Archive for the “ABS & CDOs” Category

Sometimes arranged marriages work out for the best; sometimes they don’t. In the case of Bank of America’s purchase of 94-year-old investment firm Merrill Lynch, a weekend of high-speed discussions and unprecedented market conditions culminated in their $50 billion union. The arrangement surprised Wall Street and investors alike, and has many people asking whether the pairing of these two very distinctly different financial operations will yield long-term success for BofA in the future.

The challenges facing Bank of America are significant to say the least. Before the acquisition this past weekend, Merrill Lynch was swimming in troubled financial waters. The company has taken some $40 billion in write-downs - with another $8.8 billion potentially to come - from failed investments, and reported losses for four consecutive quarters. Its stock has fallen nearly 70 percent this year. And in August, Merrill’s CEO John Thain announced a liquidation of $30.6 billion of toxic collateralized debt obligations (CDOs) at fire-sale prices in an attempt to shore up the company’s strained balance sheet.

With its purchase by Bank of America a seemingly done deal, the threat that Merrill Lynch might meet a similar fate of Lehman Brothers, which declared bankruptcy on Sept. 15, is removed entirely. The deal also positions BofA, a retail-focused bank, to enter the world of global investment banking, making it the nation’s largest financial services company with more than 20,000 financial advisers and $2.5 trillion in client assets.

Still, many perceive the strategy to be a big gamble on the part of Bank of America. On Monday, the day that the acquisition was announced, shares of Bank of America fell more than 20%.

“The market reaction is very clear: The market is absolutely appalled by the deal,” said James Ellman, head of San Francisco hedge fund Seacliff Capital, in a Sept. 15 story in the Houston Chronicle. According to the story, Ellman, who does not own shares of either Bank of America or Merrill Lynch, says the market believes BofA paid too much for Merrill Lynch, a move that ultimately could lead to a number of scenarios, including an attempt to renegotiate the sale price.

The apparent skepticism on the wisdom of the BofA-Merill Lynch union also was seen in recent actions taken by Standard & Poor’s Ratings Services. The ratings agency lowered its long-term credit rating on Bank of America, saying the purchase of Merrill Lynch carries integration risk for the bank, and puts further pressure on BofA’s capital.

Meanwhile, two of the top men in charge at Merrill Lynch stand to make a tidy profit from the firm’s sale to Bank of America. A Sept. 16 story on Bloomberg.com reports that CEO John Thain could pocket $11 million if he does not stay on once the purchase is finalized. Thomas Montag, who’s in charge of Merrill’s global sales and trading division, may be looking at a payout of $30 million in accelerated stock awards and $6.4 million in options.

Both of the payouts are in addition to a $15 million signing bonus Thain received last December and a nearly $40 million bonus Montag is guaranteed to receive this coming January.

Moving forward, a lot is riding on Bank of America’s CEO Kenneth Lewis and his high-stake gamble to acquire the world’s largest and most widely recognized brokerage firm. Only time will tell whether his decision leads to a match made in financial heaven or becomes a union doomed to fail because of incompatibility.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in valuating their legal options when confronted with subprime and other mortgage-related investment losses.

For the moment, Jefferson County, Alabama, has successfully avoided filing for the largest municipal bankruptcy in the United States. Jefferson County commissioners will find out next week if their proposal to restructure the county’s $3.2 billion sewer debt at lower, fixed interest rates over a longer term meets the approval of creditors.

The temporary reprieve allows the county to delay making further interest payments to lenders.

Jefferson County commissioners were joined by Alabama Governor Bob Riley when they presented the proposal at an Aug. 29 meeting with creditors. Reportedly, lenders and others involved in the sewer project plan to hold off in taking any legal action against Jefferson County until Sept. 30 while they study the proposal’s merits.

Today was a critical day for Jefferson County, with county commissioners facing the possible end of its financial road. At 5 p.m., a forbearance agreement between Jefferson County and lenders for the sewer debt was set to expire. Following months of trying to work out a new financing deal with lenders, bondholders and others - as well as having taken several forbearances to delay making interest-rate payments on the debt - county officials were set to file for bankruptcy.

A bankruptcy for Jefferson County would almost double the previous municipal bankruptcy record set in 1994 by Orange County, Calif., which had debts of $1.7 billion.

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.

Hit hard by the subprime crisis fallout, Asset Management Fund’s Ultra Short Fund is going the way of a number of ultra short bond funds this year: down the tubes.

Pitched as a conservative, low-risk investment that mimics the safety of money-market funds, the AMF Ultra Short Fund proved to be the opposite for investors. Heavily invested in toxic subprime-backed securities - in this case, hybrid adjustable rate mortgages (ARMs) - the fund plummeted in value when things began to go haywire in the housing market.

Most unsettling to irate investors who put their money into the AMF Ultra Short Fund is the fact that it did not begin to truly decline in value until May 2008, yet until that time, its managers - Shay Assets Management, Inc. - continued to invest heavily in the risky hybrid ARMs.

A hybrid ARM offers a combination of adjustable-rate and fixed-rate features. For an initial period - typically one to three years - it carries a fixed rate, followed by rate adjustments once every year for the balance of the loan term. Many people who sign up for hybrid ARMs do so to reap the benefits of the fixed-rate period. However, at the end of the fixed-rate period, many of these same homeowners are unprepared to see their monthly mortgage payment jump upwards of 30 percent or more.

In its product literature, AMF Asset Management describes its Ultra Short Fund as designed to provide current income with a very low degree of share-price fluctuation. Instead, the fund has declined more than 15% this year.

Several investors who suffered losses in the AMF Ultra Short Fund are going to court, charging the fund’s managers and AMF with not only misrepresenting the fund but also for knowingly keeping information from them about the concentration of risky mortgage-backed securities that the fund contained.

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.

When Merrill Lynch - one of the world’s largest brokerage houses - announced plans to sell $31 billion of collateralized debt obligations (CDOs), it put a price tag on the sale at $6.7 billion. Less than two weeks earlier, the Merrill Lynch CDOs had been valued at $11.1 billion.

The value inconsistency of the Merrill Lynch CDOs is troubling on several fronts, a fact that investors are all too aware of. Not only does it create controversy regarding the accuracy of the Merrill Lynch balance sheets but also begs the question of whether the write downs haunting Wall Street will ever be put to rest.

The Merrill Lynch CDO sale was a pivotal moment for the financial world - one that is sending a loud and clear message that the problems plaguing CDOs and other mortgage-backed securities is not liquidity in the market but rather how the underlying assets are being valued by investment firms.

A July 30 article in the Wall Street Journal highlights the increasing difficulty that investors face in deciphering fact from fiction when it comes to the valuations of CDOs touted by Wall Street. “Are executives basing valuations on realistic market prices, rather than a rosy, ‘trust us – these will be good money’ view,” says the story.

Valuing complex, asset-backed securities like CDOs is a tricky and oftentimes convoluted process. That’s because investment firms employ their own statistical models, not market prices, to assign value. And that can spell trouble - in this case, trouble comes in the form of write downs. Investment banks and securities firms have posted nearly $500 billion in losses and write downs after the subprime crisis unfolded last year.

Since then, dozens of Wall Street’s biggest players have dug themselves into the proverbial CDO hole based on the simple fact they failed to acknowledge the true scale of their CDO exposure. Others overvalued their CDO assets so they could prolong the period of time before they eventually had to take the losses onto their books. And still others have simply chosen to believe the market for CDOs will eventually return to normal.

That hasn’t happened, as evidenced by the Merrill Lynch CDO sale, July 29, and its subsequent write down of $5.7 billion. Some analysts predict other financial firms will soon follow Merrill’s lead and rid themselves of their own toxic CDO holdings to free up their balance sheets once and for all. When all is said and done, the extra losses could potentially double the write downs that financial institutions have taken thus far.

The Wall Street Journal article cites the example of Citigroup, which at the end of the second quarter had nearly $30 billion in gross CDO holdings, of which $9.8 billion was hedged. According to the article, a portion of the bank’s net holdings are valued in line with Merrill’s recently announced CDO sales price. But about $14.4 billion are asset-backed commercial paper CDOs valued at approximately 62 cents on the dollar.

Citigroup stands behind the higher value, saying it hasn’t suffered cash-flow losses on the holdings and that they are high quality. However, in a report issued July 30, a Morgan Stanley analyst harshly criticized Citigroup’s pricey valuation, stating the bank may need to reduce the value of the CDOs by an additional 21%.

The same scenario is being played out at Bank of America, which has $11 billion in CDOs backed by subprime mortgages. Of that amount, $5.1 billion are CDOs made up of other CDOs. These are called “CDOs squared,” and are considered the most toxic of debt products. Nonetheless, Bank of America has valued these “CDOs squared” at 35 cents on the dollar, which is far more than what Merrill Lynch received for its higher-grade and better-quality CDOs.

Again, is it any wonder investors are growing more and more leery every time Wall Street talks?

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.Â

Merrill Lynch, the third-largest securities firm in the United States, will liquidate $30.6 billion of toxic collateralized debt obligations, CDOs, at fire-sale prices as it attempts to shore up a balance sheet hit hard by the credit crunch.

The Merrill Lynch CDOs will be sold to an affiliate of Lone Star Funds, a Dallas-based private equity firm, for $6.7 billion, or about 22 cents on the dollar. Only two weeks ago, at the end of its second quarter, Merrill said these assets were worth $11.1 billion, or 36 cents on the dollar.

Moreover, Lone Star apparently needs to come up with just $1.7 billion to close the deal. It will borrow the remaining amount - 75% - from Merrill.

The struggling investment bank also will raise $8.5 billion in a public stock sale. The announcement comes less than two weeks after John Thain, Merrill’s chief executive, claimed the firm’s resources were more than adequate to weather the ongoing credit crisis. Temasek Holdings, a Singapore-owned fund that is Merrill’s largest shareholder, will buy $3.4 billion of the new stock, according to a statement issued by Merrill Lynch on July 28.

The CDO and stock sale means Merrill will record a pre-tax write down of $5.7 billion in its upcoming third quarter. A total of $4.4 billion of the write down stems from the CDO sale.

For months, Merrill Lynch has been plagued with problems. In mid-July, the firm announced a $4.6 billion second-quarter loss, after a write-down of $9.4 billion. The second-quarter losses marked Merrill’s fourth straight quarterly loss. In total, Merrill has lost $19.2 billion over the past year and suffered more than $40 billion of write-downs from subprime-linked mortgages.

New York-based Merrill Lynch has been one of the biggest losers in the subprime game. When the housing boom went south last year, Merrill - the leading underwriter of CDOs - was forced to take billions of dollars of the securities onto its books as buyers fled the market. Ultimately, Merrill’s overexposure to subprime-related securities cost Stanley O’Neal his job.

Meanwhile, Merrill’s disastrous missteps into subprime territory have exacted a severe financial toll on investors. Trading continues at it lowest level in a decade, with shares losing more than half their value since January. In order to raise capital, the company sold its 20% interest in Bloomberg, a financial-information provider, in July. At the time, Chief Executive John Thain assured analysts and investors alike “that the firm was now in a very comfortable spot in terms of capital.”

Ten days later, Thain announces more write-downs and additional efforts to ramp up the company’s finances - a move that not only leaves investors who thought the worst was over doing a double take, but also ignites questions as to whether Merrill Lynch and its new chief executive may indeed have a credibility problem.

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

Profits before quality control - that’s the conclusion of a 10-month investigation by the Securities and Exchange Commission (SEC) into how the nation’s three largest credit-rating firms failed to protect investors because of their reviews of subprime mortgage-backed securities.

SEC Chairman Christopher Cox announced the findings at a news conference on July 8, revealing that the SEC found “serious shortcomings” in the business practices and quality control standards of Moody’s Investor Services, Standard & Poor’s Ratings Services and Fitch Ratings.

The three major rating agencies found themselves under fire earlier this year after having given top credit ratings to securities based on toxic subprime mortgages. When thousands of the securities were subsequently downgraded following the subprime meltdown, the value of the investments plummeted, forcing investment banks and securities firms to take billions of dollars in losses and write-downs onto their balance sheets.

In its final report, the SEC said the rating agencies had struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The report showed that none of the rating agencies examined had specific written or comprehensive procedures for rating RMBS and CDOs.

Moreover, significant aspects of the rating process were not always disclosed or even documented by the ratings firms, and conflicts of interest were not always managed appropriately.

“We’ve uncovered serious shortcomings at these firms, including a lack of disclosure to investors and the public, a lack of policies and procedures to manage the rating process, and insufficient attention to conflicts of interest,” said SEC Chairman Christopher Cox in a press release issued by the SEC.

Last month, the SEC proposed a series of reforms designed to regulate conflicts of interests, disclosures, internal policies, and business practices of credit rating agencies.

• The first segment of the reforms would address conflicts of interest in the credit ratings industry and require new disclosures designed to increase the transparency and accountability of credit ratings agencies.

• The second portion would require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds through the use of different symbols or by issuing a report disclosing the differences.

• The third part of the SEC’s proposed rulemaking would clarify for investors the limits and purposes of credit ratings and ensure that the role assigned to ratings in SEC rules is consistent with the objectives of having investors make an independent judgment of credit risks.

In June, Moody’s, S&P, and Fitch reached an agreement with New York state Attorney General Andrew Cuomo in an attempt to overhaul the firms’ incentives for providing their services.

The SEC report can be viewed in its entirety at:http://www.sec.gov/news/studies/2008/craexamination070808.pdf

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 net continues to widen in the auction-rate securities probe. Now, federal prosecutors are investigating whether two former brokers from Switzerland’s second-largest bank lied to investors about how they placed their money into the short-term securities.

The investigation focuses on two New York-based brokers, Eric Butler and Julian Tzolov, who resigned from Credit Suisse Group on Sept. 7, 2007, following accusations from clients that they had been misled about the risks of auction-rate securities, which turned out to be backed by risky collateralized debt obligations (CDOs).

Both men later took jobs with Morgan Stanley, and were reportedly fired on July 7. They also had been employed with Lehman Brothers Holdings and CIBC World Markets Corp.

First reported July 9 in the Wall Street Journal, the investigation, which doesn’t target the Swiss bank, is the first criminal probe stemming from the collapse of the auction-rate market in February.

The probe into the former Credit Suisse brokers comes only weeks after Massachusetts Secretary of State William Galvin filed a civil suit against UBS for fraud and misconduct over auction-rate securities. Among the charges, Galvin alleges UBS knowingly informed investors that auction securities were “safe, liquid cash alternatives” when it knew, in fact, they were not.

In addition, Galvin charged UBS with ramping up its marketing efforts to sell auction-rate securities to various individual investors at a time when the firm’s brokers had prior knowledge that the auction market was headed for failure.

Investor problems involving the two former Credit Suisse brokers were first reported by the Wall Street Journal last fall. At the time, the two men helped run a $15 billion cash-management service for corporate clients. The service offered slightly higher yields than money funds, reaching 5% in some cases, according to the paper.

The commissions that brokers receive on auction-rate securities are typically three to four times as large as for other short-term fixed-income securities. According to the July 9 Wall Street Journal article, Credit Suisse brokers typically received a portion of 0.1% to 0.25% for auction-rate purchases, but received no commission for putting clients into money market funds. When the men left Credit Suisse last October, “their total fees and commissions for a 12-month time period reportedly were $6.4 million and prior assets under management were about $2.3 billion.”

To date, client complaints against Eric Butler and Julian Tzolov have resulted in at least two civil settlements. Records from the Financial Industry Regulatory Authority (FINRA), the non-governmental watchdog group of U.S. securities firms, show civil settlements of $7 million and $3.6 million were reached last fall. When the auction-rate market seized up in February of this year, additional complaints were filed.

Until now, the fallout from the frozen state of the auction-rate market has been civil lawsuits and individual arbitration claims. The appearance of criminal charges against two former Credit Suisse Group brokers, however, may mean the auction-rate securities debacle is headed down a new path, one in which Wall Street is forced to pay up or come up with a plan to appease investors who’ve been financially burned in the auction-rate ordeal.

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

As supposedly one of the most respected credit ratings agencies in the country, Moody’s Investors Service may want to take inventory of its own employees. On July 1, the ratings agency revealed that several staff members had violated code of conduct rules, awarding triple-A ratings to products that should have been rated drastically lower.

The revelation is yet another public relations nightmare for Moody’s which, along with Standard & Poor’s and Fitch Ratings, has come under fire recently for assigning high ratings to numerous subprime-related securities that later plummeted in value.

As reported July 1 in Fortune magazine, it was revealed last month that a coding error in Moody’s computer model caused a certain set of structured bonds, known as constant-proportion debt obligations (CPDOs) and backed by derivatives, to be given triple-A ratings when they should have been ranked as much as four levels lower.

For investors, that kind of error can produce detrimental consequences. Investors depend on credit rating agencies to determine the creditworthiness of their investment. Thousands of investors who thought they were buying top-notch securities actually were getting nothing short of junk.

For its part, Moody’s says employees were to blame for the error, not the company’s corporate practices. Moody’s also says it intends to implement measures that will strengthen its rating and monitoring processes.

But for thousands of investors who thought they were buying highly-rated securities when in reality they got toxic junk, that bit of corporate wisdom may be too little, too late.

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.

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

A 15-member task force composed of local, state, and federal investigators is scrutinizing mortgage lenders and Wall Street firms involved in the subprime mortgage crisis. The probe, initiated by federal prosecutors from New York’s Eastern District, will look for potential crimes like insider trading, mortgage fraud by brokers, and securities and accounting fraud.

Prosecutors will examine questions affecting investors such as:

• Did lenders change credit histories or other facts about borrowers before issuing loans and selling the loans to Wall Street firms or banks, who packaged them into securities to sell to investors?

• Did mortgage lenders misrepresent their firms’ quality of mortgage loans, growing number of loan defaults, or financial position in securities filings? Did they use questionable accounting methods to cover up losses?

• Did Wall Street brokers mislead investors about their collateralized-debt obligations? Did some say their obligations were backed by corporate debt instead of shaky subprime mortgage loans?

• How did lenders originating loans potentially deceive or violate agreements with the Wall Street banks that funded them? For instance, investigators will examine whether selected lenders lied about the status of their loans, neglecting to repay Wall Street firms after selling their loans directly to companies like Freddie Mac and Fannie Mae.

This task force is just one of many investigations taking place, including one looking at the circumstances that led to the collapse of two of Bear Stearns’ hedge funds last summer after losses linked to mortgage-backed securities. In addition, prosecutors are examining whether the country’s tenth-largest mortgage lender, American Home Mortgage Investment, filed false statements and committed accounting fraud prior to its 2007 collapse and whether UBS AG inappropriately valued its mortgage-securities holdings. These findings may affect investors’ ability to recover lost assets.

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