Archive for March, 2008

Massachusetts’ top securities regulator is turning up the heat on several Wall Street heavy hitters as part of a probe into the $330 billion auction-rate securities market.

Subpoenas were issued by William Galvin, Secretary of the Commonwealth of Massachusetts, on March 28, 2008, to Merrill Lynch, Bank of America Investment Services and UBS Securities for documents and information on how the companies marketed auction-rate securities to investors.

Galvin began his investigation into the auction-rate securities market after his office received numerous calls from investors, who said they thought they had invested in safe, cash-alternative investments. It was only later, when their accounts were frozen and they could no longer withdraw money that they learned it was actually auction-rate securities that had been purchased.

In the past two months, auction-rate securities have been caught in a downward spiral, with more and more auctions failing to attract bidders. Banks that normally stepped in to buy unsold securities backed off their support, already encumbered with large amounts of securities whose values have nosedived.

The lack of confidence in the auction-rate securities market continues to intensify daily, with a number of analysts predicting that this type of structure could go away entirely. Meanwhile, the list of brokers facing litigation alleging they concealed the risks of the bonds gets bigger by the minute.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.Â

In a surprising move on March 25, Bear Stearns’ former chairman, James Cayne, sold all 5.66 million shares of his stock in the company for $61 million, or $10.84 per share, reported Bloomberg.com. What does Cayne know that he’s not sharing

The move startled many, who anticipated multiple bids for Bear Stearns. As late as last week, Cayne and Joseph Lewis, another major shareholder, sought competing bids for Bear Stearns.  Now the unexpected sale implies that Cayne may harbor worries about Bear’s underlying value.  Did he just “get out while the getting was good”?

Experts consistently have trouble valuing Bear Stearns due to its complex involvement in a wide range of complicated derivative arrangements, many of which can’t be liquidated. On top of that, quite a few of Bear Stearns’core business segments suffer significant exposure to unstable market conditions. It appears that Cayne decided the $10.84 per share was the best he would get. Those who still hold investments with Bear Stearns may want to quickly evaluate their options.

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

Citigroup may suffer further writedowns of $13.1 billion on leveraged loans and collateralized debt obligations, according to Oppenheimer & Co.’s respected banking analyst Meredith Whitney. By the end of 2008, Whitney predicts that Citigroup will lose 15 cents per share.

Already, Citigroup decreased dividends and wrotedown almost $18 billion in subprime securities investments. The company cut 4,200 jobs and plans more workforce reductions in order to control costs. Thousands more Citigroup employees may lose their jobs, according to experts.

Uncertainty clouds Citigroup’s financial picture because of the firm’s lack of transparency about its overall loss exposure. At the end of 2007, Citigroup reported that off-the-balance-sheet entities tied to the firm had $356 billion in assets, with maximum potential loss exposure for those assets at $152 billion. In its annual report, Citigroup stated that its trading arm holds roughly $20 billion in hard-to-value securities related to the commercial real estate market, which recently began to falter. These disclosures complicate investors’ grasp of Citigroup’s true position and the future of their investments.

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

Merrill Lynch, the nation’s largest brokerage firm, is expected to disclose a huge write-down of $4.5 billion in collateralized debt obligations (CDOs) in the first quarter of 2008. The company already has recorded approximately $24.5 billion in write-downs related to subprime securities investments.

This latest development further underscores the rising toll that the mortgage crisis continues to wield on many Wall Street heavy hitters.

At the end of 2007, Merrill Lynch had approximately $30.4 billion of CDOs on its books. In recent months, the value of CDOs has taken a nosedive as a result of the subprime fallout and growing turmoil in the credit markets.

The scale of Merrill’s losses has some analysts fearing the worst is far from over for the company, and that it could be looking at additional multibillion-dollar losses in the future. Brad Hintz, an analyst with Sanford C. Bernstein & Co., predicts it will take at least several years for Merrill Lynch to fully divest itself of the troubles brought on by subprime securities and other related derivative instruments.

Regardless, Merrill Lynch may soon have even bigger fish to fry in the form of legal claims from unhappy shareholders and investors who’ve sustained investment losses related to the subprime debacle.

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.

Chants of “Help Main Street, not Wall Street” rang through the lobby of Bear Stearns today as protestors demonstrated against the Fed’s bailout of the investment bank.

On March 16, the Federal Reserve orchestrated a controversial takeover of Bear Stearns by J.P. Morgan. Under the takeover terms, the Fed will guarantee up to $29 billion of Bear Stearns assets.

The protestors, organized by the Neighborhood Assistance Corporation of America, were calling for the government to provide similar aid to homeowners facing foreclosure.

Protestors also were blaming Bear and J.P. Morgan for their role in the downward spiraling mortgage market. Banks have relaxed their lending standards to unwise levels – some even stooping to scams and fraud – in order to meet increased demand for mortgage investments from Bear Stearns and others. Now, many of those borrowers are in default.

The protestors and many others are disturbed at the thought that the federal government would bail out an investment bank while leaving untold numbers of individuals to lose their homes.

When police showed protestors to the door, they headed to the offices of J.P. Morgan.

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

Thousands of employees at Wall Street firms may lose their jobs in the coming months as the subprime crisis and related credit crunch persist. In fact, job cuts “could be more than 100,000 in a few years,” said Jo Bennett, a New York-based executive search firm specialist. According to USA Today, New York City alone could suffer the loss of more than 20,000 financial sector jobs over the next two years.

The job cuts signify the troubles faced by many firms and could affect investments in the long-term. In an effort to control costs, many Wall Street firms already drastically reduced their workforce. More than 34,000 financial sector employees lost their jobs in the last nine months because of the subprime crisis and credit crunch, reports Bloomberg.com. At least 11 firms cut over 1,500 jobs. Citigroup, Lehman Brothers, Bank of America, Morgan Stanley, and Merrill Lynch have been hardest hit by job cuts to date.

Going forward, the likelihood of further consolidation within the securities industry puts more jobs at risk. For instance, JPMorgan’s recent agreement to buy out Bear Stearns could lead to the elimination of thousands of jobs. While the subprime crisis and credit crunch linger, investors should keep a wary eye on the viability and strength of the firms that invest their money.

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

JP Morgan’s recent filing of detailed information on the valuations of specific structured credit securities held by itself and other banks with a court in Canada caught many off guard. Perhaps the biggest surprise to come out of the filings was that some subprime mortgage-linked securities issued by groups like UBS have lost almost 95 percent of their value.

The financial community has typically kept this kind of information under wraps. It became public only now because JP Morgan is spearheading an effort to restructure a group of 20 Canadian structured investment vehicles that issued $32 billion of asset-backed commercial paper.Â

The filings revealed bad news for other securities, as well, showing that some lost almost a third of their value, despite the fact that many were considered low risk and carried top ratings from the credit ratings agencies.

According to a March 23 article in Financial Times, the price estimates will no doubt garner the attention of auditors and regulators alike, particularly since they come at a time when the issue of security pricing is under fire. Banks are feeling the heat from regulators to book the losses they’ve incurred on the instruments. But because trading has dried up in many corners of the credit markets, it’s difficult, if not impossible, to compare prices for these instruments between banks.

For their part, regulators and investors are afraid that the banks are still varying in the degree to which they have recorded losses on their credit instruments in recent months, not to mention how hard it is for auditors to compare internal estimates with external benchmarks, according to the Financial Times story.

The worst of this storm is far from over. And, the ultimate implications for the broader economy continue to change by the day.

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.

Are you investing in conservative U.S. bond funds?  Watch out for “credit default swaps”— basically a futures contract influenced by whether the bond issuer’s credit rating increases or decreases. Although part of many bond fund portfolios, credit default swaps aren’t subject to strict regulation by the Securities and Exchange Commission. In addition, many bond funds neglect to include details of the related risks in their prospectuses.

Credit default swaps help fund managers realize a slightly higher yield – but with significant risks. First, if the bond issuer defaults, the fund must pay for the loss. In some cases, that means selling other assets that negatively impact the fund’s overall performance. Second, because the price of credit default swaps is based on a “fair value estimate,” the full cost may not be recouped when sold. This makes the stated value of credit default swaps inherently unreliable and pulls the bond fund’s overall Net Asset Value into question. Finally, if the firm on the other side of the transaction, the “counter party,” runs into financial problems, they may not be able to pay the premium for bond insurance.

Because of these risks, credit default swaps can cause major issues with a bond fund’s share price. The higher the percentage of credit default swaps, the greater the risk. Bond fund investors need to examine the level of credit default swaps permitted in their funds, as well as how the fund’s manager handles the associated risks. Funds that neglect full disclosure or appropriate management could be liable for losses.

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

From Citigroup to Bear Stearns, the list of major hedge funds that are on the brink of collapse or have halted investor withdrawals keeps growing by the day.

A number of news stories have given ink to the recent fall from grace of many hedge funds and the implications it has for other market participants. In an article in the Wall Street Journal, Liz Rappaport and Justin Lahart concluded that the pressures in one market no doubt render consequences in another. In this case, the troubles that some hedge funds are experiencing threaten to further weaken lending, borrowing, spending and investment in the U.S. economy.Â

According to a March 5, 2008, story in Business Week, at least 24 hedge funds have barred or limited investors from taking their money out of the funds, thereby tying up tens of billions of dollars for an indefinite period of time. A number of hedge funds have gone this route to avoid selling illiquid assets at fire-sale prices, which would almost certainly put a major dent of losses in their portfolios.

Other hedge funds are taking a different approach by liquidating their funds to maximize investor value or minimize losses rather than gamble on an uncertain future. For example, on March 5, Peloton Partners announced plans to liquidate its largest hedge funds due to various investments tied to subprime and Alt A mortgages. As these investments spiraled downward in value, the funds’ banks, Goldman Sachs, Merrill Lynch and UBS, demanded more collateral, leaving the funds with no alternative but to liquidate.

A few days later, on March 12, Drake Management announced the possibility of shutting down its largest hedge fund – Drake Global Opportunities Fund – and said it planned to evaluate closing two others, the Drake Low Volatility Fund and the Drake Absolute Return Fund.

Looking ahead, the liquidity problem for some major hedge funds is likely to continue, as more lenders, including Wall Street banks, demand that the funds put up more collateral to secure their loans. Bloomberg.com reports that since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, were forced to liquidate or sell holdings for this very reason.

In turn, the continuing meltdown of hedge funds will create a domino effect, producing not only more turmoil on Wall Street but on Main Street, as well.

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.

When J.P. Morgan Chase announced a Federal Reserve-backed bailout plan to acquire Bear Stearns, it appeared to send a message that the Fed would stop at nothing to avoid financial catastrophe on Wall Street.

Or so it seemed. In her March 23, 2008, column in the New York Times, Gretchen Morgenson takes a closer look at the JPMorgan-Bear arrangement and the implications it may have for market participants. The deal – and the Bank of America-Countrywide match before it – may serve as a blueprint for the Federal Reserve that goes far beyond basic bailout plans, she says. It also might be a way to deflate the credit insurance market and at same time humble speculators who were betting on big banks to fail.

Morgenson writes that, “it could be simple coincidence that the rescues caused billions of dollars (or more) in credit insurance on the debt of Countrywide and Bear Stearns to become worthless. Regulators haven’t pointed at concerns about credit default swaps, as these insurance contracts are called, as reasons for the two takeovers. And Bank of America’s chief executive, Kenneth D. Lewis, has flatly denied that his deal with Countrywide was at the behest of regulators.”

Credit default swaps are typically five-year insurance contracts that bondholders can buy to hedge their exposure to the securities. The swaps are supposed to cover losses to banks and bondholders when companies fail to pay their debts. In recent months, however, the credit insurance market has been swamped by speculators using derivatives to bet on troubled companies, making the swaps the fastest-growing contracts in years. The value of the insurance outstanding rose from $10.2 trillion to $43 trillion in 24 months.

Before a contract can be paid out to a buyer of the insurance, a company must default on its bonds. In the Bear Stearns and Countrywide takeovers, the companies were saved before they could default. Both deals specify that the acquiring banks also assume the debt of the target.

As a result, the insurance policies that once covered Bear Stearns and Countrywide bonds will become obligations of much stronger issuers – JPMorgan and Bank of America. In other words, writes Morgenson, no payouts are forthcoming.

For the hedge fund managers and Wall Street traders who recorded paper gains on their credit insurance bets as the prices of Bear and Countrywide bonds fell, the rescues mean they must now reverse those gains. According to Morgenson, if they still hold the insurance contracts, “they are up a creek – and the Fed just took away their paddles.”

So are the Bear Stearns and Countrywide a blueprint of more Federal Reserve-backed arrangements to come? Although there aren’t too many big banks left that are financially sound enough to undertake these kinds of rescues, my guess is it’s a pretty sure bet.

Stay tuned.

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.