Archive for the “Wachovia” Category

Thousands of institutional investors that bought auction-rate securities on the premise they were cash equivalents are still waiting for their liquidity to materialize. By and large, corporate investors were not included in the settlement agreements that took place last summer when Wall Street banks and investment firms agreed to buy back billions of dollars worth of auction-rate securities from retail investors and small businesses as a way to settle state and federal charges alleging misrepresentation of the instruments. Instead, institutional investors continue to be left waiting in the wings, with no ARS solution in sight.

Auction-rate securities are long-term bonds or preferred stocks that pay interest or dividends at rates determined through auctions held every seven, 14 or 28 days. In February 2008, the market for auction-rate securities essentially collapsed, leaving both retail and institutional investors holding a supposedly liquid investment now considered worthless. 

Approximately $330 billion of auction-rate securities were outstanding when the auctions began collapsing in February. About $160 billion of auction rates remain outstanding following the settlements, according to a May 24, 2009, article in Investment News, with most paying very low “penalty” rates under the terms of the failed auctions.

The ARS buyback programs that were announced by brokerage firms in August 2008 failed to provide liquidity relief to institutional investors, offering instead only vague commitments to work with corporate investors on finding a solution for their ARS holdings. Even then, it could be years before institutional investors see any of their auction-rate securities redeemed for cash. 

Meanwhile, companies such as Citigroup, Wachovia, Merrill Lynch, and UBS Financial Services all face a growing list of individual lawsuits from institutional investors that have massive amounts of money still tied up in illiquid auction-rate bonds. To date, several investors have scored major legal victories in their ARS cases, including a February 2009 decision by a Financial Industry Regulatory Authority (FINRA) arbitration panel that awarded European chipmaker STMicroelectronics $406 million over a dispute with Swiss bank Credit Suisse Group and the unauthorized purchase of auction-rate securities.

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 a deal struck March 17 with Texas Securities Commissioner Denise Voight Crawford, Wachovia Securities will pay a $4 million fine in connection to claims that it misled Texas investors about the safety of auction rate securities.

As part of the agreement, Wachovia is required to complete its repurchase of auction rate securities from Texas clients by June 30, 2009. Last August, Wachovia joined a number of investment firms and banks that reached settlements with securities regulators when it agreed to buy back $9 billion of auction-rates securities previously sold to some 40,000 investors and pay a $50 million fine.

According to the Texas commissioner’s order, Wachovia Securities “fostered the misconception” that auction rate securities were “cash like, conservative instruments.” In reality, the securities are dependent on the viability of a successful auction. If an auction fails, which happened when the ARS market collapsed in February 2008, investors are unable to access their money.

The ARS ruling in Texas follows a similar judgment in Missouri where Secretary of State Robin Carnahan sued Stifel, Nicolaus & Co. to force the St. Louis brokerage firm to step up its plans to buy back nearly $200 million in frozen auction rate securities from investors.

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. 

Investors with Raymond James Financial are still holding out for answers from the St. Petersburg-based financial services firm regarding their illiquid auction-rate securities. So far, all they’ve gotten is a four-page letter dated Jan. 2 from Thomas James, chairman and chief executive officer, in which he “apologizes” for investors’ dilemma but says the company cannot repurchase the securities it sold because it doesn’t have enough capital on hand.

The message is of little comfort to clients of Raymond James Financial who currently own about $1 billion in outstanding auction-rate bonds and auction-rate preferred securities. It’s the same scenario they’ve faced since February 2008, when the $330 billion auction-rate securities market collapsed and left hundreds of thousands of investors unable to sell securities that had been touted as cash equivalents.

Facing pressure from state and federal regulators, a number of financial firms such as UBS, Wachovia, Merrill Lynch, Morgan Stanley and others announced plans to repurchase the illiquid securities from their clients. Many already have completed their buyback programs. Clients of Raymond James Financial, however, have been left in a holding pattern.

As it turns out, they may be in for a long wait. Any potential relief is likely tied to Raymond James Financial’s ability to secure a bank loan and buy back the securities after it becomes a bank-holding company. But that process will not be completed until next summer.

Meanwhile, Raymond James Financial remains under investigation by the Securities and Exchange Commission (SEC), the New York Attorney General and the Florida Office of Financial Regulation for its handling of auction-rate securities.

The company’s stock also has taken a beating from the firm’s inability to make good on its customers’ auction-rate securities. As of Dec. 31, 2008, shares of Raymond James Financial had fallen more than 40%.

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.

About 1,000 colleges across the country are seeing once again the impact of the credit crunch on Main Street. Last week, withdrawals from an investment fund that had been used much like a checking account to pay bills were temporarily halted, leaving administrators scrambling to find other sources of financing.

Troubled lender Wachovia was the trustee of the $9.3 billion Short Term Fund before stepping down from its role Oct. 2. Now, Wachovia is trying to work out what it calls “an orderly liquidation process” for the fund’s assets.

As reported Oct. 2 in the Wall Street Journal, higher education institutions have been putting their cash into the Short Term Fund, which is managed by a Connecticut-based not-for-profit called Commonfund, for more than three decades. The fact that it may now take years for investors to get all of their money back from what they thought was a conservative investment that offered slightly higher returns than U.S. Treasury bills leaves many schools understandably concerned.

Assumption College in Massachusetts is among the institutions affected by the liquidation of the Short Term Fund. The school had approximately $20 million invested in the fund, and has been able to withdraw only about a third of that amount. The treasurer at the college said the changes involving the fund not only were an “inconvenience,” but also came as “an unexpected shock.”

Following Wachovia’s announcement to restrict investor redemptions and liquidate assets in the Short Term Fund, Commonfund took action to limit withdrawals from a second fund it manages - the $1 billion Intermediate Term Fund. Redemptions in the fund were capped at 30% for each investor account.

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 battle for control of the nation’s fourth-largest bank, Wachovia Corp., took a surprise turn Friday night, Oct. 3.  Earlier that same day, Wells Fargo announced its intent to purchase Wachovia in an all-stock deal for $15.1 billion. Upon hearing the news, Citigroup headed to court to block the acquisition, claiming it violated a prior exclusivity agreement that prohibited Wachovia from discussing a merger with any entity other than Citigroup until Oct. 6.

As of Saturday, it appears Citigroup may have the upper hand. A New York federal judge issued a ruling to temporarily block the sale of Wachovia to San Francisco-based Wells Fargo.

Three days before Wells Fargo announced its merger with Wachovia, Citigroup was negotiating a cut-price deal to buy Wachovia’s banking operations for $2.1 billion. As part of the transaction, the Federal Deposit Insurance Corp. (FDIC) would have taken on any loan losses from Wachovia in excess of $42 billion in exchange for a $12 billion stake in Citigroup.

Before the agreement could be finalized, however, Wells Fargo upped the ante, offering Wachovia significantly more money for its operations. Wells Fargo’s proposal also did not entail any financial backing from the FDIC.

Meanwhile, as the spurned suitor, Citigroup reportedly is seeking $60 billion in damages from Wells Fargo for interfering with the initial transaction, according to the Oct. 5 Sunday edition of the New York Times.

Despite the court’s ruling, both Wells Fargo and Wachovia say they intend to move forth with their previously announced merger.

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 was a surprise twist of fate for Wachovia Corp., when the nation’s fourth-largest bank announced that rival bank Wells Fargo would buy its entire business operations in an all-stock deal worth $15.1 billion, or about $7 a share.

In purchasing Wachovia, San Francisco-based Wells Fargo will not require any assistance from the Federal Deposit Insurance Corporation (FDIC). Less than a week ago, Citigroup had sought financial backing from the FDIC as it tried to put together an agreement to buy only the banking portion of Wachovia, not its brokerage and asset management businesses, for approximately $2.16 billion, or about $1 per share. Had that deal materialized, the FDIC would have been responsible for up to $270 billion of Wachovia’s most risky loans.

It was only yesterday that Wachovia announced that it would temporarily halt access to a $9.3 billion investment fund used by some 1,000 colleges to pay salaries and other expenses. The Commonfund Short Term Investments Fund will be liquidated by the end of this year.

Over the past few weeks, rumors of either a merger or government takeover have been rampant for Wachovia. Pummeled by bad mortgages - and, in particular, pay-option mortgages - the company’s stock share price has plunged 75% this year alone. In June, Wachovia’s board of directors fired its longtime CEO Ken Thompson, who previously orchestrated the ill-fated $25 billion purchase of home lender Golden West Financial Corp. in 2006. Golden West Financial is a California lender that specialized in risky payment-option adjustable-rate mortgages.

By comparison, Wells Fargo’s finances have been relatively stable in the face of the subprime crisis and the ongoing credit crunch. Unlike many of its competitors, Wells Fargo holds a substantial portion of its mortgage loans, and does not package and sell them to investors. Nor has the bank been forced to take massive write offs onto its balance sheets.

One of the immediate winners in the Wachovia-Wells Fargo transaction is billionaire investor Warren Buffet. His company, Berkshire Hathaway, is among the largest shareholders in Wells Fargo.

On the downside, however, Wells Fargo is now responsible for more than $120 billion of Wachovia’s option ARMs. The mortgages, which allow borrowers to make smaller payments at the beginning of their loan by deferring part of the interest and then making it up later on, were instrumental in creating Wachovia’s financial downfall this year.

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 unexpected liquidation of a popular short-term investment fund managed by Connecticut-based Commonfund has left at least 1,000 colleges nationwide facing a potentially severe financial dilemma. The $9.3 billion Commonfund for Short Term Investments Fund - of which Wachovia Corp. had resided as trustee - served as a checking account of sorts for many institutions, allowing them to pay expenses such as salaries and supplies.

In an email sent to schools on Sept. 29, Wachovia said its decision to step down from its role as trustee of the fund was based on recent market turmoil, which has created havoc on about 20% of the mortgage and asset-backed securities held in the Short Term Fund’s portfolio.

As of Wednesday, participants in the fund were allowed to withdraw about 34% of their money; by the end of the year, the amount increases to at least 57%, with the remaining funds to be available as additional securities reach maturity.

The real problem facing colleges, however, is that as of Sept. 29, virtually none of the non-government securities held in the fund could be sold at par.

The University of Vermont is one of the participants in the Short Term Investments Fund, with nearly $80 million invested. So far, the school has withdrawn $16 million, the maximum allowed. Even though additional withdrawals are forthcoming over the next several months, those amounts won’t be enough to cover the school’s operating costs through the end of the year, according to an Oct. 2 article in the Burlington Free Press. Now, the University of Vermont needs to come up with an alternative source of financing.

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 been a bad week for nearly 1,000 higher education institutions after learning a $9.3 billion fund they had used for years like a checking account to meet payroll and other daily expenses has been frozen. On Sept. 29, Wachovia Corp. broke the news that it was resigning from its role as trustee for the Short Term Fund Investments Fund, leaving college administrators unable to access their money and wondering if or when they will be able to pay their bills in the coming weeks ahead.

Much of the fund’s demise is connected to the freeze in the credit markets, which has impaired the ability of Connecticut-based CommonFund, which manages the fund, to sell the fund’s assets at their face value. For colleges invested in the fund, that means they stand to potentially lose money.

About 85% of the Short Term Fund Investments Fund was invested in “high-quality” commercial paper from blue-chip issuers. The rest, however, was in toxic asset-backed mortgage securities. Now, those assets are estimated to be selling for about 89 cents on the dollar.

Initially schools were told they could redeem only 10% of their holdings in the fund. The amount has since gone up to 33%, with institutions allowed to withdraw at least 57% of their money by the end of 2008. Any remaining funds must be taken in installments, according to an Oct. 2 article in the Wall Street Journal.

For a number of colleges, particularly smaller schools, the reality that they cannot withdraw their entire account balance in the Short Term Fund Investments Fund is devastating. Many rely on the fund as a way to pay for day-to-day operations.

Even more disturbing is the fact that some schools may never recover their full investment in the fund - an investment they thought was safe, conservative and liquid.

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.

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.