Archive for the “Bear Stearns Hedge Funds” 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.

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.

With the familiar sounds of Bear Stearns ringing in the background, speculation that Lehman Brothers Holdings could be headed down the same path continues to grow following a drastic drop in shares and a potential credit-ratings cut.

On Sept. 10, Lehman announced a stunning third-quarter loss of nearly $4 billion - its biggest loss since going public in 1994. On Thursday, Sept. 11, trading fell as much as 44 percent. Now, the nation’s fourth-largest brokerage firm is fighting for its survival.

By many accounts, the fight may be futile. Like the majority of investment firms this year, Lehman has been hit hard by continued losses on subprime-related mortgages.

Earlier in the week, the 158-year-old firm announced a series of restructuring plans to shore up its capital base, including selling a 55% stake in its lucrative investment management division, slashing dividends and spinning off most of its commercial property assets into a separate company.

Only time will tell whether Lehman’s restructuring plans will ever see the light of day - or, as in the case of Bear Stearns before it, a crisis of confidence by investors and business partners seals its 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.

It seems Wall Street’s leading investment banks - Lehman Brothers, Citigroup, Morgan Stanley, and Merrill Lynch - are unable to escape the glare of scrutiny over questionable business practices these days. Now a U.S. Senate committee investigation reveals that several top firms are raking in millions of dollars in profits by using complex derivatives and stock schemes to help foreign hedge funds illegally avoid paying billions in U.S. taxes.

In its 77-page report, to be released Sept. 11, the Senate Permanent Subcommittee on Investigations calls the tax-avoidance schemes another example of a “privileged few” benefiting at the expense of millions of American taxpayers who are left to shoulder a disproportionate share of the tax base.

The report says that $100 billion a year is lost to offshore tax abuses.The report names several hedge funds involved in the schemes, including Moore Capital, Highbridge and Maverick Capital.

Foreigners who invest in the United States are exempt from many U.S. taxes - they don’t pay taxes on interest earned on money deposited in a U.S. bank, nor do they pay taxes on capital gains. However, if they invest in a U.S. company and the stock pays a dividend, U.S. law requires them to pay a tax on the dividend. Dividends sent abroad are supposed to be taxed at a rate of 30% in most countries.

In reality, however, it’s a different story, and many non-U.S. stockholders never pay the dividend taxes that they owe. According to the Subcommittee’s report, the fault lies with U.S. financial institutions.

According to the report, each of the institutions investigated developed and marketed “dividend-dodging products” that disguised dividend payments to clients as nontaxable ones. The products involved complex equity swaps or loans that the banks described as offering a “dividend enhancement,” “yield enhancement,” or “dividend uplift.”

For the investment firms, the practice is a profitable one.

The Senate investigation shows that from 2000-2007 Morgan Stanley helped clients dodge payments of U.S. dividend taxes of more than $300 million. Lehman Brothers estimated that in one year alone, it helped clients avoid U.S. dividend taxes amounting to $115 million. From 2004 to 2007, UBS enabled clients to dodge $62 million in dividend taxes.

As was seen in the FBI’s investigation of Bear Stearns’ executives Matthew Tannin and Ralph Cioffi, as well as in several other recent Wall Street scandals, emails are at the center of the Senate Committee’s probe over dividend tax dodging.

As reported Sept. 11 in The New York Times, the Committee’s report cites an internal e-mail message in which an employee from Lehman Brothers refers to Microsoft’s announcement of a special dividend as “the cash register is opening!” A senior Lehman official is then quoted as saying, “Outstanding. Let’s drain every last penny out of this [market] opportunity.”

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 fall from grace of 85-year-old investment banking giant Bear Stearns is now fodder for a new book titled “Bear Trap: The Fall of Bear Stearns and the Panic of 2008.”

Authored by an anonymous former Bear Stearns senior director, “Bear Trap” will describe in detail the chain of events that ultimately led to the demise of the once-renowned Wall Street bank and the unprecedented bailout by the Federal Reserve to avoid a worldwide financial crisis.

On May 30, Bear Stearns - which had not seen an unprofitable quarter since the crash of 1929 and then again during the credit crisis of 2007-2008 - was acquired by J.P. Morgan Chase for the fire-sale price of $10 a share.

Fox Business News, which apparently located a copy of an unpublished manuscript of “Bear Trap,” says the author of the book cites emails from several Goldman Sachs employees as the culprit that unleashed a wave of significant short selling of the firm’s stock, ultimately leading to Bear Stearns’ final down fall.

“Bear Trap” will be in stores on Sept. 22, 2008. The book’s publisher, BrickTower, may reveal the identity of the anonymous author at that time, as well.

Meanwhile, can a made-for-TV movie be far behind?

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

Wall Street investment banks have come under fire lately, prompting U.S. Securities and Exchange Commission Chairman Christopher Cox to ask lawmakers to ramp up the agency’s authority to officially oversee them.

Cox told the House Financial Services Committee today that the nation’s biggest names in the investing world should have mandatory SEC oversight of their capital, liquidity and risk management practices. Currently, the SEC has a supervisory role over four of the largest investment firms - Goldman Sachs, Merrill Lynch, Morgan Stanley and Lehman Brothers - but it is on a voluntary basis only.

The SEC’s move to garner more oversight of Wall Street has been underway since the Federal Reserve’s bail-out of Bear Stearns in March. At that time, fears of similar scenarios playing out at other investment banks caused the Federal Reserve to open its discount lending window. Since then, the Federal Reserve has maintained that more oversight of investment banks is needed in the event it becomes obligated to lend them money again in the future.

The collapse of Bear Stearns and the U.S. subprime-mortgage market has contributed to almost $470 billion in write-downs and credit losses since the start of 2007.

Earlier this month, the Federal Reserve and the SEC formally agreed to an information-sharing pact in which the two agencies would exchange information and resources on common issues.

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

More charges could be looming for the two former Bear Stearns executives indicted last month for their role in the collapse of two Bear Stearns hedge funds. New York federal prosecutors did not elaborate on the new criminal charges, but confirmed at a July 18 hearing that a final decision would be rendered in the next few months.

In June, Ralph Cioffi and Matthew Tannin were arrested at their homes and charged with securities fraud and insider trading. At the center of the case are a number of e-mails between the two men, which intimated the hedge funds they managed were on the verge of collapse. Four days prior to the e-mail exchanges, Cioffi and Tannin told investors their holdings remained in solid financial shape.

Both men have pleaded not guilty in their case.

Cioffi and Tannin were in court for the July 18 hearing, but did not address U.S. District Judge Frederic Block.

The charges against the two former Bear Stearns executives constitute the first major criminal case brought by federal prosecutors stemming to the subprime mortgage meltdown. If convicted, Cioffi and Tannin each face up to 20 years or more in prison.

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

The Securities and Exchange Commission (SEC) has taken what it calls unprecedented action to curb short selling of stocks due to the financial problems at Fannie Mae and Freddie Mac. The emergency order, announced late in the day on July 15, follows widespread fears that the manipulation of investment bank and brokerage stocks is responsible for intensifying financial problems at Fannie Mae, Freddie Mac and major Wall Street firms.

Short selling is a method of trading that bets against securities. It is not illegal, and has been practiced by traders for years as a way to profit from falling stock prices. Short sellers borrow shares and then sell them with the idea of making a profit when the share price drops.

Short selling is, however, considered controversial in that it pits investors, particularly hedge funds, against companies that want to see their share prices go higher, according to a July 16 article in the Wall Street Journal.

The SEC’s plan is expected to go into effect on July 21, and will last approximately 30 days. Under the emergency order, a short seller would now be required to have an actual agreement in place in order to borrow the shares. Essentially, this will take shares out of the market for borrowing, reducing the amount of stock availa

Some critics say the SEC’s actions regarding short selling are too little, too late, and that regulators are simply making scapegoats of short sellers for the turmoil brewing at Fannie Mae and Freddie Mac. For years, many contend regulators turned a blind eye to short selling, as small businesses went under in the process. Now, as the fate of mortgage behemoths Fannie Mae and Freddie Mac and major Wall Street firms becomes more tenuous, it’s a different story.

On the heels of the SEC’s emergency order are reports that the regulatory agency has subpoenaed Goldman Sachs, Deutsche Bank AG and Merrill Lynch in its probe of suspected manipulation of shares of Lehman Brothers and Bear Stearns. The investigation marks the broadest investigation of Wall Street trading since mutual-fund abuses were targeted in 2003.

As reported July 16 on Bloomberg.com, the SEC is investigating whether illegal trading contributed to the March 10 collapse of Bear Stearns and the 80 percent drop in the market value of Lehman Brothers this year. The SEC’s probe reportedly focuses on traders who make profits by spreading false information about the firms.

The SEC also has issued subpoenas to more than 50 hedge fund advisers as part of its false rumors investigation.

According to the Wall Street Journal, Citadel Investment Group LLC and SAC Capital Advisors are among the firms that have received subpoenas. The subpoenas relate to trading in securities of the brokers, as well as correspondence between the hedge funds and other parties, the newspaper said.

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 an attempt to shore up eroding investor confidence, the United States Treasury Department and the Federal Reserve carefully crafted a plan on Sunday evening designed to throw a financial lifeline to mortgage giants Freddie Mac and Fannie Mae.

The plan, which requires approval by Congress, entails giving the Treasury Department authority to take an ownership position in Fannie Mae and Freddie Mac; temporarily increasing the companies’ existing line of credit at the Treasury; and giving the Federal Reserve a consultant-type role in setting capital requirements and other standards.

Should Fannie Mae or Freddie Mac need to borrow directly from the Fed, they will pay 2.25 percent - the same rate given to commercial banks and major Wall Street investment firms. The Treasury also would have the authority to invest government money in the companies by buying their stock.

The government’s announcement caps a tumultuous week of concern that the nation’s two main providers of funding for home mortgages in the United States might not have enough capital to handle their losses because of the rising number of bad home loans. In the past week, shares of Freddie Mac stock plunged nearly 50%, while Fannie Mae’s stock fell 45%.

According to a story in the July 14 edition of the Wall Street Journal, the goal of the government’s plan is not to stage a take-over of Fannie Mae or Freddie Mac, but rather to provide support that allows them to continue operating as private entities. By promising action on an “only-as-needed basis,” officials apparently are hoping to instill sufficient investor confidence in the two companies so that the intervention which occurred during the Fed-facilitated bail-out of Bail Sterns ultimately will prove unnecessary.

The government’s proposal comes just as Freddie Mac prepares to sell $3 billion in three- and six-month securities on Monday morning, July 14. A failure to attract bidders would be evidence of the company’s deteriorating financial health, and potentially spell disastrous consequences for the economy as a whole.

Fannie Mae and Freddie Mac are chartered by Congress to support the mortgage market, but they actually are owned by shareholders. Together, the companies hold or back more than $5 trillion in mortgage debt, roughly half of all U.S. mortgages.

As part of the government’s plan to prop up Fannie Mae and Freddie Mac, both companies would have temporary access to a line of credit that could be in place for up to 18 months. Currently, the lines of credit for Fannie Mae and Freddie Mac are capped at $2.25 billion each. The Treasury did not reveal what the level of increase might be.

Bottom line: The steps by the government to allow Fannie Mae and Freddie Mac to borrow money from the Federal Reserve are unprecedented - and a sure sign that fears over the mortgage giants have indeed moved into panic mode. If one or both of the companies were to fail, it would wreak havoc on an already tenuous financial system and deeply troubled housing market.

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 power of rumors - and the resulting damage caused to investors - has come full circle in recent months. Now the Securities and Exchange Commission (SEC) is promising to crack down on the spread of false information as a way to manipulate securities prices.

In a rare weekend announcement on July 13, SEC Chairman Christopher Cox said the SEC and other regulators would “immediately conduct examinations aimed at ensuring investors continue to get reliable, accurate information about public companies in the marketplace.”

The SEC’s investigation comes after a week-long run of rumors over the financial health of mortgage behemoths Fannie Mae and Freddie Mac. Lehman Brothers, the nation’s fourth-largest investment bank, also has been the subject of ongoing speculation, following rumors that some of its biggest trading partners were planning to scale back their business. And, in March, 85-year-old investment banking giant Bear Stearns was pushed to the brink of bankruptcy - and later acquired by JP Morgan Chase - a fate that it says was perpetuated by the spread of false rumors.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. Â