Archive for May, 2008

Auction-rate securities used to be the liquid, safe place to invest, with higher rates than most money-market accounts. Now, since the auction-rate market froze last February, investors face two unappealing options: Wait and see if the market rebounds, or search for ways to recover their money. For some, that could mean taking out a loan to meet their cash requirements.

Those who can afford to postpone access to their cash may eventually find healthier yields turning the market around. In the Sifma Auction-Rate 7-Day Index, 103 auctions posted an average yield of 3.61 percent as of May 14. By contrast, in the U.S. taxable money market, the average 7-day annualized yield sat at a lowly 1.95 percent.

Patient investors may see the brokers and banks who underwrote their securities eventually redeem them. Southern California Public Power Authority and other bond issuers already refinanced their debt in order to redeem their customers. Claymore Securities, Nuveen Investments, and Calamos Asset Management dug up financing to redeem some of their customers.

Unfortunately, options remain grim for investors who need cash quickly for mortgages, tuition, and other bills. These investors can either ask their brokers to purchase the securities for a cut-rate price, or secure a brokerage loan and pay the interest.

Numerous investors who sought liquid, safe investments claim that their brokers never fully explained the risks of auction-rate securities. Now, wondering whether the market can ever recover and needing to unload securities at less than full value, some investors grabbed at a last chance to recover their cash, filing arbitration claims against their brokerage firms.

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

The black eye for financial giant Citigroup over two failed hedge funds – ASTA/MAT - keeps getting blacker. Now the head of the two funds that crashed and burned in recent months is making his exit from the company.

After 18 years with Citi, Reaz Islam is leaving the alternative investments unit. His departure comes on the heels of dismal performances by Citigroup’s Falcon Strategies and ASTA/MAT hedge funds. Devastated by the credit crunch, both funds have plummeted in value, with Falcon losing more than 75 percent and ASTA/MAT falling as much as 77 percent.

The rapid descent of the two hedge funds has caused furor among investors who say they thought they were holding low-risk securities. As reported in a May 22 article in the Wall Street Journal, in the face of the funds’ deteriorating performances, Islam reassured brokers and clients alike that they would likely rebound.

At least two investor lawsuits have since followed, with Islam named as a defendant in a federal lawsuit earlier this month.

In an attempt to appease investors, Citigroup’s wealth-management unit recently agreed to spend about $250 million that would allow Falcon clients to exit from their positions without absorbing the funds’ full losses. The catch is they must agree to forfeit any legal claims against the funds. A similar deal will be presented to some ASTA/MAT investors.

For individual investors in the hedge funds - many of which were retirees - that rescue plan may be too little, too late. The ongoing hedge fund mess at Citigroup is yet another example of improper marketing practices on Wall Street - and further evidence of why the $1.75 trillion hedge fund industry has an immediate need for stricter disclosure policies and stronger risk-management standards.

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 used to be the liquid, safe place to invest, with higher rates than most money-market accounts. Now, since the auction-rate market froze last February, investors face two unappealing options: wait and see if the market rebounds, or search for ways to recover their money. For some, that could mean taking out a loan to meet their cash requirements.

Those who can afford to postpone access to their cash may eventually find healthier yields turning the market around. In the Sifma Auction-Rate 7-Day Index, 103 auctions posted an average yield of 3.61 percent as of May 14. By contrast, in the U.S. taxable money market, the average 7-day annualized yield sat at a lowly 1.95 percent.

Patient investors may see the brokers and banks who underwrote their securities eventually redeem them. Southern California Public Power Authority and other bond issuers already refinanced their debt in order to redeem their customers. Claymore Securities, Nuveen Investments, and Calamos Asset Management dug up financing to redeem some of their customers.

Unfortunately, options remain grim for investors who need cash quickly for mortgages, tuition, and other bills. These investors can either ask their brokers to purchase the securities for a cut-rate price, or secure a brokerage loan and pay the interest.

Numerous investors who sought liquid, safe investments claim that their brokers never fully explained the risks of auction-rate securities. Now, wondering whether the market can ever recover and needing to unload securities at less than full value, some investors grabbed at a last chance to recover their cash, filing arbitration claims against their brokerage firms.

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

Investors who have been financially burned by the frozen state of the auction-rate securities market aren’t the only ones up in arms these days. Apparently, financial advisors are angry, as well, saying they believed auction-rate securities to be safe as cash because that’s exactly how the products were explained to them in company training sessions.

Now, many of these brokers and advisors are scrambling to cover themselves in the event of future lawsuits over the misguided investments, collecting company sales materials and presentations that describe auction-rate securities as safe, 100-percent liquid investment vehicles.

Auction-rate securities are municipal bonds, corporate bonds, or preferred stocks that have interest rates reset through auctions held every seven, 14, 28, or 35 days. In theory, investors typically should be able to liquidate their ARS holdings at face value during the auctions - that is until the market seized up in February 2008 and auction-rate securities became illiquid. Investors who thought they were holding safe investments that they could cash out of at any time learned the opposite to be true.

Understandably fed up, many clients have headed to court, filing individual arbitrations and lawsuits against the brokerage companies and securities firms that they say never fully explained the true risks of auction-rate securities and instead pitched them as “cash equivalents.”

Investor complaints over auction-rate securities have led state regulators from New York to Illinois to Kansas City to even Alaska to step up their inquiries into the auction-rate market and, specifically, into the ways in which Wall Street banks sold auction-rate securities investors.

In March, a nine-state national task force, headed by Bryan Lantagne, director of the Massachusetts Securities Division, was formed to look into the auction-rate problems. The Securities and Exchange Commission (SEC) also has launched an inquiry of its own.

An unraveling of the auction-rate market seemed like an impossible concept. For more than two decades, the $330 billion auction market rode a wave of financial success. Then in February, the bottom fell out as bidders failed to show up for auctions. The investment banks that once gave financial support pulled back, and news of auction failures became the fodder of daily headlines.

As a result of the auction failures, issuers of the auction bonds, including municipalities and nonprofits, faced stiff penalties in higher interest rates - sometimes as high as 20 percent. They are now either buying back their bonds or in some cases refinancing.

For retail and brokerage clients, they’ve been presented “alternatives” that include 50 percent margin loan offers against the value of their auction-rate securities holdings.

As the furor over auction-rate securities continues to grow, so too, do the lawsuits. To date, the majority of Wall Street’s major investment banks and brokerage firms, including Citigroup, E-Trade Financial Corp., Merrill Lynch, Morgan Stanley, Raymond James Financial, UBS, AG, Wachovia Corp. and Wells Fargo Investments, are the target of investor litigation over failed auction-rate securities.

The outcome of these lawsuits is anyone’s guess. Regardless, an even bigger problem now awaits Wall Street: an unprecedented crisis in confidence with investors. The unspoken bond of trust between broker and client is supposed to be sacred; once broken, it’s difficult, if not impossible, to reconstruct. It becomes a situation reminiscent of the age-old children’s nursery rhyme in which, “all the king’s horses and all the king’s men couldn’t put Humpty together again.”

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 union between Bear Stearns and J.P. Morgan recently got a little pricier. J.P. Morgan may end up spending $9 billion to fix the bad assets and losses on Bear Stearn’s balance sheet and cover the cost of litigation and layoffs resulting from the takeover. That total rose $3 billion from J.P. Morgan’s first prediction, though in the end it could vary up or down by as much as $1 billion.

Since stepping in to rescue Bear Stearns, J.P. Morgan also increased its offer price from $2 to $10 per share. That boost put Bear’s value at $1.5 billion and alleviated the anger felt by some Bear employees and investors over J.P. Morgan’s first bargain-basement offer. J.P. Morgan contends that paying only partial value for Bear is required in order to offset Bear’s deficits resulting from bad assets like mortgage-related securities.

Even with additional Bear losses and the more expensive price, J.P. Morgan expressed confidence about the long-range advantages of the takeover. In this year’s second quarter, J.P. Morgan anticipates a $1 billion earnings increase and a $2 billion total equity boost. Although that’s less than earlier calculations of a $5 billion equity contribution, starting next year, Bear should add over $1 billion annually to J.P. Morgan’s profit numbers.

In a separate issue affecting J.P. Morgan’s future, the company recently revealed that the SEC may press civil charges as part of an investigation centering on bidding for municipal bonds. The full effect of these issues on investors remains to be seen.

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

Following the deep freeze of the auction-rate bond market in February, state and federal regulators launched a series of investigations into how investment banks marketed and sold these to investors. Now, it’s Wachovia Corporation’s turn to be in the hot seat.

On May 12, Wachovia, the nation’s fourth-largest bank, confirmed that its securities unit had received subpoenas and inquiries from the Securities and Exchange Commission (SEC) and regulators in various states regarding its auction-rate securities practices.

As with other ongoing investigations into auction-rate securities, the issue at hand is how investment banks pitched the securities to investors. A number of investors say they were told auction-rate securities would be a safe, liquid investment, much like money-market accounts but with higher rates of return.

Similar to long-term bonds, auction-rate securities are bought and sold at auctions held every seven, 28 or 35 days. The first signs of distress in the $330 billion auction-rate market unfolded earlier this year, when the investment banks and securities firms began to pull back their support and stopped bidding on the securities. As a result, auctions for the securities failed, leaving non-profit borrowers - such as municipalities, museums and hospitals - with interest payments that more than doubled. As for individual investors, they were left unable to access their once-liquid money.

State and federal regulators now want to know whether the investment banks and securities firms that first sold the securities fully explained the risks of failed auctions to investors. Earlier this year, nine states formed a task force to launch a broader investigation into the troubles affecting the auction-rate securities market. Among those involved: Massachusetts, Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas, and Washington.

Meanwhile, for the thousands of investors who are now caught in the auction-rate vortex, a resolution from these state and federal investigations can’t come soon enough. For them, action needs to happen - and now.

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 fears of a recession started in 2007, investors jumped into ultra-conservative investments such as certificates of deposit (CDs), savings deposits, and money-market funds. Now, after numerous rounds of interest-rate cuts, investors in these ultra-conservative funds face ultra-low yields.

Assets in the most conservative investments rose since last October. At the same time, the Federal Reserve tried to jump-start the economy by dropping the benchmark interest rate for banks lending money to each other from 5.25 percent in September to the current 2 percent rate.

For investors, that translates into plenty of safety but little return. As an example, Bankrate.com estimates the average yield on six-month CDs at 1.8 percent and iMoney.net calculates the average return on taxable retail money-market funds at 2 percent.

Where can investors find higher yields while keeping their money safe? The options remain extremely limited. Many investments, such as ultra-short mutual funds and auction-rate securities, proved riskier than expected. Ultra-short funds that hold large amounts of subprime, asset-backed securities shed their value over the last year. For instance, Schwab Yield Plus plummeted 28 percent. Meanwhile, the auction-rate market imploded last February when investors sold off those securities in mass.

With these low returns on safe options, investors may look at high-yield (“junk”) bonds, where the extra risk comes with much better interest rates—the average yield currently sits at 7.9 percent. But investors need to remember that firms with unstable credit issue junk bonds and defaults often come out of the woodwork in times of recession. Buyer beware.

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

With the rate of foreclosures rapidly rising, the drop in home prices escalating, and the crisis extending to nearly every major city, the most critical real estate recession in decades remains far from over, says an April 29 USA Today article by Stephanie Armour. Investors beware.

Logging the biggest decline since its creation in 2001, the Standard & Poor’s/Case Shiller home composite index covering 20 cities dropped by 12.7 percent in February compared with last year. Every one of the 20 cities (except Charlotte) registered price declines; 17 suffered record drops for the year. According to David Blitzer, chair of S&P’s index committee, “There is no sign of a bottom in the numbers.”

Foreclosure activity rose a shocking 112 percent year-over-year and 23 percent quarter-to-quarter, according to CNBC.com. Foreclosure activity includes auction sale notices, bank repossessions, and default notices.

One significant concern is the unprecedented rise in bank-owned properties. “Typically you’ll see about 20 percent of the foreclosure filings being bank-owned,” said Rick Sharga of RealtyTrac in California. “We’re getting to a point now where it’s well over 1/3 and aiming at 40 percent, so that suggests that a lot of these homes can’t even be sold to investors at auctions—because there’s just no equity in the properties.”

More than a million bank-owned homes may flood the market by the end of the year, Sharga predicts. With approximately four million properties in the Multiple Listing Service (MLS), that means 25% will be owned by banks. Despite lenders’ assertions about offering work-outs or refinancing, as well as programs to assist borrowers in default, the rising number of homes now owned by banks points to significant problems with the effectiveness of these workouts and programs.

According to a RealtyTrac report, Nevada suffered the worst foreclosure rate at 3.6 times the national average, just ahead of California and Arizona. In the first quarter of this year, one in 54 Nevada homeowners received a foreclosure notice.

Through the coming months, analysts predict even more foreclosures, causing greater problems with prices. In order to clear their balance sheets of home inventory, banks continue to slash prices, compelling sellers who owe more than their homes are worth to further cut prices.

According to Mark Zandi, chief economist at Moody’s Economy.com, “There’s no sense of stabilization. The foreclosures are causing a vicious cycle, and the job market is weakening. This doesn’t feel therapeutic anymore. This is undermining the economy.” The results raise a multitude of red flags for investors, who may want to examine their options.

Only when foreclosure filings diminish can the real estate market recover, experts say. Therefore, the faster home prices hit bottom, the quicker buyers can resuscitate home sales, said Naroff Economic Advisors’ Joel Naroff. “We’re beginning to get massive price declines, and we need that to clear this market,” he concluded.

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

“This is going to be one of the worst economic downturns since the Great Depression,” said Columbia University’s Nobel Prize laureate Professor Joseph Stiglitz in an April 25 CNBC interview. Stiglitz’s comments contradict Wall Street executives who recently claimed the worst was over. Those same Wall Street executives made similar statements last October when they suffered losses in the billions of dollars. What will Stiglitz’s bleak forecast mean for investors?

Stiglitz contends that because the main cause of the current recession is historically unique, solutions are harder to uncover. Past recessions resulted from inflation or over-abundant inventories. According to Stiglitz, this downturn came about because of “badly impaired” financial institutions and banks unable to lend capital. Now, the borrowers who historically lead the country out of recession face uncertainty about the best course of action.

Even though inflation didn’t play a primary role in starting this recession, it remains a huge concern, Stiglitz said, with skyrocketing oil prices and increasing food prices potentially hurting businesses and alarming consumers. “Oil is particularly bad,” he said, with additional dollars “going abroad.”

In addition, the housing crisis contributes to a drawn-out recession. Â Previously, Americans withdrew billions of dollars through home equity loans. Unfortunately, they often consumed that money instead of investing it. Now plummeting home values compromised an important spending source, leaving homeowners with little, if any, equity to draw upon.

Prior to the current recession, the savings rate was zero. According to Stiglitz, savings will now “go up,” leading to reduced consumer spending and deteriorating retail sales.

Stiglitz concluded that, “The Bush Administration’s [economic stimulus package] is too little, too late, and very badly designed.” The tax rebate checks are a “drop in the bucket” compared to cash held back or siphoned out.“

If you really wanted to stimulate the economy, increase unemployment insurance,” he said. “The President is telling people to go out and get jobs—and there are no jobs for them.” Unfortunately, the longer the recession drags on, the more consequences for 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.Â

Troubles continue to brew for one of the nation’s largest banks, as investors in two struggling hedge funds file lawsuits against the alternative investment units of Citigroup and the funds’ managers.

One of the funds named in a lawsuit is the banking giant’s MAT Five LLC Fund, which was marketed to high net worth, fixed-income investors as a stable, tax-advantaged investment with higher yields and low volatility. According to the lawsuit, investors say they were told similar funds had produced net returns of 14 percent on a tax-equivalent basis.

The focus of the MAT Five lawsuit is on the selling documents associated with the fund, which investors allege gave the false impression that the fund’s investment strategies would entail AAA/AA-rated municipal bonds, swaps, swap options and Treasuries.

In reality, some of the fund’s assets were invested in risky and speculative investments, including the mortgage-backed securities that have fueled the current credit crisis and generated turmoil in the financial markets. When shares of the MAT Five Fund were sold, instead of seeing returns with a 7 percent to 8 percent yield, investors saw significant losses.

As reported May 1, 2008 on Forbes.com, the MAT Five Fund posted a net total return of -17.08 percent on June 20, 2007.

In April, Citigroup was hit with another lawsuit over its Falcon Strategies Hedge Fund.

In that lawsuit, plaintiffs also contend Citigroup violated federal securities laws by misrepresenting the risk levels of the hedge. The fund, which lost 53 percent in the fourth quarter of 2007, is down more 75 percent today. The losses were largely attributed to the fund betting on mortgage-backed and preferred securities and making trades based on the relative values of municipal bonds and U.S. Treasuries. Apparently, some Collateralized Debt Obligations (“CDOs”) in the Falcon Fund currently are worth 25 percent of their original value.

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