Archive for the “American International Group, AIG” Category

Michael Lewis’ appearance on the March 14 episode of 60 Minutes offered a deconstruction of the nation’s mortgage crisis and brought to light how Wall Street, even today, continues to operate under a sense of entitlement. Lewis is the author of The Big Short: Inside the Doomsday Machine, a new book that attempts to explain how some of the brightest players in the investment world managed to destroy $1.75 trillion of wealth in the U.S. mortgage markets.

Lewis lays blames on a handful of Wall Street investment firms, including Goldman Sachs. In 2005, for instance, Goldman Sachs got American International Group (AIG) to insure $20 billion worth of mortgage securities that the ratings agencies had deemed AAA - the best of the best. In reality, the securities were toxic waste.

60 Minutes correspondent Steve Kroft asked Lewis point blank: “Do you think the big banks like Goldman Sachs played AIG for a patsy?”

“That’s exactly what they did,” Lewis replied.

Lewis also faults the credit rating agencies, which were responsible for rating the products that Wall Street created, for their role in the financial crisis of 2008.

The real insanity is that nothing has changed. Wall Street talks about reform but is slow to produce it. Transparency and oversight are bantered about in the media but that’s as far as it goes. The very financial instruments that brought down the world’s financial markets are still being sold to investors. As for the credit rating agencies, which are paid by the firms whose products they rate, little has been done to improve the transparency of their ratings.

The same thing goes for credit default swaps. “This market is the closet thing to ground zero, yet nothing has changed to make it more transparent,” said Lewis on 60 Minutes. “How can an investment firm advise clients on what to buy and sell while at the same time betting on those products to fail?,” Lewis asks.

Now that’s a question every investor out there wants an answer to.

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.

Hoping to permanently shatter the “Greed is Good” line made famous by fictitious corporate raider Gordon Gekko in the movie Wall Street, Andy Stern, president of the Service Employees International Union (SEIU), has sent a scathing letter to 29 financial services firms over executive bonuses tied to inflated profits on derivatives and other investments that ultimately turned out to be worthless. Stern called upon the companies, which included American International Group (AIG), Citigroup, Morgan Stanley, and JP Morgan Chase to either pay back the bonuses immediately or get prepared to face a slew of lawsuits.

The SEIU’s pension fund, known as the SEIU Master Trust, wants the firms’ boards of directors to review more than $5 billion in bonuses and stock option awards that were given to their companies’ top five executives since 2005.

In addition, the pension fund is demanding the companies overhaul their executive compensation practices.

 “The collective choices of top executives to reward themselves despite their failure to deliver a profit on their investments negatively impacted our pension fund and left our economy in shambles,” said SEIU’s Stern in an April 20 article by Bloomberg. “It’s as if these guys got a windfall payoff for betting the family’s savings on the wrong horse.”

All of the companies in question have come under fire recently over executive compensation issues. Leading the pack is financially troubled AIG, which has been bailed out by the U.S. government multiple times and received more than $185 billion in funds. Despite the taxpayer-funded rescue, as well as a $62 billion fourth-quarter loss, the insurer turned over $165 million in executive bonuses in 2008.

Meanwhile, pension funds investing in AIG and in other firms that awarded over-the-top bonuses to executives while their companies struggled financially have lost billions of dollars.

News of the AIG bonuses led Congress to create legislation in March that would establish a 90% tax on bonuses at any company receiving $5 billion in government aid.

The SEIU Master Trust held investments in all 29 financial services firms that received a letter from Stern.

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. 

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. 

Things are getting ugly for OppenheimerFunds these days. Not only has Tremont Capital Management, which Oppenheimer owns, lost hundreds of millions of dollars in the Bernie Madoff scandal, but bad bets on toxic mortgage-backed securities and credit-default swaps have decimated bond funds like the Oppenheimer Core Bond Fund and the Oppenheimer Champion Income Fund.

The Oppenheimer Champion Income is down more than 80%, making its performance one of the worst among bond funds for 2008. As for the Oppenheimer Core Bond Fund, it is down by more than 42%.

As reported Dec. 18 in a story by Eric Jacobson on Morningstar.com, the Core portfolio carried approximately $400 million in mortgage-backed securities as of the end of March 2008, “exceeding its (then) $2.2 billion in net assets via transactions that were effectively akin to margin borrowing.”

The fund also had approximately $800 million in exposure to credit via default swaps, including American International Group (AIG), Lehman Brothers, Wachovia, Washington Mutual, and Bear Stearns, as well as around $600 million in total return swaps. These facts, critical to investors, were never included on the fund’s balance sheet, according to the article, and therefore did not appear in its net assets.

By the end of September, the Core Bond’s credit exposure to those various markets “totaled more than 180% of net assets on a dollar basis,” says the Morningstar article. To put it another way, for every shareholder dollar in the fund, it was exposed to the credit-driven movement of more than $1.80 worth of toxic securities.

Making matter worse: Most of the additional market exposure came from off-balance-sheet derivatives, giving the appearance to investors that the funds’ portfolios were not highly leveraged and therefore more fiscally sound than what was reality. And despite the fact that both the Core Bond fund and the Champion Fund were highly exposed to commercial mortgage-backed securities, detailed information regarding the extent of that over-concentration was and is no where to be found in any of Oppenheimer’s marketing materials or on Web site.

The ramifications of Oppenheimer’s behind-the-scenes gamble with derivative bets gone bad have been painful for investors. In particular, parents who invested in several state-run college savings plan are facing major financial losses because of portfolios containing the sinking Oppenheimer funds. To top it off, the losses hit the most conservative plans the hardest.

In Oregon, the 529 College Savings Plan includes more than 70,000 investors who are saving college money for 100,000 children, grandchildren and others. The plans in the network are worth about $750 million. One year ago, the value was $1 billion. About $89 million was invested in the Oppenheimer Core Bond Fund in September 2008.

In October 2008, the board that oversees the Oregon College Savings Plan questioned Oppenheimer about the fund’s poor performance. At the time, Oppenheimer managers said they bought the mortgage-backed securities when they believed the price had bottomed out. However, the securities continued to lose value, yet Oppenheimer just kept buying them.

In Oregon’s case, an investigation with the attorney general’s office is underway regarding Oppenheimer’s actions. But the bottom line is clear: The returns on the funds simply don’t add up to what Oppenheimer represented.

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. 

The past 12 months may well be remembered as the year in which losses connected to hard-to-value securities reached unheard-of levels, as investment firms and financial institutions disclosed nearly $700 billion in write-downs for mortgage-backed securities, leveraged loans and other assets that plunged in value. Still, the coming new year could give 2008 a run for its money. That’s because of something called off-balance sheet financing.

For some time now, financial institutions have made profits hand over fist by financing business deals with off-balance sheet entities. In simple terms, off-balance sheet refers to when companies transfer certain projects, investments or underperforming assets such as collateral debt obligations (CDOs), subprime-mortgage securities or credit default swaps from the parent company to an off-balance-sheet subsidiary.

Once the assets have been removed from a company’s primary balance sheet, it gives the appearance that the parent is carrying less debt - and thereby less risk. And, because off-balance sheet entities are largely unregulated, there is no one to question otherwise.

As the concept of off-balance sheet financing gained favor with Wall Street, so too did massive leveraging. Collateral debt obligations, subprime securities, credit default swap contracts - all have increased exponentially in recent years. What Wall Street failed to consider as it took on these added risks was the possibility of failure, not to mention the systemic damage that the failure potentially could unleash on the nation’s financial system as a whole.

Case in point: Credit default swaps. Credit default swaps are privately negotiated contracts between two parties - a buyer and a seller. The buyer of a credit default swap pays a fee to the seller. In exchange for that fee, the seller agrees to cover the buyer’s losses in the event that the underlying financial instrument defaults. The problem is the credit-default swap market itself. It is a $60 trillion unregulated market where contracts are traded without any federal oversight to ensure buyers actually are capable of covering losses.

When credit markets began to freeze up this year, that’s exactly what happened to institutions like Bear Stearns, Lehman Brothers, American Insurance Group and Citigroup. At the time, all of the firms were holding high concentrations of mortgage-backed securities - the same assets they once used as collateral to get credit and had to now significantly mark down in value.

A domino effect ultimately took hold, as creditor institutions turned up the heat via margin calls on the institutions that wrote the credit default swap contracts. Unable to meet those calls, Bear Stearns, Lehman, AIG, Citigroup and others quickly found themselves in trouble. Some of the companies like Lehman filed for bankruptcy protection; others were forced into a firesale; and some turned to the federal government for a bail-out to the tune of billions of dollars.

Now, countless other financial institutions are holding their breath, hoping they won’t meet a similar fate. Unfortunately, off-balance-sheet excesses already may have put them on a path to failure. There are literally trillions upon trillions of dollars of outstanding debt obligations residing “off-balance sheet” today for nearly every Wall Street institution around. When reality finally sets in, and the off-balance-sheet assets come back on balance sheet, watch out. It could make the nation’s current fiscal crisis look like child’s play.

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. 

Bill Gross, chief investment manager at bond-fund giant Pacific Investment Management Company, has been grossly off lately when it comes to Pimco’s closed-end funds. Several of the funds, including the Pimco High Income Fund, the Pimco Corporate Opportunity Fund, the Pimco Floating Rate Strategy Fund, the Pimco Global Stocksplus Income Fund and others are down in value by 50% or more this year.

The Pimco High Income Fund in particular continues to be squeezed by plunging asset values. The $623.8 million fund has fallen 77% in value so far this year. In January, its share value was $14; as of Nov. 25, it is $3.32. In November, market conditions forced the fund to postpone a dividend payment for that month, as well as one scheduled for December, because the value of its portfolio securities had fallen below the required 200% asset- coverage ratio.

Pimco, a unit of Munich-based Allianz SE, has about $800 billion in assets under management.

Some of the problems for investors in Pimco’s closed-end funds can be traced to the collapse of the auction-rate securities market in February, which overnight eliminated a key source of financing and left preferred share holders unable to sell their aution bonds. In the months following the auction market’s demise, falling debt prices have increased the cost of borrowing and further pushed down already-battered asset values.

Pimco also is dealing with collateral damage from its overexposure to credit default swaps with Lehman Brothers and American Insurance Corporation (AIG).

A credit default swap is similar to an insurance contract between two parties. One party buys protection against the threat of default by a company, a municipality or, in some instances, pools of debt. The other party pays the seller a premium over a set period of time and then pays out if a default occurs.

According to Bloomberg, Pimco has sold credit default swaps that guarantee $760 million of debt issued by AIG. Should AIG, which continues to have financial troubles despite two bailouts from the federal government, ultimately go bankrupt, Pimco is on the fence to pay on those swaps.

As for Lehman, which filed bankruptcy on Sept. 15, sellers of credit-default protection on it will have to pay 91.375 cents on the dollar to settle their contracts. It will be the biggest payout yet in the $55 trillion credit default swap market. Pimco’s Total Return Fund, with some $130 billion under management, has written protection on a face amount of $105.4 million of Lehman debt as of June 30, according to regulatory filings.

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.

It’s a familiar refrain on Wall Street: “too big to fail.” We heard it with Bear Stearns, Fannie Mae and Freddie Mac, American Insurance Group and Lehman Brothers. And each case, the opposite proved to be true. Government rescues in the form of multibillion-dollar bailouts prevented some of those supposed fail-proof businesses from going under. Now Citigroup, once the nation’s largest financial institution, is joining the ranks, as well, after succumbing to more than $65 billion in losses.

The government’s plans to prop up Citigroup were revealed on Sunday, Nov. 23, and include an additional $20 billion of taxpayer money for the bank, along with a guarantee on more than $300 billion of the firm’s most risky assets. In exchange for the guarantee, Citigroup will issue $7 billion in preferred stock to the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC).

So how did things get so bad for one of the country’s premiere financial services firms? In three words: reckless business bets.

Over the years, Citigroup created a multibillion-dollar business in mortgage-backed securities and collateralized debt obligations (CDOs). As profits grew, Citigroup got bolder, taking more and more risks. At the same time, the company employed tricky accounting practices that allowed it to move troubled assets into off-balance-sheet trusts that could then market the debts to other institutions. Once the assets had been moved off Citigroup’s balance sheets, it made it appear the bank was carrying less risk.

Appearances can be deceiving, however, for the simple fact they often mask the truth. To date, Citigroup has suffered four quarters of consecutive multibillion-dollar losses. It still holds $20 billion of mortgage-linked securities on its books, the majority of which have been marked down to between 21 cents and 41 cents on the dollar, according to a Nov. 22 article in the New York Times.

But the worst may be yet to come. Citigroup has another $1.2 trillion that is held “off balance sheet.”  When it begins to move those questionable assets back onto its books, get ready for a whole new firestorm of losses to ignite.

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.