “industry” person.
The first Morgan Keegan arbitration award stemming from the losses associated with the crash of the subprime mortgage market last year was returned by a FINRA panel in August, 2008. The claim was filed on January 14, 2008, and the investor was awarded over 75% of his claimed investment losses.
A wave of arbitration claims against Morgan Keegan are expected to reach hearings later this year, with the rest currently scheduled for early 2009.
The Morgan Keegan arbitration claims allege that investors were not properly informed about the risk associated with the firm’s bond funds, and the extent to which the funds were invested in risky mortgage backed securities, primarily involving the subprime mortgage market which began to collapse in late 2007.
The Morgan Keegan bond funds, such as RMK Select High Income Fund, RMK Select Intermediate Bond Fund, RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Advantage Income Fund and RMK Strategic Income Fund, were sold to investors as relatively conservative investment options. However, the arbitration claims allege that the fund managers violated the objectives outlined in the prospectuses, and exposed investors to a level of risk which they would not have agreed to accept if they had been fully informed of the circumstances surrounding the assets held by the funds.
Although several Morgan Keegan class action lawsuits have been filed on behalf of all investors who purchased or acquired shares in the mutual funds, most investors are electing to pursue their claims as individual arbitration claims through the Financial Industry Regulatory Authority (FINRA). In most cases, lawyers expect these Morgan Keegan arbitration claims to be heard within 12 to 18 months, while the class action lawsuits could take years to resolve.
FINRA oversees nearly 5,000 brokerage firms throughout the United States, and most broker agreements require that individual disputes between investors and their brokers be resolved through FINRA arbitration. The securities arbitration panels are generally comprised of attorneys, accountants, retired judges, bankers, brokers and other professionals, but usually one one of them is considered an “industry” person.
The first Morgan Keegan arbitration award stemming from the losses associated with the crash of the subprime mortgage market last year was returned by a FINRA panel in August, 2008. The claim was filed on January 14, 2008, and the investor was awarded over 75% of his claimed investment losses.
A wave of arbitration claims against Morgan Keegan are expected to reach hearings later this year, with the rest currently scheduled for early 2009.
Saturday, November 22, 2008
Galvin Charges Oppenheimer With Securities Fraud
Oppenheimer & Co. Inc. has been charged with fraud and unethical conduct in Secretary of the Commonwealth William F. Galvin's wide-reaching investigation into shady auction-rate securities dealings.
Galvin alleges that Oppenheimer customers in Massachusetts were unable to access nearly $56 million when the auction-rate securities market froze last February. Galvin's office said the charges against Oppenheimer are the first against a firm that may not have participated directly in fraudulent securities auctions, but sold the securities involved to its own customers.
The complaint demands that Oppenheimer return the money its customers put into the auction-rate securities market.
Galvin alleges that Oppenheimer misled and "betrayed the trust of their clients" by selling auction-rate securities as a safe, accessible investment even as the auction-rate securities market began to fail.
Galvin also accuses several Oppenheimer executives of cashing out their auction-rate securities two weeks before the market's collapse.
An auction-rate security is a long-term debt issue that allows buyers to take advantage of short-term rewards as its interest rate is set approximately every month.
Galvin alleges that Oppenheimer customers in Massachusetts were unable to access nearly $56 million when the auction-rate securities market froze last February. Galvin's office said the charges against Oppenheimer are the first against a firm that may not have participated directly in fraudulent securities auctions, but sold the securities involved to its own customers.
The complaint demands that Oppenheimer return the money its customers put into the auction-rate securities market.
Galvin alleges that Oppenheimer misled and "betrayed the trust of their clients" by selling auction-rate securities as a safe, accessible investment even as the auction-rate securities market began to fail.
Galvin also accuses several Oppenheimer executives of cashing out their auction-rate securities two weeks before the market's collapse.
An auction-rate security is a long-term debt issue that allows buyers to take advantage of short-term rewards as its interest rate is set approximately every month.
Thursday, November 20, 2008
Jury Convicts Art Patron of Securities Fraud
Alberto W. Vilar, the investor and music lover accustomed to opulent living, front-row opera seats and the gratitude of arts impresarios, now faces a more humble prospect: prison.
A federal jury in Manhattan on Wednesday convicted him of defrauding clients of his firm, Amerindo Investment Advisors, finding him guilty on all 12 counts. The jury also convicted his former business partner, Gary A. Tanaka, on 3 of the 12 counts.
As the foreman of the jury pronounced the first verdict, the 67-year-old Mr. Vilar blinked once but remained stone-faced throughout the recitations of “guilty,” looking down at the table in front of him. Outside the courtroom, when Mr. Vilar was asked what had gone wrong, he said softly, “I don’t know.”
His lawyer, Herald Price Fahringer, promised an appeal. “We’re deeply disappointed in the jury’s verdict,” he said. “We expect to be fully vindicated on appeal.”
The verdict came after a two-month trial and three and a half days of often heated deliberations. Raised voices were heard inside the jury room at one point. A juror sniffled as she left the courtroom. One juror said there was name-calling during deliberations, Bloomberg News reported.
The two men were charged in a 12-count indictment alleging conspiracy and securities fraud, investment adviser fraud, mail fraud, wire fraud, making false statements and money laundering. Mr. Tanaka, 65, was found guilty of conspiracy, securities fraud and investment adviser fraud.
A federal jury in Manhattan on Wednesday convicted him of defrauding clients of his firm, Amerindo Investment Advisors, finding him guilty on all 12 counts. The jury also convicted his former business partner, Gary A. Tanaka, on 3 of the 12 counts.
As the foreman of the jury pronounced the first verdict, the 67-year-old Mr. Vilar blinked once but remained stone-faced throughout the recitations of “guilty,” looking down at the table in front of him. Outside the courtroom, when Mr. Vilar was asked what had gone wrong, he said softly, “I don’t know.”
His lawyer, Herald Price Fahringer, promised an appeal. “We’re deeply disappointed in the jury’s verdict,” he said. “We expect to be fully vindicated on appeal.”
The verdict came after a two-month trial and three and a half days of often heated deliberations. Raised voices were heard inside the jury room at one point. A juror sniffled as she left the courtroom. One juror said there was name-calling during deliberations, Bloomberg News reported.
The two men were charged in a 12-count indictment alleging conspiracy and securities fraud, investment adviser fraud, mail fraud, wire fraud, making false statements and money laundering. Mr. Tanaka, 65, was found guilty of conspiracy, securities fraud and investment adviser fraud.
Wednesday, November 19, 2008
Massachusetts Sues Oppenheimer for Auction-Rate Sales Fraud
Massachusetts Secretary of State William Galvin filed a complaint yesterday against Oppenheimer & Co., alleging the firm sold auction-rate securities fraudulently.
Galvin wants Oppenheimer to buy back about $56 million of the securities it sold to investors in Massachusetts. He also seeks to revoke the broker-dealer registration license of Albert Lowenthal, Oppenheimer's chief executive officer, who he says sold his personal holdings of the securities two weeks before the market collapsed in February.
Galvin wants Oppenheimer to buy back about $56 million of the securities it sold to investors in Massachusetts. He also seeks to revoke the broker-dealer registration license of Albert Lowenthal, Oppenheimer's chief executive officer, who he says sold his personal holdings of the securities two weeks before the market collapsed in February.
Monday, November 17, 2008
Update -- Lehman Bros. Principal Protected Notes
WHICHEVER way you look at it, an investment fund or note that trumpets a 'protected' stamp is very clever marketing. As recent events have painfully shown, it is a misnomer and the description should be banned from fund or investment product literature.
Protected and guaranteed unit trusts first made their debut in 2000 when the market was rocked by the bursting of the technology bubble. Fund managers who offered them raised billions of dollars, the bulk of which have since matured to a mixed record by now - that is, most of them delivered the capital and no more after 3-5 years.
At worst, those that set out to protect or guarantee 70-90 per cent of investors' capital - on the grounds that a lower level of guarantee allows the manager to take on more risk and deliver more returns - finished at just what they set out to secure. That outcome is disappointing. Who would be happy with just 70-90 per cent of his capital after 3-5 years, when a deposit would have delivered the full capital plus an interest rate, albeit piffling? What's more, the outcome is actually a loss when a sales charge is factored in.
The subscription rate of capital-protected unit trusts in fact pales in comparison with retail structured notes, as investors took to notes even more feverishly. Notes, as you would know by now, are hardly regulated, if at all. Unlike unit trusts, there appears to be no minimum credit rating for underlying securities; little disclosure of what exactly the funds are invested in; and absolutely no disclosure of fees. That opened the marketing floodgates.
But first, back to basics on the distinction between protected and guaranteed products. A protected fund or note relies on the strength of the underlying securities or bonds to deliver an investor's capital. This suggests that the most robust of products would go for the highest AAA-rated securities.
To call itself guaranteed, on the other hand, a fund or note needs an institution to underwrite the maturity value.
A crisis situation like today's illustrates just how illusory protection really is. And the flimsiness of the structure was engendered not only by product manufacturers (fund managers and investment banks) but also by relatively loose regulation.
On the product side, structuring a protected fund in the last few years was a challenge because of the low interest rate environment, particularly in Singapore dollars. So, fund managers and banks trawled from lower-quality credits - with at least minimum investment-grade ratings - to put together a basket that would in aggregate deliver an attractive yield. This included reaching into complex structured debt which also fetched higher yields because of their implicit risks.
The big question - even at that time - was whether there was enough cushion in terms of credit quality to secure investors' principal. As we can see now from various structured products whose mark-to-market values are alarmingly low, the answer is clearly no.
As for regulation, the Monetary Authority of Singapore's (MAS) code for collective investment schemes typically sets a concentration limit of 10 per cent for a single security for unit trusts. With lobbying from the fund management industry, this was loosened for structured funds to one-third. This was arguably something that worked against investors' interests. Diversification helps to preserve principal.
Protected and guaranteed unit trusts first made their debut in 2000 when the market was rocked by the bursting of the technology bubble. Fund managers who offered them raised billions of dollars, the bulk of which have since matured to a mixed record by now - that is, most of them delivered the capital and no more after 3-5 years.
At worst, those that set out to protect or guarantee 70-90 per cent of investors' capital - on the grounds that a lower level of guarantee allows the manager to take on more risk and deliver more returns - finished at just what they set out to secure. That outcome is disappointing. Who would be happy with just 70-90 per cent of his capital after 3-5 years, when a deposit would have delivered the full capital plus an interest rate, albeit piffling? What's more, the outcome is actually a loss when a sales charge is factored in.
The subscription rate of capital-protected unit trusts in fact pales in comparison with retail structured notes, as investors took to notes even more feverishly. Notes, as you would know by now, are hardly regulated, if at all. Unlike unit trusts, there appears to be no minimum credit rating for underlying securities; little disclosure of what exactly the funds are invested in; and absolutely no disclosure of fees. That opened the marketing floodgates.
But first, back to basics on the distinction between protected and guaranteed products. A protected fund or note relies on the strength of the underlying securities or bonds to deliver an investor's capital. This suggests that the most robust of products would go for the highest AAA-rated securities.
To call itself guaranteed, on the other hand, a fund or note needs an institution to underwrite the maturity value.
A crisis situation like today's illustrates just how illusory protection really is. And the flimsiness of the structure was engendered not only by product manufacturers (fund managers and investment banks) but also by relatively loose regulation.
On the product side, structuring a protected fund in the last few years was a challenge because of the low interest rate environment, particularly in Singapore dollars. So, fund managers and banks trawled from lower-quality credits - with at least minimum investment-grade ratings - to put together a basket that would in aggregate deliver an attractive yield. This included reaching into complex structured debt which also fetched higher yields because of their implicit risks.
The big question - even at that time - was whether there was enough cushion in terms of credit quality to secure investors' principal. As we can see now from various structured products whose mark-to-market values are alarmingly low, the answer is clearly no.
As for regulation, the Monetary Authority of Singapore's (MAS) code for collective investment schemes typically sets a concentration limit of 10 per cent for a single security for unit trusts. With lobbying from the fund management industry, this was loosened for structured funds to one-third. This was arguably something that worked against investors' interests. Diversification helps to preserve principal.
Lehman Brothers Bankruptcy Update
Lehman Brothers Holdings Inc. may complete billions of dollars in trades and unwind transactions that were pending two months ago when it filed the biggest bankruptcy in history, under an accord with European affiliates.
The deal gives the firm access to information systems in Europe, which it said were "sealed off" by its bankruptcies on both sides of the Atlantic. Without the accord, the New York- based company said it "cannot execute trades or even obtain information on current positions," key requirements for paying creditors owed more than $613 billion.
Lehman Brothers International Europe, which ran Lehman's London-based prime brokerage, had about 3,500 asset managers, including hedge funds, as clients. The customers haven't known the status of their positions since Lehman's bankruptcy on Sept. 15 froze at least $65 billion in brokerage assets.
The deal gives the firm access to information systems in Europe, which it said were "sealed off" by its bankruptcies on both sides of the Atlantic. Without the accord, the New York- based company said it "cannot execute trades or even obtain information on current positions," key requirements for paying creditors owed more than $613 billion.
Lehman Brothers International Europe, which ran Lehman's London-based prime brokerage, had about 3,500 asset managers, including hedge funds, as clients. The customers haven't known the status of their positions since Lehman's bankruptcy on Sept. 15 froze at least $65 billion in brokerage assets.
Friday, November 14, 2008
Amerindo Co-Founders Stole $20 Million, U.S. Says
Alberto Vilar and Gary Tanaka, co-founders of Amerindo Investment Advisors Inc., stole $20 million from clients, even cutting and pasting one investor's signature to transfer money from her account, prosecutors said.
Vilar and Tanaka, "drowning in a sea of debt" after their investments in computer and Internet companies plummeted in value beginning in 2000, stole from clients to keep Amerindo afloat and to cover Vilar's personal expenses, Assistant U.S. Attorney Marc Litt told jurors Nov. 12 in closing arguments in the federal fraud and conspiracy trial in Manhattan.
Prosecutors claim Vilar and Tanaka's victims included Lily Cates, the mother of actress Phoebe Cates. When a bank threatened to auction Vilar's luxury Manhattan co-op in 2003 because of missed mortgage payments, the men used Cates's cut- and-taped signature to steal $250,000 from her brokerage account at Bear Stearns, Litt said.
"That's about as fraudulent as it gets -- cutting and taping a client's signature on a document," Litt argued to the 12 jurors and three alternates.
Vilar, 67, and Tanaka, 65, are charged with 12 counts of conspiracy, securities fraud, investment-adviser fraud, mail fraud, wire fraud, money laundering and lying to the U.S.
Securities and Exchange Commission. They face as long as 20 years in prison if convicted of the most serious charges.
Vilar and Tanaka, "drowning in a sea of debt" after their investments in computer and Internet companies plummeted in value beginning in 2000, stole from clients to keep Amerindo afloat and to cover Vilar's personal expenses, Assistant U.S. Attorney Marc Litt told jurors Nov. 12 in closing arguments in the federal fraud and conspiracy trial in Manhattan.
Prosecutors claim Vilar and Tanaka's victims included Lily Cates, the mother of actress Phoebe Cates. When a bank threatened to auction Vilar's luxury Manhattan co-op in 2003 because of missed mortgage payments, the men used Cates's cut- and-taped signature to steal $250,000 from her brokerage account at Bear Stearns, Litt said.
"That's about as fraudulent as it gets -- cutting and taping a client's signature on a document," Litt argued to the 12 jurors and three alternates.
Vilar, 67, and Tanaka, 65, are charged with 12 counts of conspiracy, securities fraud, investment-adviser fraud, mail fraud, wire fraud, money laundering and lying to the U.S.
Securities and Exchange Commission. They face as long as 20 years in prison if convicted of the most serious charges.
Update on Lehman Principal Protection Note Investigation
On September 15, 2008 Lehman Brothers Holdings filed for bankruptcy protection, leavinf investors who previously purchased the company’s 100% Principal Protection Notes (PPNs) unprotected and at a loss. Funnily enough it was Lehman’s own marketing brochures that touted the notes as providing “100 percent principal protection.” Little did they realize that the value of the notes was contingent on Lehman’s own solvency, meaning that when Lehman filed for bankruptcy, many of their investor’s notes subsequently went into default.
In the wake of the bankruptcy, a class action was filed on November 6, 2008 on behalf of individuals who purchased Lehman Principal Protection Notes (PPNs) from UBS Financial Services, Inc. The complaint alleges that UBS brokers made false and misleading statements that omitted key facts about the risks connected to the Lehman notes.
“Investors should be aware of the pending class action,” said attorney Ryan K. Bakhtiari of Aidikoff, Uhl & Bakhtiari. “The class case has certain pitfalls that investors need to be aware of in selecting an attorney.
In the wake of the bankruptcy, a class action was filed on November 6, 2008 on behalf of individuals who purchased Lehman Principal Protection Notes (PPNs) from UBS Financial Services, Inc. The complaint alleges that UBS brokers made false and misleading statements that omitted key facts about the risks connected to the Lehman notes.
“Investors should be aware of the pending class action,” said attorney Ryan K. Bakhtiari of Aidikoff, Uhl & Bakhtiari. “The class case has certain pitfalls that investors need to be aware of in selecting an attorney.
Thursday, November 13, 2008
Lehman Principal Protection Note Investigation; Aidikoff, Uhl & Bakhtiari and Co-Counsel Recommend Investors Consider All Legal Options
On November 6, 2008 a class action, was filed on behalf of persons who purchased Lehman Principal Protection Notes (PPNs) from UBS Financial Services, Inc. Following Lehman Brothers’ bankruptcy filing on September 15, 2008, PPNs are now in default causing the holders of PPNs to become senior unsecured creditors in the Lehman bankruptcy proceeding.
Aidikoff, Uhl & Bakhtiari recommends investors consider all of their legal options in the wake of Lehman’s bankruptcy and the filing of the PPN class action.
“Investors should be aware of the pending class action,” said attorney Ryan K. Bakhtiari of Aidikoff, Uhl & Bakhtiari. “The class case has certain pitfalls that investors need to be aware of in selecting an attorney. In our opinion, most investors will fare better by filing individual arbitrations.”
Important Facts to Consider Prior to Joining A Lehman Principal Protection Note Class Action
• The pending Lehman Principal Protection Note class action Class Period is between May 30, 2006 and September 15, 2008. Investors who made purchases prior to May 30, 2006 are not represented and will have no right to recovery in the Class Action.
• In the case of Lehman Principal Protection Notes, many investors sought safe, liquid, cash investments but were sold a product that was, in reality, much different. Such investors will have viable claims based on the investment's unsuitability. Because a suitability claim is dependent on an individual’s circumstances, this claim cannot be prosecuted on a class wide basis.
• Investors with significant losses in PPNs are unlikely ever to be made whole in a Class Action. Class action representation may be attractive where individual losses are small so that any one investor may not have an economic interest in pursuing the case. However, investors who have lost more than $100,000 should strongly consider pursuing their rights on an individual basis.
• Class actions are filed by attorneys seeking to represent all investors who have suffered a common wrong or purchased the same investment. Classes in securities cases are typically represented by the investor with the largest claim at stake. This often means that state pension funds or institutional investors will choose the attorneys and will be the ones who work on the strategy of the case. The interests of the class representative may not always be aligned with your interest; a specific example of this potential conflict is the inability to pursue suitability claims.
• Class actions sometimes create hurdles to recovery for individual investors including depositions and motion practice which are generally not permitted in securities disputes decided before FINRA. The FINRA arbitration process can be completed in approximately 12 months, recovery through a class action may take several years.
Aidikoff, Uhl & Bakhtiari recommends investors consider all of their legal options in the wake of Lehman’s bankruptcy and the filing of the PPN class action.
“Investors should be aware of the pending class action,” said attorney Ryan K. Bakhtiari of Aidikoff, Uhl & Bakhtiari. “The class case has certain pitfalls that investors need to be aware of in selecting an attorney. In our opinion, most investors will fare better by filing individual arbitrations.”
Important Facts to Consider Prior to Joining A Lehman Principal Protection Note Class Action
• The pending Lehman Principal Protection Note class action Class Period is between May 30, 2006 and September 15, 2008. Investors who made purchases prior to May 30, 2006 are not represented and will have no right to recovery in the Class Action.
• In the case of Lehman Principal Protection Notes, many investors sought safe, liquid, cash investments but were sold a product that was, in reality, much different. Such investors will have viable claims based on the investment's unsuitability. Because a suitability claim is dependent on an individual’s circumstances, this claim cannot be prosecuted on a class wide basis.
• Investors with significant losses in PPNs are unlikely ever to be made whole in a Class Action. Class action representation may be attractive where individual losses are small so that any one investor may not have an economic interest in pursuing the case. However, investors who have lost more than $100,000 should strongly consider pursuing their rights on an individual basis.
• Class actions are filed by attorneys seeking to represent all investors who have suffered a common wrong or purchased the same investment. Classes in securities cases are typically represented by the investor with the largest claim at stake. This often means that state pension funds or institutional investors will choose the attorneys and will be the ones who work on the strategy of the case. The interests of the class representative may not always be aligned with your interest; a specific example of this potential conflict is the inability to pursue suitability claims.
• Class actions sometimes create hurdles to recovery for individual investors including depositions and motion practice which are generally not permitted in securities disputes decided before FINRA. The FINRA arbitration process can be completed in approximately 12 months, recovery through a class action may take several years.
Government won't buy troubled bank assets
The government has abandoned the original centerpiece of its $700 billion rescue effort for the financial system and will not use the money to purchase troubled bank assets.
Treasury Secretary Henry Paulson said Wednesday that the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending. He also announced that the administration was looking at a major expansion of the program into the markets that provide support for credit card debt, auto loans and student loans.
Paulson said 40 percent of U.S. consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets need support.
"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.
On the issue of using the $700 billion bailout package to provide help to ailing auto companies, Paulson said the administration preferred an approach that would accelerate support to that industry from other legislation Congress passed this fall.
Treasury Secretary Henry Paulson said Wednesday that the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending. He also announced that the administration was looking at a major expansion of the program into the markets that provide support for credit card debt, auto loans and student loans.
Paulson said 40 percent of U.S. consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets need support.
"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.
On the issue of using the $700 billion bailout package to provide help to ailing auto companies, Paulson said the administration preferred an approach that would accelerate support to that industry from other legislation Congress passed this fall.
Wednesday, November 12, 2008
UBS and Lehman Sued For Misreprsentation of Lehman Principal Protection Notes
A buyer of sophisticated bonds of Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) sued executives of the bankrupt investment bank and underwriter UBS Financial Services Inc on Friday, claiming they misrepresented the risks of the securities.
The lawsuit filed in U.S. District Court in Manhattan seeks class action status on behalf of holders of Lehman Principal Protection Notes who stand to lose all or most of their investments since the 185-year-old investment bank went bankrupt on Sept. 15.
The notes, purchased by the plaintiff, identified as investor Stephen P. Gott, between May 30, 2006 and Sept. 15 of this year are in default since Lehman filed for bankruptcy.
The lawsuit filed in U.S. District Court in Manhattan seeks class action status on behalf of holders of Lehman Principal Protection Notes who stand to lose all or most of their investments since the 185-year-old investment bank went bankrupt on Sept. 15.
The notes, purchased by the plaintiff, identified as investor Stephen P. Gott, between May 30, 2006 and Sept. 15 of this year are in default since Lehman filed for bankruptcy.
GMAC Debt Rating Cut to "CC" by Fitch
Fitch Ratings on Tuesday downgraded GMAC LLC's issuer default and senior unsecured debt ratings further into junk, citing continued operating losses at the General Motors Corp. financing arm.
Fitch cut the ratings to "CC" from "B+" and placed them on negative watch, meaning they could be lowered further. About $72 billion of unsecured debt is affected.
Fitch said the lower ratings also reflect GMAC (nyse: GJM - news - people )'s consideration of a debt swap and its exploration of becoming a bank holding company to take advantage of the Treasury Department's $700 billion financial rescue plan.
Fitch cut the ratings to "CC" from "B+" and placed them on negative watch, meaning they could be lowered further. About $72 billion of unsecured debt is affected.
Fitch said the lower ratings also reflect GMAC (nyse: GJM - news - people )'s consideration of a debt swap and its exploration of becoming a bank holding company to take advantage of the Treasury Department's $700 billion financial rescue plan.
Tuesday, November 11, 2008
As Lehman Structured Notes Fail, Investor Claims Rise
Lehman, meanwhile, had sold more than $900 million worth of retail structured products in the U.S. this year through late September, ranking it among the top 10 issuers of the products, according to StructuredRetailProducts.com. Many of these offerings were designed to return investors' full principal at maturity. Now, small investors holding Lehman-issued structured products are waiting to see what they can recover through the bankruptcy proceedings, hiring their own lawyers to make claims against the brokers who sold them the products, or selling their holdings for pennies on the dollar through secondary markets, industry experts say. Firms representing Lehman in its bankruptcy didn't respond to requests for comment on the status of the products.
Monday, November 10, 2008
Dump GMAC SmartNotes
As reported by Smart Money:
As Washington scrambles to save General Motors (GM: 2.92, -0.44, -13.09%), the politics behind any bailout means small investors will ultimately be the ones who get left behind. On Capitol Hill protecting jobs, propping up the economy and punishing greedy corporate executives are the catch-phrases du jour. Guarding the interests of mom-and-pop stakeholders garners little more than lip service.
In a world of more market access and individual retirement responsibility, many small investors took a broker's advice and bought into the GM story. And we're not talking about the auto maker's stock, which has lost 94% of its value over the last decade. These investors thought they were taking the safe and conservative route by purchasing GMAC SmartNotes. It turns out this unsecured debt is neither safe nor conservative -- nor very smart.
GMAC, once a wholly owned unit of General Motors, is the largest lender to GM's car dealers. In 2006, GM sold a 51% stake to private-equity group Cerberus Capital Management. That was back when GMAC was a strong source of profits for GM.
But today GMAC, which also has a home-mortgage arm in addition to its auto-lending business, has gone the way of other financial firms caught up in the housing and credit bubble. GMAC lost a net $2.5 billion in the third quarter, more than the $1.6 billion it lost a year earlier, and warned that its home-mortgage unit is on the verge of collapse. Its debt is well into junk territory.
As Washington scrambles to save General Motors (GM: 2.92, -0.44, -13.09%), the politics behind any bailout means small investors will ultimately be the ones who get left behind. On Capitol Hill protecting jobs, propping up the economy and punishing greedy corporate executives are the catch-phrases du jour. Guarding the interests of mom-and-pop stakeholders garners little more than lip service.
In a world of more market access and individual retirement responsibility, many small investors took a broker's advice and bought into the GM story. And we're not talking about the auto maker's stock, which has lost 94% of its value over the last decade. These investors thought they were taking the safe and conservative route by purchasing GMAC SmartNotes. It turns out this unsecured debt is neither safe nor conservative -- nor very smart.
GMAC, once a wholly owned unit of General Motors, is the largest lender to GM's car dealers. In 2006, GM sold a 51% stake to private-equity group Cerberus Capital Management. That was back when GMAC was a strong source of profits for GM.
But today GMAC, which also has a home-mortgage arm in addition to its auto-lending business, has gone the way of other financial firms caught up in the housing and credit bubble. GMAC lost a net $2.5 billion in the third quarter, more than the $1.6 billion it lost a year earlier, and warned that its home-mortgage unit is on the verge of collapse. Its debt is well into junk territory.
DBSI Commences Voluntary Chapter 11 Bankruptcy Proceeding
DBSI Inc, which together with its subsidiaries comprises a network of real estate and non-real estate entities throughout the country, commenced a voluntary chapter 11 proceeding in the United States Bankruptcy Court for the District of Delaware on November 10, 2008.
DBSI's businesses have been significantly impacted by the recent turmoil in the real estate financial and credit markets, the general deterioration of the economy and the historic declines in the stock market. These problems were exacerbated recently by the actions of the various parties and, in the last week, the commencement of legal actions that DBSI submits are without merit and only serve to impede DBSI’s efforts to effectively address its financial difficulties.
As a result of these circumstances, DBSI determined that it had no alternative but to commence a voluntary chapter 11 proceeding in order to implement its plan for an orderly restructuring to maximize value for all parties-in-interest and to immediately stay the efforts of parties desiring to pursue their own individual interests.
DBSI's businesses have been significantly impacted by the recent turmoil in the real estate financial and credit markets, the general deterioration of the economy and the historic declines in the stock market. These problems were exacerbated recently by the actions of the various parties and, in the last week, the commencement of legal actions that DBSI submits are without merit and only serve to impede DBSI’s efforts to effectively address its financial difficulties.
As a result of these circumstances, DBSI determined that it had no alternative but to commence a voluntary chapter 11 proceeding in order to implement its plan for an orderly restructuring to maximize value for all parties-in-interest and to immediately stay the efforts of parties desiring to pursue their own individual interests.
Sunday, November 9, 2008
IMF: Subprime Losses Could Hit $1 Trillion
Alan Greenspan, the former head of the U.S. Federal Reserve, went on television Tuesday to say that despite the ongoing troubles roiling world markets increased financial regulation is a terrible idea. This was especially noteworthy because earlier in the day the International Monetary Fund said it estimates losses related to subprime troubles might be in the neighborhood of one trillion dollars. No matter how the crisis will be addressed, something sure-fire needs to happen, and fast.
The IMF said in its bi-annual assessment of global financial markets, that market turmoil related to the credit crisis could result in potential aggregate losses of $945 billion; this number exceeds the highest prior estimate by $345 billion. The Street's consensus is that the subprime saga has cost $170 billion to date.
The IMF said in its bi-annual assessment of global financial markets, that market turmoil related to the credit crisis could result in potential aggregate losses of $945 billion; this number exceeds the highest prior estimate by $345 billion. The Street's consensus is that the subprime saga has cost $170 billion to date.
Saturday, November 8, 2008
GMAC Debt Crisis Mounting
The 300 bankers gathered at New York's Waldorf-Astoria Hotel last May faced a stark choice: Accept Sam Ramsey's plea to restructure $60 billion of GMAC LLC's debt or risk pushing the lending arm of General Motors Corp., the largest U.S. automaker, to the brink of insolvency.
"There was not room for slippage," said Ramsey, 49, a former Bank of America Corp. executive who joined Detroit-based GMAC in September and became chief risk officer two months later. He pulled it off as banks led by New York-based JPMorgan Chase & Co. and Citigroup Inc. provided GMAC and its Residential Capital LLC mortgage unit with the biggest restructuring package since the credit-market rout began a year ago.
Whether that's enough to ride out the worst housing slump since the Great Depression remains in doubt. Moody's Investors Service cut GMAC's credit rating one level to six rankings below investment-grade last week as ResCap burns through cash after losing $5.3 billion in the past six quarters.
"There was not room for slippage," said Ramsey, 49, a former Bank of America Corp. executive who joined Detroit-based GMAC in September and became chief risk officer two months later. He pulled it off as banks led by New York-based JPMorgan Chase & Co. and Citigroup Inc. provided GMAC and its Residential Capital LLC mortgage unit with the biggest restructuring package since the credit-market rout began a year ago.
Whether that's enough to ride out the worst housing slump since the Great Depression remains in doubt. Moody's Investors Service cut GMAC's credit rating one level to six rankings below investment-grade last week as ResCap burns through cash after losing $5.3 billion in the past six quarters.
Friday, November 7, 2008
Pennies on the Dollar for Lehman Principal Protection Notes
In what could become just the tip of a legal iceberg for UBS, Lehman Brothers and others over sales of Lehman Principal Protection Notes, a class-action lawsuit has been filed in the United States District Court for the Southern District of New York. Among the claims that the plaintiff, Stephen P. Gott, alleges: UBS, Lehman and officers and executives of both companies intentionally misstated key facts to investors about the Lehman Principal Protection Notes, as well as omitted information regarding certain risks.
The complaint further contends that UBS marketed and sold Lehman Principal Protection Notes as an investment suitable for investors who wanted to protect their entire principal investment. When Lehman Brothers filed for bankruptcy on Sept. 15, 2008 it subsequently defaulted on many of the notes. As a result, investors now face the distinct possibility of losing all or a substantial part of their investments.
On page nine of the complaint, which was formally filed Nov. 6, the plaintiff also asserts that Lehman Brothers actually used proceeds from the Principal Protection Notes for its own general business purposes, including funding other corporate operations that were suffering financially.
In addition to UBS, Lehman Principal Protected Notes were marketed and sold by several other brokerage firms, including Citigroup, Merrill Lynch and Wachovia. In each instance, the notes were touted as “conservative” investments. In reality, however, they were structured products that combined fixed-income investments with derivatives, leaving investors looking for conservative investments open to considerable - and unexpected - risk.
For these investors, Lehman Principal Protection Notes and their so-called advertised benefit of 100% principal protection translate into pennies on the dollar. Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
The complaint further contends that UBS marketed and sold Lehman Principal Protection Notes as an investment suitable for investors who wanted to protect their entire principal investment. When Lehman Brothers filed for bankruptcy on Sept. 15, 2008 it subsequently defaulted on many of the notes. As a result, investors now face the distinct possibility of losing all or a substantial part of their investments.
On page nine of the complaint, which was formally filed Nov. 6, the plaintiff also asserts that Lehman Brothers actually used proceeds from the Principal Protection Notes for its own general business purposes, including funding other corporate operations that were suffering financially.
In addition to UBS, Lehman Principal Protected Notes were marketed and sold by several other brokerage firms, including Citigroup, Merrill Lynch and Wachovia. In each instance, the notes were touted as “conservative” investments. In reality, however, they were structured products that combined fixed-income investments with derivatives, leaving investors looking for conservative investments open to considerable - and unexpected - risk.
For these investors, Lehman Principal Protection Notes and their so-called advertised benefit of 100% principal protection translate into pennies on the dollar. Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
GMAC SmartNotes Losses
GMAC LLC may leave thousands of individuals on the hook for about $15 billion of junk-rated debt unless the auto and home lender finds a way to pay its bills.
GMAC, the largest lender to car dealers of General Motors Corp., issued more than $25 billion of debt called SmartNotes over the past decade to retail investors. While GMAC has paid off the debts as they matured, five straight unprofitable quarters raised doubt about GMAC's survival, and SmartNotes due in July 2020 have lost about three-quarters of their value.
"An investment like this is totally unsuitable for the retail investor," said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, who rates GMAC bonds junk, or below investment grade. "You're selling it to the widows and orphans who think of GMAC as being this strong, long- standing corporation when the reality is far from that."
GMAC's losses since mid-2007 total $7.9 billion, driven by record home foreclosures and auto sales that GM has called the worst since 1945. Stomaching some of Detroit-based GMAC's deficit are individuals who purchased SmartNotes through brokers at firms including Merrill Lynch & Co., Fidelity Investments and Citigroup Inc.'s Smith Barney unit.
GMAC, the largest lender to car dealers of General Motors Corp., issued more than $25 billion of debt called SmartNotes over the past decade to retail investors. While GMAC has paid off the debts as they matured, five straight unprofitable quarters raised doubt about GMAC's survival, and SmartNotes due in July 2020 have lost about three-quarters of their value.
"An investment like this is totally unsuitable for the retail investor," said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, who rates GMAC bonds junk, or below investment grade. "You're selling it to the widows and orphans who think of GMAC as being this strong, long- standing corporation when the reality is far from that."
GMAC's losses since mid-2007 total $7.9 billion, driven by record home foreclosures and auto sales that GM has called the worst since 1945. Stomaching some of Detroit-based GMAC's deficit are individuals who purchased SmartNotes through brokers at firms including Merrill Lynch & Co., Fidelity Investments and Citigroup Inc.'s Smith Barney unit.
Swiss Clients Dump Lehman Structured Products, Swiss Regulator to Investigate
Exchange Traded Funds volumes traded on the Swiss Stock Exchange soared in October to a record 95.4% against the previous month, and 183.6% on the year to reach SFr7.6bn, according to numbers released by the SWX.
In contrast, demand for structured products has fallen, as investors pile out of these investments as the credit crunch bites.
Structured products and warrants raised SFr5.8bn on the SWX in October, down nearly 13% year-on-year and 14% month-on-month.
Yesterday, the Swiss banking regulator said it is investigating the sales of structured products by the failed investment bank Lehman Brothers to clients at Credit Suisse and other banks.
Clients in Switzerland have complained about heavy losses from structured products issued by Lehman, which collapsed earlier this year, according to a Dow Jones Newswires report.
In contrast, demand for structured products has fallen, as investors pile out of these investments as the credit crunch bites.
Structured products and warrants raised SFr5.8bn on the SWX in October, down nearly 13% year-on-year and 14% month-on-month.
Yesterday, the Swiss banking regulator said it is investigating the sales of structured products by the failed investment bank Lehman Brothers to clients at Credit Suisse and other banks.
Clients in Switzerland have complained about heavy losses from structured products issued by Lehman, which collapsed earlier this year, according to a Dow Jones Newswires report.
Thursday, November 6, 2008
PIMCO Bond Funds Halt Dividend Payment
Pimco High Income Fund said it is postponing payment of a dividend because the value of the fund's portfolio securities fell below a key threshold due to current market conditions.
The fund was scheduled to make a payment Monday of 12.1875 cents per share to shareholders of record as of Oct. 11. Allianz Global Investors Fund Management LLC manages the fund.
The company also said it is suspending the declaration of its next dividend, which would have been paid in December.
The dividends are being suspended based on a company rule that requires a postponement of payments if the fund's auction rate preferred shares minimum asset coverage falls below 200 percent. Because of the ongoing credit crisis and decline in equity markets, the value of the fund's portfolio securities fell below the threshold leading to a suspension of dividends.
The fund was scheduled to make a payment Monday of 12.1875 cents per share to shareholders of record as of Oct. 11. Allianz Global Investors Fund Management LLC manages the fund.
The company also said it is suspending the declaration of its next dividend, which would have been paid in December.
The dividends are being suspended based on a company rule that requires a postponement of payments if the fund's auction rate preferred shares minimum asset coverage falls below 200 percent. Because of the ongoing credit crisis and decline in equity markets, the value of the fund's portfolio securities fell below the threshold leading to a suspension of dividends.
Wednesday, November 5, 2008
Credit Default Swaps
A window into the vast, murky world of credit-default swaps opened on Tuesday — and the view was a bit surprising.
The market for the instruments, which have played a significant role in the financial crisis, seems to be smaller than many analysts believed. And countries, not just companies, are often the subject of contracts that are used to protect investors against losses from defaults or simply to make bearish bets.
That, anyway, is the impression given by a report released by the Depository Trust and Clearing Corporation that ostensibly provides the most data yet on this market. But the report does not shed any new light on which entities have sold protection through swaps and whether they have enough capital to meet their obligations, a crucial concern for policy makers.
The depository corporation, which clears swaps and other financial transactions, said that it had cleared swaps providing coverage on $33.6 trillion in debt. In other words, investors have bought (or sold) protection on bonds and other debt totaling that much, an amount that is slightly greater than the $30.8 trillion of American bonds outstanding.
Last month, the International Swaps and Derivatives Association estimated that nearly $47 trillion in swaps were outstanding as of June. That number might include transactions not cleared by the depository corporation.
The market for the instruments, which have played a significant role in the financial crisis, seems to be smaller than many analysts believed. And countries, not just companies, are often the subject of contracts that are used to protect investors against losses from defaults or simply to make bearish bets.
That, anyway, is the impression given by a report released by the Depository Trust and Clearing Corporation that ostensibly provides the most data yet on this market. But the report does not shed any new light on which entities have sold protection through swaps and whether they have enough capital to meet their obligations, a crucial concern for policy makers.
The depository corporation, which clears swaps and other financial transactions, said that it had cleared swaps providing coverage on $33.6 trillion in debt. In other words, investors have bought (or sold) protection on bonds and other debt totaling that much, an amount that is slightly greater than the $30.8 trillion of American bonds outstanding.
Last month, the International Swaps and Derivatives Association estimated that nearly $47 trillion in swaps were outstanding as of June. That number might include transactions not cleared by the depository corporation.
Tuesday, November 4, 2008
Citigroup and JPMorgan Sued by Louisiana Pension Funds
Two Louisiana pension funds filed lawsuitas against Citigroup and JPMorgan Chase in the wake of the subprime fallout and 2008 credit crunch. The Louisiana Sheriffs’ Pension and Relief Fund and the Louisiana Municipal Employees’ Retirement System allegesd that Citigroup and JPMorgan misled investors in more than $29 billion of Citigroup’s securities offerings dating back to May 2006.
The proposed class-action lawsuits also name former Citigroup chairman Charles Prince and more than a dozen underwriters of the securities offerings, including units of Bank of America Corp., Goldman Sachs Group Inc., UBS AG, Barclays PLC, Deutsche Bank AG and Fortis.
The complaint, which was filed Oct. 1 in New York State Supreme Court in Manhattan, contends that Citigroup “harmed investors by causing a significant decline in the value of the securities purchased in or traceable to a series of securities offerings.”
The suit also claims that Citigroup failed to disclose its “massive exposure to losses from its mortgage-related assets” and failed to write down the assets to properly reflect their true value.
The success of public pension funds depends on the entities that serve as the steward of the fund’s assets. In a number of instances that are just now coming to light, that work has been severely flawed. Meanwhile, pension fund managers continue to reassure retirees and current employees that their funds are safe and the assets sufficient to pay benefits for several years.
The truth is that it depends on the quality and quantity of the securities contained in the fund’s portfolio, as well as the valuation model used to determine the value of the assets. Many portfolios of large pension funds include a high concentration of hard-to-value and difficult-to-sell assets, including mortgage-related securities and other collateralized pools of debt. These investments do not readily trade on the secondary market. Therefore, the value assigned to them simply does not reflect their actual value.
The proposed class-action lawsuits also name former Citigroup chairman Charles Prince and more than a dozen underwriters of the securities offerings, including units of Bank of America Corp., Goldman Sachs Group Inc., UBS AG, Barclays PLC, Deutsche Bank AG and Fortis.
The complaint, which was filed Oct. 1 in New York State Supreme Court in Manhattan, contends that Citigroup “harmed investors by causing a significant decline in the value of the securities purchased in or traceable to a series of securities offerings.”
The suit also claims that Citigroup failed to disclose its “massive exposure to losses from its mortgage-related assets” and failed to write down the assets to properly reflect their true value.
The success of public pension funds depends on the entities that serve as the steward of the fund’s assets. In a number of instances that are just now coming to light, that work has been severely flawed. Meanwhile, pension fund managers continue to reassure retirees and current employees that their funds are safe and the assets sufficient to pay benefits for several years.
The truth is that it depends on the quality and quantity of the securities contained in the fund’s portfolio, as well as the valuation model used to determine the value of the assets. Many portfolios of large pension funds include a high concentration of hard-to-value and difficult-to-sell assets, including mortgage-related securities and other collateralized pools of debt. These investments do not readily trade on the secondary market. Therefore, the value assigned to them simply does not reflect their actual value.
Subscribe to:
Posts (Atom)