Archive for the “General Investor Information” Category

Auditors, bankers, financial professionals and legislators hoping for less stringent accounting standards in 2009 because of the current economic downturn are out of luck. Their reality check came Dec. 31 courtesy of the Securities and Exchange Commission (SEC), which ruled it would not suspend the so-called “mark-to-market,” or fair-value, accounting rule that requires financial institutions to value hard-to-sell assets at current market prices.

Critics blame the rule, defined in the Financial Accounting Standards Board’s Statement No. 157, for the excessive write-downs that have taken place in the wake of the subprime crisis and credit crunch. Those in favor of fair-value accounting contend any changes would do more harm than good to investors.

The SEC has ruled on the side of investors. In a 200-plus-page report examining a possible connection between fair-value accounting and the nation’s financial meltdown, the SEC compared the idea of suspending the accounting standards to “shooting the messenger and hiding from capital providers the true economic condition of a financial institution.”

The SEC did offer eight recommendations for refining the rule’s application when valuing hard-to-price assets, however. Among the agency’s proposals: the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available.

The SEC’s report was mandated as part of Congress’ $700 billion bailout package in October.

Now that the SEC has agreed to maintain fair-value accounting standards, companies that hold various structured finance products such as mortgage-backed securities and collateralized debt obligations will be required to value those assets at current market prices, even if it means market values are substantially lower than the values previously assigned. As for auditors, their work will likely get even more involved, as they begin punching in overtime to ensure clients don’t miscalculate the true value of their holdings.

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 Wall Street closes out one of its worst-performing chapters in recent memory, a new dilemma is brewing in the world of securities arbitration. The Financial Services Regulatory Authority (FINRA), the independent watchdog of all securities firms doing business in the United States, reports a serious shortage of individuals needed to hear the growing number of arbitration disputes between investors and brokerage firms.

According to data from FINRA, investment arbitration claims in 2008 were up nearly 50% from 2007. In addition, during the first 11 months of 2008, more cases had been filed than were filed in all of 2007. As of November 2008, there were 4,414 broker arbitration claims filed, compared with 2,986 in the prior year.

The rise in claims has put added pressure on FINRA to recruit and train additional arbitrators. Apparently, the shortfall is so critical it has caused FINRA to place an SOS on its Web site, asking people with business and investment experience to consider serving as an arbitrator. Payment for providing these services is $400 per day.

To learn more about the qualifications needed to become an arbitrator, visit FINRA’s Web site at: http://www.finra.org/ArbitrationMediation/Neutrals/BecomeAnArbitrator/index.htm

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

The year of 2008 will likely be remembered as the year subprime mortgages and corporate scandals changed the face of Wall Street. Buried under the weight of the subprime crisis, financial institutions took nearly $800 billion in writedowns and losses. The value of stocks worldwide plummeted by more than $30 trillion. Goliath investment houses like Bear Stearns fell apart. State, municipal and corporate pension funds reported massive losses from investments tied to faulty valuation models and high-risk mortgage-backed securities and their derivative spin-offs, collateralized debt obligations (CDOs).

Then there’s the near financial collapse of mortgage giants Fannie Mae and Freddie Mac and American Insurance Group (AIG), which required a financial intervention courtesy of the U.S. government. Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy protection in 2008. Washington Mutual and IndyMac, along with some 20 other banks were forced to close their doors. Government bailouts reached an astronomical $9 trillion. And as a final nod to 2008, investors lost some $50 billion in a Ponzi scheme orchestrated by the former Nasdaq chairman, Bernard (Bernie) Madoff.

For investors, 2008 is the year that went from bad to worse. It began with the collapse of the auction-rate securities market in February and continued with credit default swaps and structured investment products. For the first time since the 1930s, the Dow Jones Industrial Average experienced losses of more than 30%, closing the year at 8,776.39. By comparison, the Dow finished out 2007 at 13,264.82. Bank stocks in particular took a beating in 2008, with Bank of America and Citigroup losing nearly 70% of their value. As for shareholders, they saw about $7 trillion of their wealth wiped out.

In the world of ultra-short bond funds, 2008 provided the lesson that ultra short does not translate to “ultra safe.” A number of supposedly safe and conservative ultra-short funds got into trouble in 2008 by investing in risky mortgage-backed securities and collateralized mortgage obligations (CMOs). When losses in those toxic assets began to skyrocket, investors lined up to pull their money out in droves, sparking a wave of fund redemptions.

As a result, several fund managers were forced to liquidate their funds’ assets. State Street Global Advisors’ SSgA Yield Plus Fund began liquidating in May after the fund fell 19%. It turns out more than 50% of the fund’s assets were tied to mortgage-related securities funds. One month later, the Evergreen Ultra-Short Opportunities Fund liquidated, as well, when its assets plunged more than 20% in value. Finally, there is Charles Schwab’s YieldPlus Fund. Marketed to investors as a safe alternative to cash, the fund suffered the most losses of any ultra-short bond fund in 2008, losing more than 40% of its value.

Investors, meanwhile, are suing all three funds, charging that they investments were represented as conservative “cash alternatives” and similar to money-market funds. Far from safe or conservative, the funds were heavily concentrated in risky mortgage and asset-backed securities. And, in the case of Schwab’s YieldPlus Fund, several investors who have filed lawsuits claim various Schwab executives and fund manager Kimon Daifotis committed “acts of gross misconduct” by encouraging investors to hold on to their YieldPlus shares, while simultaneously dumping millions of YieldPlus shares from the portfolios of Schwab’s other mutual funds.

Capping out 2008, of course, is the Bernie Madoff scandal. The disgraced hedge fund manager was arrested Dec. 11 by federal agents on charges of securities fraud for scamming $50 billion from investors. Meanwhile, the Securities and Exchange Commission (SEC), the supposed protector of investors and their investments, apparently turned a blind eye to Madoff’s subterfuge over the years by ignoring red flags that signaled problems with his funds and their “too-good-to-be-true” returns.

For investors, the Madoff affair may well be the final nail in the coffin when it comes to confidence in Wall Street. Already shaken from a year that was punctuated by the subprime crisis and corporate scandals - including the implosion of Bear Stearns, the collapse of the auction rate securities market, the bankruptcy of Lehman Brothers and inept accounting practices by Fannie Mae and Freddie Mac and other institutions - Wall Street has its work cut out in 2009 as it tries to renew investors’ faith once again.

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

A new report from Advisen Ltd., which provides information and analytics to the global commercial insurance industry, offers insight regarding the effects of the subprime meltdown and the resulting credit crisis on liability insurance loss ratios.

The report, The Subprime Mortgage Meltdown, the Global Credit Crisis and the D&O Market, says U.S. insurers will see nearly $6 billion in losses from lawsuits stemming to subprime mortgage-related issues. The losses are more than 60% higher than the figure Advisen previously forecast in February and yet another indicator that what began as a subprime issue has spread into a crisis of global proportions.

According to Dave Bradford, co-founder of Advisen, the revised forecast reflects an increase in securities class-action suits, securities fraud suits brought by regulators and law enforcement agencies, shareholder derivative suits and defense costs associated with dismissed suits.

Other key findings in the report include:

• Financial institutions and other companies report more than $750 billion in write-downs on losses relating to securities backed by subprime mortgages as of Nov. 1, 2008

• 124 subprime-related securities class-action lawsuits have been filed to date.

• Credit-default swaps tied to mortgage-backed securities have been and continue to be a key source of losses for financial institutions and others.

• More than 48 investigations have been launched by the Securities and Exchange Commission (SEC) on subprime-related issues.

The release of the latest Advisen report coincides with the 2008 Professional Liability Underwriting Society Conference, which is being held this week in San Francisco. The theme of the conference is “Prospects for the Future: Golden Opportunities or Fool’s Gold?”

The Subprime Mortgage Meltdown, the Global Credit Crisis and the D&O Market is available for free at: http://corner.advisen.com/The_Global_Credit_Crisis_and_D_O_final_2.pdf

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. 

Frozen credit markets and tighter lending policies have made it more and more difficult for state and local governments not only to finance large-scale projects but also to take care of their day-to-day bills. Bond sales are the lifeblood of states, towns and counties because they provide a funding mechanism to finance new projects, make public improvements, build new schools and roads and pay the salaries of public employees. To pay for the projects, however, there must be investors to buy the bonds. And that’s not happening.

For weeks, the dismal state of the credit markets has reverberated loud and clear in the $2.66 trillion market for state and city bonds, where trading is now almost nonexistent and exorbitant interest rates the norm. Just last week, the governor of California - the country’s biggest state and the world’s sixth-biggest economy - put pen to paper to relay his concerns to Treasury Secretary Henry Paulson about the financial troubles engulfing the Golden State. The situation apparently is so bad that Gov. Arnold Schwarzenegger says he may need to solicit help from the federal government in the form of an emergency $7 billion loan in the coming months. (Schwarzenegger’s letter can be viewed at http://www.latimes.com/media/acrobat/2008-10/42718750.pdf).

California is far from alone in having to deal with bond issues stemming to the global credit crunch. In Springfield, Massachusetts, improvements for city streets were put on hold this week because raising money by floating municipal bonds had become prohibitively expensive. Only recently was Massachusetts itself able to sell $750 million in revenue bonds at decent interest rates, thus securing enough money to stay afloat until late November.

Other states such as Louisiana and New Mexico also are feeling the effects of the country’s financial markets. Both states postponed multimillion-dollar bond sales. Lewiston, Maine, met a similar fate on Oct. 13, when a $30 million scheduled municipal bond sale was put on the back burner. In San Francisco, the interest rate on about $780 million worth of variable-rate municipal bonds for airport improvements rose four-fold in just two weeks in September, taking interest costs from $275,000 a week to more than $1 million. And, in Hawaii, poor market conditions have forced it to delay the sale of more than $600 million worth of state bonds.

In each of these cases, the deadlock in the credit markets ultimately could spell a potential cash crisis for city and state governments. As reported Oct.3 in the New York Times, California’s inability to access short-term financing has left its cash reserves dangerously low - so low, in fact, that according to California’s state treasurer Bill Lockyear, they will be drained completely by the end of October. That means payments for state-financed services like teachers’ salaries, nursing homes and law and fire personnel all are at risk.

Since writing his first letter to Treasury Secretary Paulson, Governor Schwarzenegger now says he is “cautiously optimistic” that California may in, fact, no longer need the government’s financial help, and that recent actions by the U.S. Treasury Department to inject $250 billion of capital into the nation’s banks could be the catalyst necessary to get the credit markets moving once again.

Some economists would disagree. They contend the government’s plan to make equity investments into thousands of financial firms holds tremendous potential to backfire and that it could tempt some banks to hoard the money to help their own balance sheets or perhaps take unnecessary risks at the government’s - rather, taxpayers’ - expense.

The response from the stock markets to the government’s plan to free up lending has been less than positive, as well. One day after staging its largest rally since 1933, the Dow Jones Industrial Average fell once again on Oct. 14, ending the day at 9310.99. Another sign that the plan to revive U.S. financial markets is failing to inspire confidence: The London Interbank Offered Rate (LIBOR), which is what banks charge each other to borrow money, has barely moved.

Meanwhile, as state and local governments struggle to find solutions to their individual credit crises, many small business owners are inching closer to losing the battle altogether. A survey conducted by American Express OPEN Small Business Monitor in October reveals that nearly 20% of small business owners are at risk of going out of business because of current economic conditions, up from 9% in August.

Nearly two-thirds of those surveyed said the uncertainty of the economy has created a negative impact on their business operations, compared to 50% in August. As a result, 12% have made layoffs, nearly 80% say sales are decreasing and 51% say they’ve been forced to use personal resources in order to pay business expenses.

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.

Apparently some things are better the second time around. After saying “no” on Sept. 29, the House of Representatives debated and then passed in a vote of 263 to171 a $700-plus billion rescue plan for Wall Street today, the centerpiece of which gives the U.S. Treasury the green light to buy up billions of dollars in toxic mortgage securities and other bad debt from financial institutions. Earlier in the week, in a vote of 74 for and 25 against, the U.S. Senate overwhelming passed the controversial bailout bill.

The House may have changed its mind because of several revisions made to the original bill.

Among the changes:

• An insurance program that would provide a guarantee on the value of some of the mortgage-backed assets purchased by the Treasury.

• Authority for the Securities and Exchange Commission (SEC) to change “mark-to-market” accounting rules. Wall Street banks and other financial services firms use the rules to value assets at their current market value instead of their projected value.

• A temporary increase in the amount of bank deposits covered by the Federal Deposit Insurance Corporation (FDIC) to $250,000 from $100,000.

• Retention of limits for executive bonuses at companies that benefit from the bailout.

• Some $150 billion of taxpayer benefits unrelated to the bailout, including a one-year delay of higher tax rates under the Alternative Minimum Tax; a clean-energy tax package; and extensions on tax deductions for tuition and education expenses.

When the House conducted its first vote on the bailout plan several days ago, the bill fell 13 votes short of passing. As members readied for today’s second vote, at least 24 lawmakers said they would switch their previous votes of “no” to a “yes.”

Representative Steve Cohen (D-Tenn.) was one of the individuals who tried to garner support from the opposition, making an analogy to musical lyrics by Mick Jagger of the Rolling Stones: “Sometimes you get what you want. Sometimes you get what you need.”

Only time will tell if that indeed becomes the case. Stay tuned.

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.

A $700 billion bailout plan for Wall Street - the result of closed-door deal-making on Capitol Hill over the weekend - failed to muster enough support in the House of Representatives today, with a vote of 228-205 against the controversial measure. A total of 95 Democrats and 133 Republicans voted “no.”

Supporters of the plan fervently tried to get the opposition on board, keeping the vote open much longer than the standard 15-minute time frame. But even those efforts failed.

When news of the bill’s defeat became known, the response from the financial markets was swift. The Dow Jones Industrial Average plunged by more than 700 points at one point, with both the Nasdaq and the Standard & Poor’s 500 Index dropping nearly 7%. Tremors of panic were seen with regional banks, as well, with shares in National City falling 66% to their lowest since April 1982.

The legislation, titled the “Emergency Economic Stabilization Act,” would have given the federal government an immediate $250 billion to buy up troubled assets from investment banks and financial services companies as a way to shore up the ailing economy. The final version of the bill also included a cap on golden parachutes received by executives whose companies participated in the bailout program.

Supporters of the bailout package say they intend to bring the bill up for consideration again in the immediate future.

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.

U.S. Treasury Secretary Henry Paulson is engaged in the fight of his life on Capitol Hill, as he tries to gain swift approval on the federal government’s $700 billion bailout plan for Wall Street. So far, the response from Democrats and Republicans has been lukewarm at best.

Here are a few reasons why:

1. The money behind the bailout is a band-aid solution.

Today it’s $700 billion, tomorrow who knows what the price will be. No one can predict if $700 billion is enough to bring stability back to the financial market. Unless Wall Street institutes greater checks and balances and improves its risk-management practices, investors’ confidence in the markets will never be fully restored.

Even more important, the historic bailout contains no oversight conditions on whom or what will be watching the federal government when it uses $700 billion of taxpayer money to buy distressed subprime loans and other toxic assets from various financial institutions. Instead, as the proposal currently reads, Paulson has unlimited power to decide how the $700 billion will be spent and on what.

Specifically, the bailout proposal states: “Decisions by the secretary pursuant to the authority of this act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

2. The plan smacks of ‘the good old boys’ mentality.

Henry Paulson is perhaps Wall Street’s most revered alumni. Before becoming U.S. Treasury Secretary, Paulson served as chairman and chief executive officer of Goldman Sachs. Paulson’s own past statements affirm his allegiance to his former stomping ground, and suggest that his current recommendations regarding the bailout might be based on the adverse impact the markets are having on his Wall Street buddies.

A few months ago, Paulson was quoted as saying that those who “gambled in real estate are nothing more than speculators.” He went on to say that, “while some in Washington are proposing big interventions, most of the proposals I’ve seen would do more harm than good.”

A short time later, Paulson told MSNBC that the unusually high number of home foreclosures was not preventable and that there is very “little that public policy makers can, or should, do to compensate for untenable financial decisions.”

3. Paulson’s past assessments - as well as those of Federal Reserve Chairman Ben Bernanke - of market conditions demonstrate serious errors in judgment.

• On March 28, 2007, Bernanke tells Congress that he believes the problem in subprime lending “is likely contained.”

• On April 20, 2007, Paulson says that he believes the housing market downturn has been reached or is nearly there.

• On July 26, 2007, Paulson says that the meltdown in the subprime mortgage market “doesn’t pose any threat to the overall economy.”

• On August 16, 2007, Paulson states that the “turmoil in the financial markets will “extract a penalty” on U.S growth, yet the economy looks strong enough to weather problems without falling into a recession”.

• On May 7, 2008, the Wall Street Journal quotes Paulson as saying “the credit crisis is waning” and that “the worst is likely behind us.”

4. The $700 billion taxpayer-funded plan lacks accountability and transparency.

The bailout plan is aimed at saving Wall Street - the same institutions and individuals responsible for getting us into this mess to begin with. Poor lending decisions, mismanagement, lack of transparency, corporate greed - all have contributed to the financial crisis engulfing the country today. Yet, Paulson wants to reward the perpetrators behind the crisis by putting taxpayers’ money on the line.

Where’s the bailout for homeowners? For small businesses? For the automobile industry? Each of these segments of commerce plays an important role in the day-to-day life of Main Street. Says Alan Meltzer, a former economic advisor to the late President Ronald Reagan, on the bailout plan: “This is a scare tactic to try to do something that is in the private, but not the public, interest.”

5. A weaker dollar could result from the bailout plan.

In early September, the U.S. dollar had rallied to a one-year high against the world’s currencies. Following the turmoil on Wall Street, however, it slowly began to fall. The bailout plan, which will push American debt in the $11.3 trillion range, is likely to increase fears about America’s fiscal health, sending the value of the dollar down even further.

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.

IndyMac’s recent demise has led many to believe it’s the start of more bank failings to come. According to lists prepared by the Federal Deposit Insurance Corporation (FDIC), at least 90 more banks are in deep trouble.

The FDIC is keeping the names of the banks private, but ABC News obtained other lists prepared by several research groups and financial analysts that offer similar insight to those banks that are in danger of failing.

To determine the failure rate, the lists used what’s called the “Texas ratio,” an early warning system developed by Gerard Cassidy and others at RBC Capital Markets that compares a bank’s assets and reserves to its non-performing loans. Banks with a ratio of more than 100 percent are deemed the most likely to fail.

Included on the ABC News list of troubled banks was the Colorado Federal Savings Bank of Greenwood Village, Colorado. It had a Texas ratio of 244.8 - meaning its bad loans outweighed its assets. The Eastern Savings Bank of Hunt Valley, Maryland, was listed as having a Texas ratio of 222.74. The Integrity Bank of Alpharetta, Georgia, was listed with a 191 Texas ratio. Ameribank, Inc. in Welch, West Virginia, had a Texas ratio of 153.7.

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.

Fears continue to escalate about the future of mortgage giants Fannie Mae and Freddie Mac. On July 11, both the New York Times and the Wall Street Journal reported that federal officials were weighing a government takeover of one or both of the companies, placing them in a conservatorship if problems worsen.

Fannie Mae and Freddie Mac guarantee about half of all mortgages in the United States. If regulators were to place the companies in a conservatorship, their common shares would be worth little or nothing, and essentially double the size of public debt by adding about $5 trillion in potential obligations to the nation’s balance sheet, according to the New York Times.

As of Friday, shares of Fannie Mae and Freddie Mac stock had fallen nearly 50 percent, following concerns by investors that both companies were looking at additional losses and possible default on debt.

Both Fannie Mae and Freddie Mac are privately owned government-sponsored enterprises (GSEs), and play a critical role in the country’s mortgage market. As explained by the Wall Street Journal, Fannie Mae and Freddie Mac are shareholder-owned companies that buy mortgages, package them into securities and then sell them to investors. The companies do not actually make home loans but instead provide stability and liquidity to the mortgage market by guaranteeing that investors who buy mortgage securities will receive timely payments of principal and interest.

Should a conservatorship for Fannie Mae and Freddie Mac actually come to fruition, it would be the second time in less than five months that such a rescue plan was engineered to avoid a crisis in the nation’s financial markets. In March, in order to prevent the bankruptcy of Bear Stearns, the Federal Reserve stepped in to facilitate the sale of the 85-year-old investment banking giant to JPMorgan Chase for $236 million. In January 2007, Bear Stearns was worth $20 billion.

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.

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