Archive for the “Credit Default Swaps” Category

The market for credit default swaps - complex derivative instruments invented by JP Morgan Chase & Co. in 1992 and today believed to be a key contributor to the onset of the nation’s financial meltdown - is sorely in need of a major overhaul. The trouble is the big participants in the market, including financial institutions and other special interest groups, apparently don’t want that to happen.

Credit default swaps initially emerged as a way for financial institutions to buy insurance against defaults on their corporate debt. Similar to an insurance contract, a credit default swap involves one party paying another party to protect it from the potential risk of default on a bond, loan, or other types of debt. If the loan or bond defaults, the insurer, or seller, compensates the buyer for the loss. Sellers of credit default swaps typically are banks, hedge funds or investment firms.

The market for credit default swaps is unregulated. Contracts for the swaps trade over the counter versus through the New York Stock Exchange. Lacking any oversight or regulation, the potential for financial disaster is great. As reported May 18 by Bloomberg, lax oversight of credit derivative instruments played a leading role behind the financial failures of powerhouse firms like Lehman Brother Holdings and American International Group (AIG), not to mention the $1.4 trillion in writedowns that banks have taken in the past year.

For more than a decade, however, these same investment banks have fought tooth and nail against government regulation of OTC credit default swaps. Why? Because credit default swaps contracts translate into huge profits for them. In 2008, JPMorgan reportedly took in $5 billion in profits from trading in fixed-income over the counter derivatives, according to the Bloomberg article.

Meanwhile, the rest of us are forced to wait out what appears to be an unrelenting and merciless financial crisis - a crisis largely triggered by the ticking time bomb known as credit default swaps. Defusing this ticking bomb with improved regulation and transparency is long overdue.

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.

In addition to ballooning budget deficits and rising unemployment, many Tennessee cities and counties also are facing massive interest payments on bonds, largely because they were ill advised by investment bank Morgan Keegan to use a complex financing arrangement involving derivatives. Already strapped for cash, places such as Lewisburg and Mount Juliet now must either come up with the money to pay the bonds’ higher interest payments, which in some cases has quadrupled, or terminate the interest rate swaps, yet another costly measure.

Tennessee’s derivative debacle has become even more controversial following a recent story in the New York Times that reported on Morgan Keegan’s lengthy and questionable role in selling interest-rate swaps to local government officials in Tennessee.

Since 2001, Memphis based Morgan Keegan has sold $2 billion worth of derivative instruments to 38 cities and counties in Tennessee, according to state records. In addition to acting as an advisor and underwriter of derivative instruments, Morgan Keegan also resided over state sponsored seminars on interest rate swaps in which bankers from Morgan Keegan taught representatives from various Tennessee cities and counties about derivative financing.

That apparent conflict of interest now has the attention of Tennessee Governor Phil Bredesen. On April 9, in a story in the New York Times, Bredesen publicly questioned the appropriateness of Morgan Keegan’s multiple roles as teacher, adviser and underwriter. The governor also had harsh words for state officials, whom he said failed to do enough to protect cities and counties that ultimately used municipal bond derivatives.

Tennessee comptroller Justin P. Wilson has since put a freeze on all applications for interest rate swaps. On May 4, the Tennessee State Board will begin reviewing the guidelines that oversee derivatives, as well as the appropriateness of allowing investment banks like Morgan Keegan to teach state mandated seminars to area officials.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime 

Lewisburg, Tennessee, is a quaint, affable town known for rich farmland and friendly neighbors. Now, thanks to investment bank Morgan Keegan & Company, Lewisburg is becoming known for something else: municipal bond derivative deals gone bad.

The small city’s introduction to Morgan Keegan and the derivative instruments occurred five years ago, when Lewisburg was trying to lower the interest on a bond for a new sewer system. Bob Phillips, Lewisburg’s part-time mayor, approached Morgan Keegan for advice and quickly became immersed in the complex world of derivatives.

As reported April 7 by the New York Times, that world soon soured for Lewisburg an hundreds of small cities just like it. Municipalities that bought derivatives were much like homeowners, securing fixed-rate mortgages and then refinancing with lower interest, variable rate mortgages, says the New York Times article.

In the case of the municipalities, however, many officials now say they were never told or didn’t understand that interest rates on derivatives can go much higher if economic conditions turn sour.

When the inevitable happened and the economy, in fact, worsened, Lewisburg paid the price. The cost of interest paid on its sewer bonds has quadrupled to an astounding $1 million. As for Lewisburg residents, they face a 33% increase in water and sewer rates.

And the added costs couldn’t come at a worst time. Unemployment in Lewisburg currently stands at more than 10%, as a slew of established businesses close their doors. Even longtime employer Sanford Pencil, the Sharpie pen maker, is preparing to relocate to Mexico. 

At the time Lewisburg officials entered into their municipal derivative contract with Morgan Keegan, the Memphis based investment firm dominated nearly the municipal bond derivative business in Tennessee, both in terms of acting as an adviser and as an underwriter. According to the New York Times article, data compiled by Tennessee’s comptroller’s office show Morgan Keegan sold some $2 billion worth of municipal bond derivatives to 38 cities and counties since 2001.

Many of the deals orchestrated by Morgan Keegan have resulted in similar predicaments like happening in Lewisburg. In nearby Claiborne County, Tennessee, for instance, officials there are desperately trying to get out of a municipal bond derivative contract with Morgan Keegan. Doing so, however, will cost the county $3 million, money the county can ill afford.

The same is true in Mount Juliet. Located about 17 miles from downtown Nashville, city leaders recently learned that payments on their bonds had increased by 500% to $478,000, according to the New York Times story.

Meanwhile, as Lewisburg, Mount Juliet and many other Tennessee municipalities struggle to find a way out of their derivative messes, Morgan Keegan is counting the millions and millions of dollars in fees it’s collected by serving in the dual, and questionable, role of underwriter and adviser.

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. 

Investor allegations of mismanagement and negligence regarding an open-ended fixed income mutual fund owned and managed by OppenheimerFunds have resulted in a class-action lawsuit against Oppenheimer and its Champion Income Fund (OPCHX).

Filed on Feb. 13, the complaint charges OppenheimerFunds and various officers and directors connected to the Champion Income Fund of violating the Securities Exchange Act of 1934, the Securities Act of 1933 and the Investment Company Act of 1940.

According to the complaint, OppenheimerFunds and its managers not only failed to exercise due diligence when it came to the Champion Income Fund but also intentionally withheld critical information about their investing strategy. Marketed as a high-yield bond fund, Oppenheimer managers began to substantially increase their use of derivative instruments in late 2006, purchasing high-risk subprime mortgage securities. Information regarding that additional risk exposure, however, apparently was never disclosed to investors until after the Champion Income Fund plummeted in value.

In December 2008, Angelo Manioudakis, the man whose gamble on toxic mortgage-backed securities and other risky structured finance deals ultimately backfired, abruptly resigned as the manager of the Champion Income Fund.

The Oppenheimer Champion Income Fund has lost nearly 80% of its value, making it the worst-performing taxable high-yield bond fund of 2008. By comparison, similar bonds were down 30%. 

Credit-default swaps also added to the losses of the Champion Income Fund. Similar to insurance contracts, credit-default swaps provide protection for investors against bond and loan defaults. In exchange for making possible payouts, sellers of credit-default swaps receive regular interest payments.

In the case of the Oppenheimer Champion Income Fund, credit-default swaps were sold on financially troubled companies like Lehman Brothers Holdings, American International Group (AIG) and General Motors Corp.  In 2008, all three firms either went bankrupt or sought financial protection from the federal government. That, in turn, had a devastating financial effect on the assets in the Champion Income Fund’s portfolio.

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. 

Hedge-fund firm Tremont Group Holdings, which is owned by OppenheimerFunds, could be forced to close its doors later this year after losing more than half of its assets to Bernard Madoff and his alleged $50 billion Ponzi scheme.

As reported Jan 27 by the New York Post, Tremont already has reduced its staff by some 40%, with the remaining employees told to prepare for potential severance packages this June.

Tremont’s Rye Investment Management shuttered its operations last month. The hedge fund group had retained Madoff as the sole manager of its funds, investing some $3.5 billion of client’s money with him.

The Tremont situation is another black mark against parent company OppenheimerFunds, which has faced a slew of problems over massive losses in several of its bond funds. The Oppenheimer Champion Income Fund (OCHCX) has plunged more than 80% in value in the past nine months, following wrong-way bets on subprime mortgage securities and risky credit-default swaps.

The Oppenheimer Core Bond Fund, which is offered by 529 plans in Illinois, Oregon, Texas, Maine and New Mexico, also has recorded big losses recently, falling by more than 40% in 2008. By comparison, similar funds posted 4% gains.

Both funds are the subject of investor lawsuits and state investigations over claims that the funds’ management misrepresented the funds as conservative and low risk when, in fact, they invested in some of the most risky and highly illiquid derivatives possible.   

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. 

Unexpected and unexplained losses in the Oppenheimer Champion Income Fund (OCHCX), the Oppenheimer Core Bond Fund (OPIGX) and other funds owned and managed by OppenheimerFunds are causing a financial headache for investors, college savings plans and pension funds across the country. Now, as OppenheimerFunds prepares for what could be the first of a lengthy run of arbitration claims, a consortium of four nationally recognized law firms has launched an independent investigation into how Oppenheimer executives may have misrepresented the funds to investors.

The legal alliance behind the investigation into OppenheimerFunds includes Maddox Hargett & Caruso, Uhl & Bakhtiari, David P. Meyer & Associates, and Page Perry, LLC. It was in 2007, following the onset of the subprime mortgage crisis and the subsequent meltdown on Wall Street, that the group created their affiliation - SubprimeLosses.com - to help individual and institutional investors combat fraudulent actions on the part of dishonest investment firms and brokerages.

As it turns out, dishonesty and wrong-way bets on subprime mortgage securities and risky credit-default swaps are responsible for the fiscal nightmare now facing investors in the Oppenheimer Champion Income Fund and the Core Bond Fund. The funds, which initially had been presented as conservative and safe investments by Oppenheimer management, were instead tied to high-risk, speculative derivative deals.

By the end of December 2008, assets in the Champion Income Fund had plunged by more than 80% in value. The Oppenheimer Core Bond Fund, which is offered by 529 plans in Illinois, Oregon, Texas, Maine and New Mexico, fell by more than 40% last year. By comparison, similar funds posted 4% gains.

Both the Oppenheimer Champion Fund and the Core Bond fund were managed by Angelo Manioudakis. In December, Manioudakis abruptly resigned from his position at OppenheimerFunds.

Meanwhile, investors are left to inherit the repercussions of Manioudakis’ ill-informed management decisions. Far from safe or conservative, the Champion and Core Bond funds invested in extremely risky and highly illiquid derivatives. Not knowing about this critical detail has collectively cost investors - many of whom are retirees, living on a fixed income - millions of dollars. Yet, Oppenheimer management, company marketing materials, even information contained in the funds’ prospectus never revealed this important and vital fact.

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.

A champion it’s not. Investments in high-risk mortgage-backed securities and credit-default swaps have pummeled the Oppenheimer Champion Income Fund (OPCHX). OppenheimerFunds’ flagship junk-bond mutual fund recorded one of the worst performances among its bond-fund peers in 2008, with assets losing more than 80% of their value. Only the Regions Morgan Keegan Select High Income Fund fared worse.

Problems for Oppenheimer’s Champion Income Fund first came to light in 2006, when fund manager Angelo Manioudakis started to focus on a risky - and, some say questionable - investing strategy that involved total-return swaps. A total return swap is a financial contact that transfers both the credit risk and market risk of an underlying asset from one party to another.

In the case of the Champion Income Fund, the underlying assets were tied to securities on commercial mortgages. Following the burst of the housing bubble in the summer of 2007 and the subsequent onset of the subprime debacle, Manioudakis’ gamble that the securities would increase in value never saw the light of day.

Making matters even worse for the Champion Income Fund: credit-default swaps. Through at least September 2008, the fund sold credit-default swaps on companies that already were in deep financial trouble - companies like Lehman Brothers Holdings, which filed for bankruptcy protection on Sept. 15, and American International Group (AIG), which has required two emergency bailouts from the government in order to stay afloat.

The financial devastation caused by wrong-way bets placed on derivatives goes far beyond just investors of the Champion Income Fund. At least 10% or more of the fund is held by other Oppenheimer funds, as well.

Unfortunately, investors never realized the level of risks they were taking on with the Champion Income Fund. That’s because Oppenheimer’s financial advisors marketed the fund as a conservative, high-income bond fund, one that presented only minimal degrees of risk. Even the fund’s own prospectus - as well as a revised version that was created after the fund began to lose vast amounts of money - described the Champion Income Fund as an appropriate investment for retirees, with an overall investment strategy that focused on building a broad and diversified portfolio to help moderate the special risks of investing in high-yield debt instruments.

Investors who’ve lost millions of dollars because of Oppenheimer’s irresponsible gamble on some of the riskiest and most toxic derivatives possible know otherwise.

In related OppenheimerFunds news, thousands of Illinois families are up in arms over unexpected and dramatic losses in the state’s Bright Start College Savings program and what they say is the mismanagement of the Oppenheimer Core Plus Bond Fund (OPIGX).

The fund, which was supposed to be invested in conservative investment-grade bonds and U.S. government securities but instead took on assets in risky mortgage-backed securities, credit default swaps and other toxic investments, lost more than 40% of its market value last year. By comparison, similar funds managed by other investment firms posted positive returns of about 5%.

Illinois State Treasurer Alexi Giannoulias is preparing to sue OppenheimerFunds in an attempt to recover the $85 million that the Bright Start College Savings program has lost thus far.  

Like Oppenheimer’s Champion Income Fund, the Core Plus Bond Fund was managed under the not-so-watchful eye of Angelo Manioudakis.  Besides Illinois, the Oppenheimer Core Plus Fund is included in 529 college savings plans in Oregon, Texas, Maine, and New Mexico.

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. 

Investors in the Oppenheimer Champion Income Fund (OCHBX, OPCHX and OCHCX) have lost millions of dollars because of decisions by the fund’s management to gamble on illiquid mortgage securities and credit-default swaps. Now, some investors - many of whom are retirees and have lost their entire life savings - are taking legal action. The first of what may be many arbitration claims to come has just been filed with the Financial Industry Regulatory Authority (FINRA).

Among the charges in the complaint: OppenheimerFunds and the former manager of the Oppenheimer Champion Income Fund, Angelo Manioudakis, intentionally withheld critical information about the fund’s risks and its concentration in toxic derivatives and other risky securities. 

As of Dec. 31, 2008, the Oppenheimer Champion Income Fund has seen the value of its assets plunge by more than 80%. The reason: Massive bets on subprime mortgage securities and total-return swaps. Total-return swaps are extremely complex agreements between parties to exchange cash flows in the future based on the performance of a set of underlying securities in the fund.

The Oppenheimer Champion Income Fund also contained credit-default swaps, another complicated and highly speculative derivative product. Credit-default swaps are like an insurance policy; they protect investors in the event a bond or loan defaults. In return for this guarantee, buyers agree to pay - much like an insurance premium - a fixed percentage fee to the seller of the contract.

There is a downside to this kind of speculative leveraging, however. Billionaire investor Warren Buffet spoke out against credit-default swaps as early as 2002, calling them “financial weapons of mass destruction.”

The $50-plus trillion market for credit-default swaps is unregulated. That means contracts are regularly traded without any oversight to ensure buyers actually can cover possible losses. When the mortgage-backed securities that many credit-default swaps were supporting began to plummet in value in 2007, investors quickly discovered their credit-default swaps to be a liability, rather than a guarantee, against risk. 

For sellers of credit-default swaps, the outcome can be equally grim. This is especially true in instances where the seller has provided insurance on companies that go bankrupt or experience severe financial problems. Oppenheimer’s Champion Income Fund found this out after selling credit-default swaps on Lehman Brothers Holdings, American International Group (AIG) and General Motors Corp.

At issue for investors in the Oppenheimer Champion Income Fund is the fact that the fund’s management, as well as various literature and materials on the fund, touted its investment strategy as “building a broad and diversified portfolio to help moderate the special risks of investing in high-yield debt instruments.”  Investors also claim the fund was advertised as far less risky than the typical high-income fund.

In reality, the Oppenheimer Champion Income Fund achieved neither. Instead, it invested in some of the most dangerous and toxic securities on the market.

For retirees and other conservative, risk-adverse investors who were in the Champion Income Fund, this strategy was a disaster waiting to happen.

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. 

In February 2007, M&T Bank came across a complex Wall Street innovation called “Gemstone VII.” Deutsche Bank did the pitching to M&T, and reportedly promised big returns and little risk. Like many Wall Street-engineered products, however, the investment turned out too good to be true. M&T Bank ended up losing $80 million.

M&T Bank is now suing Deutsche Bank for what it claims was a misrepresentation of Gemstone’s securities. Far from the conservative, low-risk instrument that M&T thought it was getting into, Gemstone consisted of bonds backed by toxic subprime mortgages and risky credit-default swaps.

M&T also contends that Deutsche Bank withheld key information from credit rating agencies Moody’s Investors Service and Standard & Poor’s regarding the securities held by Gemstone. By not having that information, the agencies inappropriately assigned higher ratings than they should have to the CDOs.

According to the complaint filed Jan. 19 with the New York State Supreme Court in Erie County, M&T is seeking more than $100 million of punitive damages.

The M&T/Deutsche Bank case is indicative of a new trend in which corporate and institutional investors are taking Wall Street to task for falsely marketing certain financial instruments. Another case that involves the mishandling of CDOs is the Ohio State Teachers Retirement System, which recently sued and won a $550 million settlement from Merrill Lynch.

Institutional investors are often regarded as “sophisticated” and “financially savvy;” therefore, critics argue that they should know what they’re investing in. However, whether an individual or institutional investor, brokerage firms and investment banks are bound by law to provide complete and truthful disclosure about the securities they represent. If misrepresentation occurs, institutional investors deserve to hold the responsible parties accountable.

It would appear that the law is leaning in their favor, as evidenced by the Ohio State Teachers Retirement System’s $550 million win from Merrill Lynch and cases like the one just filed by M&T.

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 year of 2008 will likely be remembered as the year subprime mortgages and corporate scandals changed the face of Wall Street. Buried under the weight of the subprime crisis, financial institutions took nearly $800 billion in writedowns and losses. The value of stocks worldwide plummeted by more than $30 trillion. Goliath investment houses like Bear Stearns fell apart. State, municipal and corporate pension funds reported massive losses from investments tied to faulty valuation models and high-risk mortgage-backed securities and their derivative spin-offs, collateralized debt obligations (CDOs).

Then there’s the near financial collapse of mortgage giants Fannie Mae and Freddie Mac and American Insurance Group (AIG), which required a financial intervention courtesy of the U.S. government. Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy protection in 2008. Washington Mutual and IndyMac, along with some 20 other banks were forced to close their doors. Government bailouts reached an astronomical $9 trillion. And as a final nod to 2008, investors lost some $50 billion in a Ponzi scheme orchestrated by the former Nasdaq chairman, Bernard (Bernie) Madoff.

For investors, 2008 is the year that went from bad to worse. It began with the collapse of the auction-rate securities market in February and continued with credit default swaps and structured investment products. For the first time since the 1930s, the Dow Jones Industrial Average experienced losses of more than 30%, closing the year at 8,776.39. By comparison, the Dow finished out 2007 at 13,264.82. Bank stocks in particular took a beating in 2008, with Bank of America and Citigroup losing nearly 70% of their value. As for shareholders, they saw about $7 trillion of their wealth wiped out.

In the world of ultra-short bond funds, 2008 provided the lesson that ultra short does not translate to “ultra safe.” A number of supposedly safe and conservative ultra-short funds got into trouble in 2008 by investing in risky mortgage-backed securities and collateralized mortgage obligations (CMOs). When losses in those toxic assets began to skyrocket, investors lined up to pull their money out in droves, sparking a wave of fund redemptions.

As a result, several fund managers were forced to liquidate their funds’ assets. State Street Global Advisors’ SSgA Yield Plus Fund began liquidating in May after the fund fell 19%. It turns out more than 50% of the fund’s assets were tied to mortgage-related securities funds. One month later, the Evergreen Ultra-Short Opportunities Fund liquidated, as well, when its assets plunged more than 20% in value. Finally, there is Charles Schwab’s YieldPlus Fund. Marketed to investors as a safe alternative to cash, the fund suffered the most losses of any ultra-short bond fund in 2008, losing more than 40% of its value.

Investors, meanwhile, are suing all three funds, charging that they investments were represented as conservative “cash alternatives” and similar to money-market funds. Far from safe or conservative, the funds were heavily concentrated in risky mortgage and asset-backed securities. And, in the case of Schwab’s YieldPlus Fund, several investors who have filed lawsuits claim various Schwab executives and fund manager Kimon Daifotis committed “acts of gross misconduct” by encouraging investors to hold on to their YieldPlus shares, while simultaneously dumping millions of YieldPlus shares from the portfolios of Schwab’s other mutual funds.

Capping out 2008, of course, is the Bernie Madoff scandal. The disgraced hedge fund manager was arrested Dec. 11 by federal agents on charges of securities fraud for scamming $50 billion from investors. Meanwhile, the Securities and Exchange Commission (SEC), the supposed protector of investors and their investments, apparently turned a blind eye to Madoff’s subterfuge over the years by ignoring red flags that signaled problems with his funds and their “too-good-to-be-true” returns.

For investors, the Madoff affair may well be the final nail in the coffin when it comes to confidence in Wall Street. Already shaken from a year that was punctuated by the subprime crisis and corporate scandals - including the implosion of Bear Stearns, the collapse of the auction rate securities market, the bankruptcy of Lehman Brothers and inept accounting practices by Fannie Mae and Freddie Mac and other institutions - Wall Street has its work cut out in 2009 as it tries to renew investors’ faith once again.

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.