Archive for the “Credit Default Swaps” Category

In the wake of the Sept. 15 bankruptcy filing of Lehman Brothers Holdings, New York and other municipalities are finding themselves stuck with unexpected costs to get out of interest-rate swap contracts gone sour. In the case of the Big Apple, it has paid Lehman and Wall Street banks at least $75.9 million since March to buy out ill-fated swap agreements.

Between 2002 and 2005, New York was among several issuers that turned to interest-rate swaps as a way to lower borrowing costs on some $7 billion in bonds, according to a Dec. 24 article by Bloomberg. What they failed to take into account, however, was the unexpected. In this case, the unexpected meant the sudden bankruptcy of a counterparty - an event that not only terminates a swap contract but could do so in less-than-desirable “mark-to-market conditions.”

When the unexpected became reality on Sept. 15 with the bankruptcy of Lehman Brothers, New York and others like it were forced to pony up funds in order to exit their interest-rate swap agreements and issue new debt to replace bonds linked to the swaps.

Making matters worse: Many states already are financially strapped and have record budget deficits looming. Spending millions, and in some cases, billions of dollars, to cover increased interest payments and penalties couldn’t come at a more fiscally problematic time.

In a swap contract, two parties agree to exchange interest-rate payments. Typically, the deal consists of exchanging a fixed payment for a variable interest rate.

Besides New York, a number of state and local governments have been burned by interest-rate swaps tied to Lehman Brothers. When officials in Sacramento County, California, terminated the county’s swap with Lehman recently, they had to pay $23 million. Then, because the terms of the new deal with Deutsche Bank were not as favorable as those with Lehman, Sacramento County officials had to pay an estimated $8 million more for protection from fluctuations in interest rates.

The Butler Area School District in Pennsylvania is another municipal agency to lose big because of interest rate swaps. In August, the district opted to pay JPMorgan Chase $5.2 million to get out of its swap contract - more than seven times what it paid to enter the agreement in the first place, according to Bloomberg.

JP Morgan also is a central figure in several lawsuits involving interest-rate swap deals for a sewer system in Jefferson County, Alabama. County commissioners there now contend the Wall Street banks - and JP Morgan in particular - that devised the financing arrangement overcharged the county by as much as $100 million. Since then, the county has been teetering on the brink of bankruptcy.

In September 2008, following federal probes into its interest-rate swap deals, JP Morgan announced that it would no longer sell derivatives to state and local governments.

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. 

After a string of bad bets on high-risk mortgage-backed securities and credit-default swaps, OppenheimerFunds’ Senior Vice President Angelo Manioudakis has left the company. On Manioudakis’ watch, the Oppenheimer Champion Income Fund has lost more than 80% of its value this year - the biggest decline of any bond fund tracked by Morningstar, Inc. By comparison, the average junk-bond fund fell 32%.

Manioudakis’ departure may be the least of the issues for OppenheimerFunds, however. OppenheimerFunds owns Tremont Capital Management, an investment-management business that placed hundreds of millions of dollars of investors’ money in funds run by Bernard (Bernie) L. Madoff, who was arrested last week for operating a $50 billion Ponzi hedge fund fraud scheme.

Meanwhile, Jerry Webman will temporarily take over for Manioudakis as head of OppenheimerFunds’ Core Plus team.

Problems for the Oppenheimer Champion Income Fund began shortly after Manioudakis and his team took over management responsibilities for the fund in 2006.  The fund’s demise was then hastened by too many derivative bets gone bad and, in particular, something called total-return swaps. As reported Dec. 16 in the Wall Street Journal, total-return swaps are agreements between parties to exchange cash flows in the future based on how a set of securities performs. In the case of the Oppenheimer Champion Income Fund, the fund was betting that top-rated commercial mortgage-backed securities would recuperate this year. It was a gamble that failed miserably.

Credit-default swaps (CDS) and mortgage securities tied to financially ailing companies like Washington Mutual and mortgage giant Freddie Mac also became a major source of trouble for the Oppenheimer Champion Income Fund. Compounding the fund’s problems were purchases in Lehman bonds between June and September with nearly $30 million in principal value. When Lehman filed Chapter 11 bankruptcy protection on Sept. 15, those bonds plummeted in value to $144,000.

Moving forward, other OppenheimerFunds offerings that held the Oppenheimer Champion Income Fund could be headed for their own set of financial problems. One of the funds includes the Oppenheimer Conservative Investor Fund, which had 4% in the Champion Income fund through November, according to the Wall Street Journal. Year to date, the Oppenheimer Conservative Investor Fund is down an astonishing 40%, making it one of the worst-performing conservative allocation funds followed by Morningstar.

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. 

After raking in millions of dollars in underwriting fees for municipal bonds, Goldman Sachs turned around and told another group of investors that they could make big profits by buying insurance from the investment bank because those bonds could be headed for default. Goldman’s strategy is known as “shorting municipal credit,” and while technically not illegal, the actions reek of conflict of interest and questionable business conduct.

For years, traders have been able to make money short-selling stock, but shorting municipal bonds via credit default swaps is a relatively new phenomenon. Goldman Sachs is both a leading dealer of municipal credit default swaps, as well as a major underwriter of municipal securities.

This summer, Goldman collected $1 million in fees for helping the state of New Jersey sell $345 million in highway improvement bonds to investors. The fees are among some $15 million that the investment firm has earned since 2002 for selling hundreds of millions of dollars in New Jersey debt to investors, according to a Nov. 23 article in the Newark Star-Ledger.

In California, Goldman reportedly has earned about $25 million over the past five years in underwriting fees from bond issues.

In September, several news reports say Goldman began ramping up its strategy of shorting municipal credit, outlining plans in a 58-page report obtained by ProPublica, a New York-based not-for-profit group. According to the report, Goldman advised certain investors that states like New Jersey and five others might not be able to make their bond payments as planned because of pending budget shortfalls. As a result, investors buying default insurance stood to make big profits from their demise.

As for Goldman Sachs, it bit the hand of at least one client that fed it and profited all around. The investment firm not only collected millions of dollars in fees from the states where it sold bonds and found buyers, but also made money when it sold credit default swaps to investors and thereby bet those same states would be unable to make their scheduled payments.

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 new report from Advisen Ltd., which provides information and analytics to the global commercial insurance industry, offers insight regarding the effects of the subprime meltdown and the resulting credit crisis on liability insurance loss ratios.

The report, The Subprime Mortgage Meltdown, the Global Credit Crisis and the D&O Market, says U.S. insurers will see nearly $6 billion in losses from lawsuits stemming to subprime mortgage-related issues. The losses are more than 60% higher than the figure Advisen previously forecast in February and yet another indicator that what began as a subprime issue has spread into a crisis of global proportions.

According to Dave Bradford, co-founder of Advisen, the revised forecast reflects an increase in securities class-action suits, securities fraud suits brought by regulators and law enforcement agencies, shareholder derivative suits and defense costs associated with dismissed suits.

Other key findings in the report include:

• Financial institutions and other companies report more than $750 billion in write-downs on losses relating to securities backed by subprime mortgages as of Nov. 1, 2008

• 124 subprime-related securities class-action lawsuits have been filed to date.

• Credit-default swaps tied to mortgage-backed securities have been and continue to be a key source of losses for financial institutions and others.

• More than 48 investigations have been launched by the Securities and Exchange Commission (SEC) on subprime-related issues.

The release of the latest Advisen report coincides with the 2008 Professional Liability Underwriting Society Conference, which is being held this week in San Francisco. The theme of the conference is “Prospects for the Future: Golden Opportunities or Fool’s Gold?”

The Subprime Mortgage Meltdown, the Global Credit Crisis and the D&O Market is available for free at: http://corner.advisen.com/The_Global_Credit_Crisis_and_D_O_final_2.pdf

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. 

First there were auction-rate securities, then collateral debt obligations (CDOs). Now, credit-default swaps are making news. On Oct. 20, U.S. federal prosecutors and New York Attorney General Andrew Cuomo jointly announced that their two agencies had launched an investigation into the $58 trillion credit-default swaps market and whether Wall Street investment firms manipulated the instruments for their own financial gain.

Among other things, regulators are looking to determine if traders used the credit swaps to artificially lower share prices of various financial companies, which then resulted in large sell-offs and a downward spiral of company stock.

According to an Oct. 20 article in the New York Times, the New York Attorney General’s office issued subpoenas to stock exchanges, investment firms and three companies involved in processing trades in swaps and stocks. The firms are: the Depository Trust Clearing Corporation, Markit and Bloomberg.

Credit-default swaps have been the source of problems for several high-profile companies recently, including Bear Stearns, Lehman Brothers, American International Group (AIG), Morgan Stanley and others.

A credit-default swap is a contract for insurance on certain types of debt. Buyers of credit swaps pay a fee in exchange for having their losses covered in the event the debt defaults. The problem is the credit-default swap market itself. It is unregulated. That means contracts are regularly traded without any oversight to ensure buyers actually can cover losses.

That may be changing in the future, however. Joint investigations between federal prosecutors and the New York attorney general are a rarity. That fact alone suggests the investigation into credit-default swaps is going to be a big one - and that fundamental changes involving transparency and oversight could be coming sooner rather than later.

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.