Archive for the “Bank of America” Category

It survived a stock market crash and the Great Depression, but Lehman Brothers could not triumph over the subprime mortgage problems of the 21st century.

Seconds before midnight on Sunday, Sept. 14, the 158-year-old investment banking firm agreed to file for Chapter 11 bankruptcy, officially ending a weekend of rumors and speculation on its demise. As employees began arriving for work on Monday morning, many were told not to return the following day.

Lehman Brothers was the nation’s fourth-largest investment bank, and the biggest underwriter of mortgage-backed securities. Its historic collapse is attributed to some $60 billion in toxic real estate holdings, along an inability to raise much-needed capital in recent weeks. In its filing for bankruptcy protection, Lehman reported total debts of $613 billion against total assets of $639 billion.

Lehman’s debt ratings were another key source of its problems. All three rating agencies had warned last week that rating downgrades were likely unless Lehman could come up with a solid restructuring plan or a buyer.

Many people are asking why the U.S. federal government, which intervened in the Bears Stearns case in March to orchestrate its sale to JP Morgan Chase and, more recently, prevented mortgage giants Fannie Mae and Freddie Mae from going under, failed to save Lehman Brothers. Reportedly, U.S. Treasury Secretary Henry Paulson was unwilling to use taxpayer money once again to resolve a Wall Street banking crisis.

For the time being, only Lehman’s parent company, Lehman Brothers Holdings, will seek Chapter 11 bankruptcy protection. The filing does not include any of Lehman’s subsidiaries or investment banking and asset management operations. Those units will continue to operate as usual for now. Analysts say Lehman is likely to either find a buyer - or buyers - for those business segments or unwind them gradually.

In addition, Wall Street’s major banks have created a $70 billion fund to ease the effects on the financial markets from the Lehman bankruptcy. Among the firms participating: Citigroup, Barclays, UBS, Bank of America, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch and Morgan Stanley.

By 9:30 a.m. on Monday, Sept. 15, Lehman’s shares had fallen more than 90%, from $3.65 last Friday to just 29 cents. It was only six days ago that Lehman’s CEO Richard Fuld said the investment firm was poised for a comeback and that it had ample capital and liquidity.

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.

As Lehman Brothers headed into liquidation territory late Sunday evening, Sept. 14, another dramatic event was unfolding on Wall Street: the sale of Merrill Lynch to Bank of America for $44 billion.

The boards of directors of both companies have approved the deal, and Bank of America will pay nearly $30 for each share of Merrill Lynch stock.

The surprise announcement arrived on the heels of a flurry of weekend meetings between officials at the New York Federal Reserve Bank, the U.S. Treasury, the Securities and Exchange Commission (SEC) and various Wall Street banks regarding a rescue plan for Lehman Brothers.

Like Lehman, Merrill Lynch has been mired down by toxic real estate holdings this year. In total, the 94-year-old firm has posted more than $45 billion in losses. In August, Merrill’s financial crisis became so severe that CEO John Thain announced the liquidation of $31 billion in collateralized debt obligations (CDOs) for pennies on the dollar. The CDOs were sold to the private equity firm of Lone Star Funds for $6.7 billion. Fourteen days prior to the sale, Merrill stated the assets to be worth $11.1 billion.

The sale of Merrill Lynch to Bank of America was unexpected on Wall Street. Over the course of the weekend, BofA was thought to be one of the lead suitors for Lehman Brothers. As of late Sunday afternoon, however, Bank of America apparently walked away from those discussions - reportedly because U.S. Treasury Secretary Henry Paulson would not offer any government backstop as part of the deal.

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.

Unable to overcome mounting losses on subprime-rated mortgages, one of the oldest and most revered names on Wall Street apparently is on a desperate track to find a buyer. Among the reported suitors for Lehman Brothers Holdings: Bank of America, Deutsche Bank AG, JC Flowers & Co. and Barclays.

The past three months have been brutal for Lehman. The nation’s fourth-largest investment bank has seen its shares fall more than 80 percent, along with a record $3.9 billion third-quarter loss in September and $5.6 billion of write downs.

Lehman’s future outlook took yet another hit on Sept. 11 when Moody’s Investor Service announced plans to downgrade the long-term debt rating on the 158-year-old investment bank if it did not have a “strategic arrangement” in place for a buyer or links with a stronger financial partner. A downgrade not only would increase Lehman’s borrowing costs, but also could cause other institutions and partners to become leery of doing business with the firm.

That’s exactly what occurred in the case of Bear Stearns, which collapsed in March after clients and vendors abandoned the 85-year-old investment firm on the belief it had become financially insolvent. The Federal Reserve eventually stepped in to orchestrate a deal with JPMorgan Chase to buy the company.

Following the Bears Stearns bail out, the Federal Reserve opened up a lending facility that gave Wall Street investment banks access to a quick source of cash. In exchange for 28-day loans of Treasury securities, companies temporarily use certain assets - including mortgage-backed securities, asset-backed securities and collateralized loan obligations - as collateral.

Critics of the Fed’s lending facility say it undermines the incentive for investment firms to maintain liquidity buffers and instead encourages them to take additional risks because of the belief that the government will come to the rescue if things go wrong.

And apparently that may be the case for Lehman Brothers. As reported Sept. 12 in the Washington Post, both the Federal Reserve and the U.S. Treasury Department are actively involved in finding a buyer for the troubled firm and expect a deal to be in place by the end of this weekend. Several potential scenarios reportedly are under consideration, including selling various divisions of Lehman to multiple buyers.

News of the government’s behind-the-scenes involvement with Lehman Brothers comes less than a week after Treasury Secretary Henry Paulson announced the takeover of Fannie Mae and Freddie Mac and five months after federal regulators arranged the sale of Bear Stearns to J.P. Morgan Chase.

Meanwhile, with news of a forced sale of Lehman Brothers becoming a more likely reality, investors are left to watch the value of their stock evaporate by the hour, and employees of Lehman anxiously wait for word on their future fate.

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.

One of the largest underwriters of auction-rate securities - Bank of America (BofA) - has become the ninth financial institution to settle claims involving improper sales of the instruments. As part of an agreement with Massachusetts regulators, BofA, the nation’s second-largest bank will buy back $4.5 billion of the illiquid investments from about 5,500 customers, including individual investors, small businesses and charities.

Bank of America says it will redeem the securities at par value beginning Oct. 1 through Dec. 31. The company also will compensate investors for any losses incurred if they sold their securities at a discount following February’s collapse of the auction-rate market.

An undisclosed fine will be levied against Bank of America, as well.

Separate investigations by New York State Attorney General Andrew Cuomo and the U.S. Securities and Exchange Commission into Bank of America’s handling of auction-rate securities remain ongoing.

For the past six months, regulators in several states have been following investor complaints that Wall Street banks sold and marketed auction-rate securities as cash-like investments. To date, nine firms - including Bank of America - have agreed to buy back nearly $55 billion worth of auction-rate securities from retail investors.

As in the other eight settlement agreements, Bank of America does not offer a definite liquidity solution for institutional clients that fail to qualify for the scheduled buybacks. Between 2000 and 2008, Bank of America originated nearly $15 billion in municipal auction-rate securities, according to a Sept. 10 article on Bloomberg.com.

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 collapse of the auction-rate securities market has left issuers of auction-rate bonds - municipalities, hospitals, universities and others - drowning in high interest rate costs, often in the double digits and three times what they’re used to paying. With no buyers for auction-rate securities - and unwilling to wait for the federal government or regulators to fix the liquidity crisis - their only alternative is to exit the auction market and replace the auction-rate bonds with lower cost and less volatile debt.

And that can be a pricey endeavor. From Indiana to California to New York, issuers of auction bonds are encountering sky-high costs and countless headaches as they try to put the auction-rate securities debacle behind them. In total, issuers have had to pay an extra $2 billion in interest costs following the collapse of the auction market in February.

Making matters even worse: These same borrowers may be on the hook for billions of more dollars in refinancing fees to convert their auction-rate bonds - money that in most cases will go to the very same Wall Street institutions that caused all of their problems in the first place by pulling out of the auction-rate market six months ago.

As reported Sept. 9 on Bloomberg.com, the biggest state issuer of auction rate debt is New York State, with $4 billion in auction-rate bonds. To date, that state has spent $138 million to rid itself of the securities. One of its unexpected costs in dumping the auction bonds was $101 million to repay borrowings by the state Dormitory Authority on behalf of the City University of New York. Those are funds that could have gone toward providing preschool classes for more than 30,000 children, according to the article.

But that’s just the beginning. Total expenses for New York to covert its auction bonds into other forms of financing will climb to $340 million or more, according the Bloomberg article.

Based on Bloomberg data, states, cities, hospitals, and other municipal borrowers have now refinanced or plan to refinance approximately $104 billion of their $166 billion in auction-rate debt, which amounts to 62% of all auction-rate bonds.

When all is said and done, the final bill for replacing the $166 billion in auction-rate debt could reach upwards of $7 billion, which does not include extra interest costs, according to Bloomberg.

Auction-Rate Settlements

As of August 2008, eight Wall Street banks - Citigroup, Morgan Stanley, JPMorgan Chase, Wachovia, Deutsche Bank AG, Merrill Lynch, Bank of America and Goldman Sachs - have agreed to buy back more than $50 billion of auction-rate securities from retail investors and settle claims of misleading investors about the liquidity risks of the securities.

As part of the settlements, issuers of the auction bonds will be reimbursed refinancing fees on bonds sold after Aug. 1, 2007 and replaced after Feb. 11. That covers only about 1 percent of public-sector borrowings, according to Bloomberg.

Even more disturbing to issuers: When they do pay a bank refinancing fees for converting their auction-rate bonds, they simultaneously reduce that institution’s losses on the very securities that state regulators forced them to buy back.In the end, replacing auction-rate debt has become an expensive, unpleasant and arduous process for many issuers of auction-rate bonds. Not only is it creating financial havoc on already strained state budgets for some public-sector borrowers, but it also means numerous worthwhile and needed public projects must be placed on the backburner for years to come.

On Sept. 18, auction-rate securities will take center stage at a hearing held by the U.S. House Financial Services Committee. Among other things, the Committee plans to examine the actions of regulators and investment banks and their possible connection to the collapse of the $330 billion auction-rate securities market in February.

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

Bank of America apparently is getting ready to join Citigroup, UBS, JPMorgan and other banks that agreed to cut deals with state and federal regulators and resolve investigations into the alleged mishandling of auction rate securities sales.

On Sept. 3, Massachusetts Secretary of State William Galvin said Bank of America, the nation’s second-largest bank, must either reach an agreement with state regulators or be prepared to face legal action. On Sept. 4, New York Attorney General Andrew Cuomo followed up on Galvin’s edict, serving subpoenas to eight Bank of America executives as part of his six-month investigation on how Wall Street’s biggest banks sold auction rate securities to investors.

So far, eight Wall Street heavyweights - UBS, Morgan Stanley, Citigroup, JPMorgan Chase, Wachovia, Merrill Lynch, Goldman Sachs and Deutsche Bank - have agreed to settle claims that they marketed auction rate securities as cash-like alternatives to investors. In addition to buying back nearly $50 billion of the securities from retail investors, the banks also must pay fines totaling more than $500 million to state and federal regulators.

However, the New York attorney general says any settlements agreed to thus far do not cover any possible misconduct by individual brokers.

Meanwhile, two former Credit Suisse Group AG brokers were formally charged with violating securities laws and fraudulently selling subprime mortgages connected to auction rate securities to corporate clients.

As reported Sept. 5 on Bloomberg.com, Julian Tzolov and Eric Butler were charged on Sept. 3 for falsely representing various securities to investors as backed by federally guaranteed student loans and safe alternatives to cash or money market funds.

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.

Imagine you went to a bank, where you opened an account and placed your entire life savings or children’s college fund in it. When you needed the money and tried to withdraw it, you were told the funds wouldn’t be available for a long, long while.

That’s exactly the scenario thousands of investors in auction-rate securities have faced since February, when the $330 billion auction-rate market became frozen. Beginning that month, buyers for the securities all but disappeared from the market. After already taking millions of dollars in subprime mortgage-related write downs and credit losses, brokerage firms and investment banks that once prevented the auctions from failing refused to step in and support them.

As a result, the auction-rate market became “frozen,” and retail investors were left with what they thought was a short-term, cash-equivalent investment that had become a long-term, illiquid instrument.

Auction-rate securities - which are long-term bonds sold by issuers such as municipalities, student loan companies, hospitals and closed-end funds - have interest rates that reset every seven, 14, 28 or 35 days. If an auction fails to draw enough bidders, the interest rate resets to a level previously determined in documents issued at the time of the bond sale.

From 1984 through 2006, only 13 auction failures were recorded. By May 2008, more than 80 percent of auctions were failing, as investors began a mass exodus from the market because much of the debt was insured by companies facing losses from bad bets on subprime-related mortgage-related debt.

Issuers were left facing penalty interest rates, sometimes as high as 20 percent, while investors already holding auction securities were stuck with bonds they could not sell.

Many of these investors were retirees and families who have lost their children’s college education funds - funds they say were made in investments pitched to them as cash-alternatives.

Earlier this year, investor complaints over auction-rate securities led securities regulators in 10 states to launch probes into the auction-rate securities market and the sales practices used by Wall Street banks to market the securities to investors.

In a lawsuit filed June 26 by Massachusetts Secretary of State William Galvin, UBS became one of the first investment banks to face fraud charges since the auction-rate securities market seized up in February.

In a 101-page complaint, Galvin claims UBS committed fraud by selling the auction bonds as the equivalent of money-market funds without disclosing to investors the inherent risks associated with the auction securities. The company also is charged with selling the securities, which were only redeemable in cash at UBS auctions, while already believing that the auction market was headed for collapse.

As reported June 27 on Bloomberg.com, while executives at the Swiss-based bank identified the hazards of auction-rate securities in August, they simultaneously began to “mobilize the troops,” holding more than a dozen conference calls with its sales team and giving them new marketing materials to promote the bonds, according to e-mails from David Shulman, head of UBS’s municipal securities group.

“The pressure is on to move inventory,” Shulman said in an Aug. 30 e-mail.

According to the Bloomberg article, UBS ramped up its marketing efforts to individual investors in August. Financial managers were paid 40 percent of the marketing fee from the periodic auctions, according to e-mails.

Galvin is seeking to force UBS to liquidate all of the auction- rate bonds it previously sold to investors in Massachusetts, which is reportedly about $200 million.

The Massachusetts securities regulator also is investigating Merrill Lynch and Bank of America over their dealings in auction-rate securities.

Meanwhile, the latest charges against UBS are giving investors in Massachusetts a much-needed and long overdue glimmer of light at the end of the auction-rate tunnel.

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.

Investigations into the auction-rate securities industry continue to heat up.

On April 17, New York Attorney General Andrew Cuomo issued subpoenas to 18 banks, including UBS AG and Merrill Lynch & Co., as part of his investigation into how Wall Street banks marketed the securities to investors. Among the institutions that received subpoenas: UBS, Merrill Lynch, Goldman Sachs Group, Citigroup Inc., Raymond James Financial, First Albany, Wachovia Corp., Morgan Keegan, Piper Jaffray, AG Edwards, Deutsche Bank, TD Ameritrade, Lehman Brothers Holdings, RBC Dain Rauscher, Bank of America, JPMorgan Chase & Co., Morgan Stanley, and E*Trade Financial.

In recent weeks, regulators have stepped up their probes into the $330 billion auction-rate market. Since February, auction failures have reached more than 70 percent, leaving many issuers stuck with penalty interest rates as high as 20 percent.

As for individual investors - who entered the auction-rate market through closed-end funds - they are now trapped in a long-term, illiquid investment they once thought was short term and safe as safe as cash in the bank.

Meanwhile, securities regulators in nine other states have launched their own probes and investigations into the auction-rate marketing practices of investment banks and securities firms. Earlier this month, the nine states banded together to coordinate their efforts with the formation of a task force. Bryan Lantagne, director of Massachusetts’ securities division, will head the newly formed committee.

Among the states participating on the task force thus far: Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington.

In a letter sent April 11, the Securities and Exchange Commission (SEC) asked investment firms and banks for the names of customers who held auction-rate securities and their total value as of Dec. 31 and Feb. 29, in addition to the amounts held by customers and in the firms’ inventories as of March 31.

To no one’s surprise, the list of lawsuits from investors who say they were misled about the risks of auction-rate securities gets bigger by the day. And with good reason. If they had been properly informed by the brokers they trusted and put their faith in, many investors would never have bought into the auction market. For them, a resolution can’t come soon enough.

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 growing list of lawsuits filed by investors who say they were deceived into buying now-illiquid auction-rate securities apparently has made an impression with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Both agencies are taking a closer look at how investment firms, brokers and public companies marketed the securities to investors.

Auction-rate securities are long-term bonds whose interest rates reset in auctions held every seven, 28, or 35 days. In February, as the credit market tightened, the auctions failed to attract enough bidders. Investment banks that typically stepped in to support an auction’s financing - and thereby prevent it from failing - refused to do so. As a result, investors now find themselves holding securities they are unable to sell.

On April 8, FINRA sent surveys to a number of investment firms for information on how auction-rate securities are marketed and sold. Depending on what FINRA uncovers, enforcement action could be taken at a later date. The agency also announced it is seeking additional details on customer complaints regarding auction-rate securities.

FINRA and SEC aren’t the only one looking into this issue. In March, Massachusetts Secretary of State William Galvin issued subpoenas to UBS, Merrill Lynch, and Bank of America for testimony and documents on how they pitched the securities to customers.

Finally, on April 9, Goldman Sachs announced that it also had received requests for information from “various governmental agencies and self-regulatory organizations” relating to auction products and recent auction failures. It is the first time that Goldman has been linked to any auction-rate securities probes.

Investors who are now stuck holding illiquid auction-rate securities say they were duped into buying the investments. Among other things, they want to know why they were kept in the dark about the possibility of an auction failing. Most important, investors want to know why the brokers they trusted pitched them the story that auction-rate securities were liquid, low-risk investments in first place?

Because now, for the thousands of investors who are unable to access their frozen auction-rate securities accounts, it’s a story that has yet to bring a happy ending.

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.

Brokers who reportedly misled investors into buying auction-rate securities as safe, cash-alternative investments are now finding themselves in the hot seat.Â

Both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have begun looking into exactly how brokers sold auction-rate securities to investors. Among other things, FINRA is asking financial companies for a breakdown of total auction-rate-securities holdings by customer type, how auction-rate securities are categorized on customer statements, how firms marketed the products and the number of customer complaints related to auction-rate securities the firms have received since Oct. 1. Â

FINRA also has started a “sweep” investigation into the auction-rate securities issue, meaning that while they are investigating the industry practice they may not necessarily take any enforcement action. The SEC is assisting in the sweep investigation.

Auction-rate securities are made up of long-term bonds or preferred stock with interest rates that reset every seven, 14, 28 or 35 days. Typically, auction-rate securities are marketed and sold by an investment firm, with the only resale market occurring via an auction’s success.

In recent months, the auction bond market has been fraught with problems. Unable to attract bidders, auctions have failed, leaving investors holding securities no one wants.

In March, Massachusetts Secretary of State William Galvin subpoenaed three investment firms -UBS AG, Merrill Lynch and Bank of America - for information on how they marketed auction-rate securities to investors.

Earlier this month, Goldman Sachs revealed that it, too, had received requests for information relating to auction products and recent auction failures from “various governmental agencies and self-regulatory organizations.” This is the first time Goldman Sachs has been connected with an auction-rate securities investigation.

Interestingly, on March 31, 2008, FINRA issued an Investor Alert containing guidance on several options for investors who are holding unexpectedly illiquid auction-rate securities. FINRA failed to mention, however, that litigation is indeed one of their options.Â

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.