Archive for the “JP Morgan Chase” Category

The financial markets got another dose of bad news this morning when Citigroup - the nation’s second-largest bank by assets - reported a third-quarter net loss of nearly $3 billion as the New York-based bank continues to struggle from exposure to derivatives and bad bets on mortgage-related securities.

It is Citigroup’s fourth consecutive quarterly loss.

The banking giant’s latest earnings results pale in comparison to its financial standing for the same period one year ago when it earned $2.2 billion.

In addition to its poor third-quarter performance, Citigroup has eliminated 11,000 jobs between the current quarter and the previous one, bringing the total number of layoffs to 23,000 so far this year. On the company’s earnings call Oct. 16, Gary Crittenden, Citigroup’s chief financial officer, referred to the latest round of layoffs as “right-sizing.”

Citigroup’s dismal earnings follow another recent setback for the bank when it failed to beat out Wells Fargo for ownership of Wachovia Corp. With financial assistance from the Federal Deposit Insurance Corp. (FDIC), Citigroup initially wanted to put up $2 billion, or $1 a share, for Wachovia’s banking operations, with the FDIC taking on some $270 billion of Wachovia’s most troubled assets. The deal was thwarted, however, when Wells Fargo upped the ante and agreed to buy all of Wachovia’s operations for $15 billion, or $7 a share, and without help from the FDIC. The deal was confirmed by the Federal Reserve on Oct. 14.

As is the case for the majority of financial institutions, 2008 has been a rocky year for Citigroup:

• Citigroup’s losses over the past 12 months have surpassed $20 billion.

• The company has written down the value of investments tied to bad mortgages and other toxic debt by more than $50 billion;

• In May, Citigroup’s CEO announced that the company must rid itself of at least $500 billion in assets in order to get out of businesses tied to risky mortgages and other low-quality debt;

• In August, Citigroup - which is the largest underwriter of auction-rate securities - agreed to buy back roughly $7.5 billion worth of the securities it sold to some 40,000 retail investors. The bank also paid a $50 million civil penalty to the State of New York and a $50 million penalty to the North American Securities Administrators Association; and

• Legal issues continue to heat up from angry investors in Citigroup’s ASTA and MAT Funds. Both the ASTA Fund and MAT Fund were highly leveraged municipal bond funds that borrowed approximately $8 for every $1 raised. Ultimately, the funds suffered massive losses, with both funds losing approximately 90% of their original value. Investors, meanwhile, were repeatedly told by Citigroup that the funds would rebound. Among other things, investors claim Citigroup did not disclose accurate and true information about the funds and their potential risks and failed to institute appropriate risk management practices to prevent the funds’ management from investing in risky and highly speculative investments.

Moving forward, it appears Citigroup has a long road to haul before its financial issues turn the corner. The newly announced plan by the federal government to inject capital into U.S. banks may help. Citigroup - as well as JPMorgan Chase, Bank of America Corp. and Wells Fargo - is set to receive $25 billion.

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 more bank has bitten the dust. In yet another deal orchestrated by the U.S. federal government, Wachovia Corp. will be bought by Citigroup for approximately $2.1 billion. According to a statement issued by the Federal Deposit Insurance Corporation (FDIC) on Sept. 29, Citigroup will absorb up to $42 billion in losses on Wachovia’s most risky mortgages, with the FDIC taking on any losses beyond that amount. In exchange, Citigroup will hand over $12 billion in preferred stock and warrants to the FDIC.

The government’s deal with Citigroup is similar in structure to the agreement that it put together in March, when the Federal Reserve provided financial backing to JPMorgan Chase for the takeover of the 85-year-old investment firm of Bear Stearns.

For months, Wachovia’s financial picture has been in a downward spiral, the root of which was connected to its 2006 purchase of Golden West Financial. California-based Golden West specialized in optional adjustable-rate mortgages (ARMs) - mortgages that offered low payments at the beginning of a borrower’s home loan, followed by much higher payments later on.

With its portfolio burdened from massive losses on these optional ARMs, Wachovia’s stock plummeted more than 80% in value this year.

The final outcome for Wachovia illustrates the increasing toll that subprime problems have levied on the nation’s banking industry. In July, there was the collapse of IndyMac Bank. And, just last week, Washington Mutual - the country’s largest savings and loan – had been teetering on the brink of bankruptcy before its seizure by the government and subsequent sale to JPMorgan Chase.

In order to buy Wachovia, Citigroup must sell $10 billion in common stock, as well as slash its quarterly dividend - the second time it has done so this year - in half to 16 cents.

Once the deal with Citigroup has been finalized, Wachovia will remain a public company, with two main divisions: its brokerage arm, Wachovia Securities, and its investment management business, Evergreen Asset Management.

Interestingly, it was just two years ago that the Federal Reserve had imposed a ban on Citigroup from making any major acquisitions because of the bank’s inadequate risk-management controls and regulatory problems. Earlier this summer, Citigroup agreed to buy back some $7.3 billion in illiquid auction-rate securities from individual investors, charities and businesses, as well as pay a hefty fine of $100 million to settle potential fraud charges by New York Attorney General Andrew Cuomo over auction-rate securities sales and destruction of subpoenaed documents.

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.

Alan Fishman’s rein as CEO of Washington Mutual - a position he inherited on Sept. 8, along with a $7.5 million signing bonus and a $1 million salary - was short lived. Late Thursday evening, Sept. 25, federal regulators seized the nation’s largest savings and loan and quickly orchestrated a deal to sell the bulk of the troubled bank’s assets to JPMorgan Chase for $1.9 billion. It is the biggest bank failure ever in United States history and the 13th bank failure so far this year.

WaMu’s descent this year has been swift. The Seattle-based institution was a major originator of subprime and other risky residential mortgages. Of the $182 billion in single-family mortgages that WaMu had on its books as of June 30, nearly $53 billion were optional adjustable-rate mortgage (ARMs) - a flashy and potentially dangerous loan option that allows borrowers to pay less in the beginning of their mortgage followed by payments that can increase dramatically if interest rates go up during the loan’s tenure. In addition to the ARMs, nearly $17 billion of WaMu’s loans were subprime mortgages.

After becoming increasingly burdened from massive mortgage and credit card losses, WaMu’s shares lost nearly 90% of their value this year. On Sept. 8, Washington Mutual fired its CEO Kerry Killinger, replacing him with Fishman. By June 30, following credit rating downgrades to junk status, the bank had posted $6.1 billion in losses.

In taking over Washington Mutual, JPMorgan will pay the government $1.9 billion, and assume WaMu’s loan portfolio of $307 billion in assets. In total, JPMorgan is expected to write down approximately $31 billion of bad loans and raise some $8 billion in new capital.

As for shareholders and some bondholders, the deal means they will be wiped out. JPMorgan will not acquire any of WaMu’s liabilities nor claims by shareholders and senior debt and subordinated bond holders. WaMu’s customers’ deposits will be secure, however, according to federal regulators.

WaMu’s final curtain call and 119-year existence as an independent company came much like the scene depicted in the 1946 film, It’s a Wonderful Life, in which a run on the bank nearly forced the collapse of the fictional Building & Loan. In the end, of course, the Building & Loan survives. Sadly for Washington Mutual, real life was not so kind. In the past 10 days, depositors had withdrawn nearly $17 billion of their money, signaling a potential collapse that would have been devastating on the Federal Deposit Insurance Corp.’s insurance fund.

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.

Former Jefferson County Commissioner Mary Buckelew has pleaded guilty to obstruction of justice as part of a federal corruption investigation into bond sales used to finance the county’s controversial sewer system. When Buckelew initially was questioned by a grand jury several months ago on whether she received any payments from a Montgomery investment banker involved in the county’s sewer bond deals, she denied any wrongdoing.

In reality, however, prosecutors showed that Buckelew accepted numerous gifts - including some $4,000 worth of designer shoes and purses, as well as a $1,400 spa treatment - from an investment banker whose firm later collected millions of dollars in fees and commissions related to the county’s bond financing deals.

In pleading guilty to the charge of obstruction of justice, Buckelew could face up to 20 years in prison and fines of $250,000.

Buckelew isn’t the first Jefferson County commissioner to wind up in a federal courthouse. On Sept. 19, 2007, former Jefferson County Commissioner Chris McNair was sentenced to 60 months in prison on charges of conspiracy and taking bribes from sewer contractors. In addition, McNair was ordered to pay restitution to Jefferson County in the amount of $851,927.

Another former commissioner, Gary White, also was arrested on federal bribery charges for his alleged influence in the county’s $3.2 billion sewer work. White was convicted once and is now awaiting his second trial on charges that he took at least $20,000 from sewer contractors.

In total, 22 people have been convicted in Jefferson County’s ongoing sewer project scandal, including contractors, engineers and now three former county commissioners.

Jefferson County’s problems first began in 2002, when county commissioners sought the advice of JP Morgan Chase and other banks to finance a massive upgrade to the county’s sewer system, which was pumping raw and partially treated sewage into nearby streams. The county then borrowed money for the sewer project via the bond market in a series of complex transactions called interest-rate swaps. When the mortgage crisis began to unfold and banks subsequently tightened their lending, interest rates on the sewer debt skyrocketed out of control.

Meanwhile, upon hearing the news of Buckelew’s plea deal, Birmingham Mayor Larry Langford - who once resided on the Jefferson County Board of Commissioners at the time the sewer plans were first put together and who also is the target of an investigation by the Securities and Exchange Commission (SEC) for his connection in the bond swap transactions - offered his support for the commissioner, describing her as “an exceptionally fine person,” according to a Sept. 23 article in The Birmingham News.

The citizens of Jefferson County may have a different opinion. Because of the corrupt actions of their elected officials and Wall Street banks, water rates have gone up more than 350%, with the average customer now paying about $65 a month. On top of that, Jefferson County still cannot meet its payment obligations for the overpriced sewer work, meaning it is looking at the biggest municipal bankruptcy in U.S. history.

To read Buckelew’s plea agreement in its entirety, go to http://blog.al.com/spotnews/2008/09/buckelewplea.pdf.

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.

Unresolved financial issues over a $3.2 billion sewer debt in Jefferson County, Alabama, have caused the project’s bond insurers - Syncora Guarantee and Financial Guaranty Insurance Co. - to file a lawsuit in U.S. District Court in Birmingham and ask the judge to strip Jefferson County Commissioners of their duties and appoint an independent receiver to take charge.

The lawsuit is the latest controversy in an ongoing battle between county commissioners and creditors over how to resolve Jefferson County’s outstanding sewer debt obligations. In August, Alabama Governor Bob Riley convened a meeting with the county’s creditors in which he offered a plan to restructure the debt at a lower, fixed rate over a longer term. The banks, led by JPMorgan Chase, agreed that the county could delay interest payments on the debt until the end of September.

Now that deadline is fast approaching. If a resolution is not reached soon, Jefferson County will be forced to declare Chapter 9 bankruptcy. It would be the biggest bankruptcy by a municipality government since 1994 when Orange County, California, filed for protection from a $1.7 billion debt.

For years, the sewer project in Jefferson County has been an ongoing source of frustration for Birmingham residents. A combination of risky financing arrangements and complex interest-rate swaps ended up creating a fiscal nightmare for local officials, with sewer debt payments spiraling out of control and residents forced to pay sewer rates that have gone up nearly 330% since 1997.

More troubles unfolded when local officials - including Birmingham Mayor Larry Langford - were accused of accepting money under the table in exchange for awarding bonds and swaps businesses when Langford headed the Jefferson County Council. At least two lawsuits also have been filed against banks by taxpayer groups.

In 2007, former Jefferson County Commissioner Chris McNair, who oversaw the county’s sewer department, pleaded guilty to conspiracy and bribery for accepting money from a contractor.

In a related development, Standard & Poor’s Ratings Services recently lowered its rating three notches on some of Jefferson County’s sewer bonds. According to a statement from the agency’s credit analyst, the downgrade reflects the likelihood that the county will be unable to meet its future payment obligations.

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 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.

Facing $19 billion in bad home loans and falling stock prices, Washington Mutual is engaged in a full-on fight to allay investors’ fears that it can weather the latest financial storm. In the past week, the nation’s largest savings and loan has seen a 46-percent drop in its stock, its CEO Kerry Killinger fired, been put on probation by the Office of Thrift Supervision for poor risk management and compliance practices and had its credit ratings reduced by Fitch Ratings and Moody’s Investors Service to below investment grade.

The financial health of the Seattle-based bank apparently is so bad that it could be looking for a buyer. According to a Sept. 12 story in the American Banker, Washington Mutual has entered into “advanced discussions” to sell itself to JPMorgan Chase. The article says that while a deal has not been struck, “negotiations are ongoing at the highest levels of both companies, including James Dimon, the chairman and chief executive of JPMorgan, and Alan Fishman, the newly installed CEO of Wamu.”

This isn’t the first time JP Morgan has expressed interest in Washington Mutual. In March, JP Morgan tried to strike a deal to buy the bank, but was put off when WaMu received a $7 billion capital infusion from TPG Inc., a Fort Worth, Texas-based private-equity firm.

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.

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.

An Alabama activist group is taking banking giant JPMorgan Chase, 11 other firms and prominent Jefferson County, Alabama, officials to court, charging that the deals behind a $3.2 billion sewer debt were tainted in corruption, bribery and other wrongdoings.

The Citizens for Sewer Accountability and two Jefferson County residents - Carnell Fowler and William Young - filed the lawsuit on Aug. 28, and are asking the Jefferson County Circuit Court to cancel $6.6 billion in debt and related interest-rate swaps issued by the county because the arrangements were tied to public contracts allegedly obtained through bribing one or more public officials.

The 47-page suit seeks unspecified damages.

Among the charges, the lawsuit claims that former Jefferson County Commissioner and current Mayor Larry Langford and others engaged in improper conduct concerning the county’s bond deals in 2002 and, specifically, accepted money under the table to ensure sales of interest-rate swaps - risky financing arrangements that exchange one type of interest rate for another - would happen.

The lawsuit cites similar claims against William Blount, the previous president of the Jefferson County Board of Commissioners; Albert LaPierre, a lobbyist; and investment banker Charles LeCroy.

To date, Jefferson County has paid JP Morgan and other Wall Street banks that advised the county on refinancing $3.2 billion of fixed-rate debt into variable-rate bonds some $120 million in fees and commissions - six times the prevailing rate.

Today, Jefferson County is on the verge of bankruptcy, unable to make interest rate payments that have skyrocketed into the double digits following the subprime crisis and the ongoing credit crunch.

On Sept. 5, Alabama Governor Bob Riley negotiated a deal with the county’s creditors to restructure the sewer debt at lower, fixed interest rates over a longer term. The banks have yet to respond to the proposal, but agreed that the county could postpone making interest payments until Sept. 30.

That agreement comes not a moment too soon. Lawyers for Jefferson County already were preparing the paperwork for Chapter 9 bankruptcy. If the county did declare bankruptcy, it would become the largest municipality default in the history of the United States.

Meanwhile, the sewer debacle continues to hit Jefferson County residents where it hurts the most: in their wallets. Sewer rates have increased by 329 percent since 1996 - two to three times the rate of inflation.

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.