Archive for February, 2008

A new thorn is in the side of an already beleaguered Wall Street: Variable Interest Entities, or VIEs.VIEs - like another obscure financial structure, the SIV (Structured Investment Vehicle) - allow banks to move certain risky assets, such as subprime-mortgage securities, off their balance sheets. Â VIEs finance themselves by selling short-term debt backed by securities, some of which are insured against default.

As Mark Pittman of Bloomberg.com reported on February 26, 2008, VIEs may add another $88 billion in losses for Wall Street, which already has been hit hard by the subprime meltdown in the housing market. Â Not surprisingly, Citigroup and Merrill Lynch have sizable exposure in VIEs. Â
Interestingly, two firms that have largely avoided the subprime debacle, Goldman Sachs and Lehman Brothers, may now be affected. Goldman recently said that it could incur losses of up to $11.1 billion from its VIEs. Lehman Brothers, having already marked down the net value of subprime mortgages by $1.5 billion, has guaranteed $6.1 billion of investors’ money in VIEs and $1.4 billion of clients’ secured financing.

Right now all eyes are on the bond insurer firms, Ambac and MBIA.  If these firms continue to see their ratings downgraded by Standard & Poor’s, Moody’s, or Fitch, then the assets in the VIEs are certain to be downgraded. This will then cause the financial firms to have to put back onto their balance sheets the assets making up the VIEs.

Therein lies the real problem. As David Hendler, an analyst at the bond research firm of CreditSights, warns, “The securities in the VIEs may be worth as little as 27 cents on the dollar.”

Our affiliation of 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.

A story by David Enrich in the Wall Street Journal reported that CSO Partners, a Citigroup hedge fund specializing in corporate debt, was closed to withdrawals after investors tried to pull more than 30% of the fund’s roughly $500 million in assets.

To stabilize the fund, which reported an 11% loss last year, Citigroup injected it with $100 million last month. The fund’s manager, John Pickett, left has since left the firm, following a bitter dispute with Citigroup executives and investor complaints that he put too much money into a single investment that went bad.
Pickett and CSO’s troubles began last summer, when Pickett wanted to commit several hundred million dollars of leveraged loans that a group of banks was selling on behalf of a German media company. Pickett later tried to back out of the buy, claiming the loan terms were changed. He was unsuccessful, and the fund’s losses quickly began to unfold.Â

Executives at Morgan Stanley, which was a lead bank for the loan deal, complained directly to John Havens, head of Citigroup’s alternative investment unit. In December 2007, following months of negotiation, Citigroup agreed to Morgan Stanley’s settlement proposal and CSO purchased $746 million of the loans at face value, even though they were trading for 86% to 93% of their face value.Â

These events are disturbing on several fronts. If Pickett had free reign to invest more than half of the fund’s assets in one deal, it either shows an incredible lack of risk management on the part of Citigroup or that such controls are routinely ignored. And if the terms of the loans were, in fact, changed by Morgan Stanley, then it’s just one more example of Wall Street’s good old boy network doing business at the expense of investors.

Our affiliation of 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 full impact of the mortgage melt down has yet to fully play out. Recent data show prices on existing homes took a nose dive of 8.9% in 2007, falling for a record 12 straight months. It is the biggest decline in the United States since World War II.

Defaults among subprime borrowers and borrowers who are unable to meet higher payments on adjustable-rate loans are driving foreclosure filings, which only add to the glut of unsold homes. In this year alone, banks may be forced to resell up to 1 million repossessed properties, which will push home prices down further. Tighter lending practices also contribute to problem, making it harder for borrowers to secure a mortgage.

And it’s far from over, say economists. With billions of dollars in adjustable-rate mortgages scheduled to be reset later this year, borrowers are looking at higher minimum payments along with the very real possibility of joining millions of other homeowners who have been forced out of their homes because they cannot keep up with  monthly payments.

Our affiliation of 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.

UBS is now preparing to do battle in court, following the revelation that it dumped millions of dollars in mortgage investments on clients.

The One of the clients is German lender HSH Nordbank AG, which filed a complaint Feb. 25 against UBS seeking to recover losses on a $500 million portfolio linked to the U.S. subprime mortgage market. HSH claims when it bought North Street 2002-4, a portfolio of collateralized debt obligations (CDOs), the investments were considered largely safe, triple-A rated bonds. The collapse of the U.S. market for subprime loans, however, made the investments much riskier, leading to a loss of least $275 million. North Street’s rating took a nose dive as well — falling to junk CC at the bottom and A- at the top.

The The HSH suit adds to legal woes for UBS. The Swiss banking giant is facing investigation by the Securities and Exchange Commission, federal prosecutors, and the Swiss Federal Banking Commission. UBS is still feeling the sting from $18.4 billion in write-offs related to subprime mortgage securities that went south last year, resulting in the Swiss bank’s first-ever annual loss.

The With UBS still holding at least $27.59 billion in these subprime securities – not to mention billions more in other risky mortgages – more writedowns are likely in the future.

The And if that isn’t enough, UBS had to seek a capital injection of nearly $12 billion from Singapore and an unidentified Middle East investor. UBS shareholders only recently approved the deal.

The Our affiliation of 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.Â

They once banded together. No more. The credit crunch is pitting investment firms and clients against each other.

• Wachovia, the fourth-largest U.S. bank, is taking a private-equity client to court to get out of its role in financing the sale of a group of local TV stations by Clear Channel Communications Inc. to Providence Equity Partners Inc. once Clear Channel and Providence lowered the selling price.Â

• Problems in the credit markets have made auction-rate securities a difficult sell for some investors. Citigroup Inc. and Goldman Sachs both made surprise announcements not to backstop auctions of securities that received little demand by bidding for some of the debt themselves.

• In January, Credit Suisse Group parted ways with a consortium of banks that intended to sell $7.25 billion worth in loans tied to a buyout of Harrah’s Entertainment Inc. by private-equity funds.

• Troubled times are facing complex mortgage securities, known as collateralized debt obligations (CDOs). CDOs combined hundreds of millions of dollars of subprime mortgage bonds and issued new securities in “tranches,” which had varying amounts of risk and return. As subprime mortgage bonds soured, legal disputes began between holders and different tranches in some CDOs regarding who should be paid what. As an example, Deutsche Bank, a trustee for the $985 million CDO called Sagittarius CDO I LLC, sued MBIA, an affiliate, last year about the rights of various classes of investors.

The bottom line: It’s a new game on Wall Street these days in which the competing interests of firms and clients now rules. Â

Our affiliation of 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 Securities and Exchange Commission (SEC) has requested information from Regions Financial Corp related to mutual funds run by Morgan Keegan & Co.The information sought by the SEC apparently stems from lawsuits by several investors who claim they were misled about the funds’ risks.

Citing research by Morningstar Inc., Reuters news service reported Feb. 27 that two bond funds operated by Morgan Keegan lost more than 50 percent of their value last year because of exposure to complex debt – often tied to mortgages – and investor redemptions.

The funds include Select Intermediate Bond A (MKIBX), which fell 50.3 percent in 2007, and saw assets dwindle to $53 million from $342 million. The second fund, Select High Income A (MKHIX), fell 59.7 percent last year, and assets dropped from $558 million $43 million.

Both funds have continued to lose value in 2008. The intermediate fund fell another 32.5 percent, while the high income fund is down 14.8 percent. According to Morningstar, neither had posted any annual losses since their creation in 1999, Reuters said.

Our affiliation of 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.

Small and midsize U.S. banks who depend on local businesses and builders are feeling the pain of the credit crunch. As both residential and commercial real estate softens in local markets, the small and midsize banks that support those industries are feeling the pressure.

Over the years smaller local banks have been losing business to their larger counterparts. However, due to their understanding of local markets, the one area that local banks had an advantage over the larger institutions was in commercial and construction lending. Unfortunately the recent downturn in this area and their investments in subprime products are hitting the small lenders particularly hard.

Although not expected to reach the numbers from the savings and loan crisis of the 1980s and early 1990s, experts predict that some 50 small banks may fail in the next year to year and a half. According to a piece by Eric Dash of  the New York Times, this fear has caused Federal regulators to step up examinations of smaller banks and require the bolstering of reserves.

In a recent Wall Street Journal article by Damian Paletta, it was reported that the FDIC is taking steps to brace itself for an increase in failed financial institutions. The agency is bringing back retirees and is looking to hire more staff. At the end of the third quarter of 2007, the agency rated 65 banks and thrifts as “problem.”

These concerns are shared by investors as well. Shares of small banks have dropped significantly in the last few months. The Standard & Poor’s midcap regional banking index is off 20 percent in the past year.

These problems are only expected to grow. As new home construction stalls and resale of existing homes continues to stumble, local lenders are going to suffer. At the same time that these banks are holding questionable subprime investments on their books, small banks are starting to see borrows that are unable to meet their obligations. Based on the signs, this may be the tip of the iceberg.

Small and midsize banks were large purchasers of subprime mortgage investments. In fact, our group has uncovered a Bear Stearns pitchbook that highlights that the Wall Street firm targeted these smaller local banks to sell these products. We are currently representing several small banks in an effort to recover the losses they have sustained as a result of the subprime crisis.

Our affiliation of 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.

State Street, the Boston-based financial services giant, continues to make news over its management of bond funds tied to the subprime mortgage industry.

In the past year, State Street marketed a number of bond mutual funds – including the Limited Duration Bond Fund, Intermediate Bond Fund, Enhanced Intermediate Bond Fund, Government Credit Bond Fund, Daily Bond Market Fund and Yield Plus Fund – to institutional investors, assuring them that the Funds would provide stable, predictable returns in line with a U.S. government and corporate bond index. Â

Investors soon discovered that “safe” turned out to be anything but that.Â

State Street’s problems first unfolded last summer. Back then, the Funds managed $1.4 billion for institutional clients. When the subprime mortgage crisis started to heat up, the Funds declined sharply in value. The Limited Duration Bond Fund, which lost 37% of its value during the first three weeks of last August, and 42% for the year, was hit especially hard. In total, assets in five of the Funds were down 43% for the year, according to an Oct. 5, 2007, article in the Wall Street Journal.

In turn, these events have caused a number of plan sponsors, investment advisers, trustees and other fiduciaries investors to take legal action against State Street. A unit of Prudential Financial, Inc., on behalf of accounts held by 28,000 individuals in 165 retirement plans that the firm markets, sued State Street Global Advisors, the manager of the Funds, in October 2007. The suit charges that clients lost $80 million in State Street’s Intermediate Bond Fund and Government Credit Bond and were exposed to undue risk, despite assurances it would guard against “unpredictable exposure to random events.”Â

The Houston Police Officers Pension System also filed charges against State Street in January, alleging that 94 percent of State Street’s Limited Duration Bond Fund was actually invested in the subprime market, rather than the agreed-upon low-risk investments.

Unisystems, the Andover Companies and the Memorial Hermann Healthcare System are filing legal actions against State Street, as well.

Based of the growing number of lawsuits coming to light, officials in states where State Street manages retirement funds have openly questioned the company’s internal risk-control processes. Three states – Alaska, Idaho and Ohio – may consider future legal action.Â

As for State Street, the company only recently acknowledged the extent of its problems. In a press release dated Jan. 3, 2008, State Street said it was establishing a reserve of $618 million, on a pre-tax basis, “to address legal exposure and other costs associated with the underperformance of certain active fixed-income strategies managed by … the company’s investment management arm.”

Our affiliation of 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 chaos on Wall Street just keeps getting louder.

According to a published report in the Wall Street Journal, Standard & Poor’s has downgraded or threatened to downgrade more than 8,000 mortgage investments. This means financial institutions could be facing losses totaling more than $265 billion, bringing more turmoil to a market already reeling from at least $100 billion in write-downs.

Thus far, S&P has lowered its credit rating on 3,787 classes of subprime mortgage bonds. Another 2,602 bonds were placed on “credit watch negative,” which means a downgrade is possible. Credit ratings for 1,953 collateralized debt obligations (CDOs) backed by mortgage bonds also were downgraded or threatened to be downgraded.

S&P stated that a number of financial institutions may be forced to sell some of the bonds affected by the recent ratings action. For banks that already have taken large write-downs, the downgrades may not have a negative effect. Â Others may feel the sting, however, including regional banks, credit unions, government-sponsored businesses, plus European and Asian banks that have yet to take a write-down.

In 2006 and the first half of 2007, rating decisions by the S&P have affected some $534 billion in mortgage-related investments, including 47% of subprime mortgage bonds. The S&P’s decisions also have had an impact on $264 billion in CDOs, with 35% of the instruments sold worldwide during that same period.

Looking ahead, America’s credit crisis may get worse before it gets better. David Wyss, an analyst with S&P, predicts that national home-price declines could reach 13% by the end of the year and bottom out in early 2009. That loss on mortgages – even those that do not go into mortgage-backed securities – could be as much as $400 billion when all is said and done.

Our affiliation of 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.

Auction-rate securities are in hot water these days. Demand for auction-rate securities has plummeted recently. In one week alone, nearly 1,000 auctions failed to attract any bidders. As a result, investors who purchased auction-rate securities are now discovering that what had been sold to them as a readily available source of cash is far from it.

Case in point: Goldman Sachs, Merrill Lynch and Lehman Brothers all have notified investors that the market for auction-rate securities is frozen – along with their cash.Â

If the credit crisis subsides, the auction-rate securities market could potentially recover. But nothing is certain.  According to report by Michael McDonald on Bloomberg.com, Bill Gross, the manager of the world’s largest bond fund – the $120 billion Total Return Fund – sees signs that “the contraction in the credit markets will last.” Â

In the meantime, investors can do nothing but wait. Or, they can pursue a rescission. Many firms sold auction-rate securities with assurances that they were short-term investments – as safe, liquid and reliable as money-market funds.  Recent events have proven contrary, and auction-rate securities are now long-term investments with an uncertain redemption date. As a result, investors are demanding the money they invested be returned, i.e. a rescission. Investors’ inability to get their money out, without taking more losses, could be enough to hold a firm liable.

Corporations, too, have invested heavily in auction-rate securities and are now paying the price. As reported Feb. 15, 2008, in the New York Times, pharmaceutical giant Bristol-Myers Squibb recently took a $275 million write-off on funds it had invested in the auction-rate market.Â

The turmoil surrounding the $330 billion auction-rate securities market has led state regulators to begin investigating just how auction-rate securities were marketed and sold to investors. William Galvin, Secretary of State of Massachusetts, currently is looking into the issue, asking nine mutual fund companies to supply information about failed auctions that left investors unable to redeem their shares.Â

Ohio’s Attorney General also has indicated lawsuits may be forthcoming against firms that sold auction-rate securities to state funds. Among them are BlackRock and Nuveen Investments, as well as other mutual fund companies, which sold approximately $60 billion of auction-rate securities to raise additional capital for their closed-end funds.

Besides investors, the collapse of the auction-rate bond market has taken a toll on the issuers of auction-rate securities – state agencies, municipalities, hospitals, colleges and universities, non-profit organizations and other entities. Concerns about the credit strength of bond insurers that back the underlying debt obligations of auction-rate securities have caused several of Wall Street’s top securities firms, including UBS, Citigroup and Goldman Sachs, to reduce or eliminate entirely their purchases of the securities.

The Wall Street Journal summed up the latest state of affairs regarding auction-rate securities by a quote from David Brow, executive director of the New York State Dormitory Authority, who criticized the firms for their reluctance, if not failure, to make a market in auction-rate securities. “This is not the finest hour of the investment banking community.”Rather than making a market in the securities, auction dealers are recommending debt restructurings “where they will earn yet another investment banking fee.”

Our affiliation of 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.