Archive for the “General Investor Information” Category

Are you investing in conservative U.S. bond funds?  Watch out for “credit default swaps”— basically a futures contract influenced by whether the bond issuer’s credit rating increases or decreases. Although part of many bond fund portfolios, credit default swaps aren’t subject to strict regulation by the Securities and Exchange Commission. In addition, many bond funds neglect to include details of the related risks in their prospectuses.

Credit default swaps help fund managers realize a slightly higher yield – but with significant risks. First, if the bond issuer defaults, the fund must pay for the loss. In some cases, that means selling other assets that negatively impact the fund’s overall performance. Second, because the price of credit default swaps is based on a “fair value estimate,” the full cost may not be recouped when sold. This makes the stated value of credit default swaps inherently unreliable and pulls the bond fund’s overall Net Asset Value into question. Finally, if the firm on the other side of the transaction, the “counter party,” runs into financial problems, they may not be able to pay the premium for bond insurance.

Because of these risks, credit default swaps can cause major issues with a bond fund’s share price. The higher the percentage of credit default swaps, the greater the risk. Bond fund investors need to examine the level of credit default swaps permitted in their funds, as well as how the fund’s manager handles the associated risks. Funds that neglect full disclosure or appropriate management could be liable for losses.

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

Following the subprime meltdown and the resulting credit crunch, many Wall Street brokerage firms and investment banks are frantically working to generate the hefty sums of cash required to stabilize their operations.

Numerous banks have sold loans – especially leveraged buyout (LBO) loans – at big discounts in order to produce cash and strike these loan liabilities from their balance sheets. Since the beginning of the year, bank holdings of LBO loans plummeted from $163 to $129 billion. Banks are even stepping out from their lending groups to sell their pieces of the LBO loans for a portion of their face value. For instance, Goldman Sachs offers its part of Chrysler’s $7 billion in loans for as low as 72 cents on the dollar.

The selling isn’t just limited to loans; some banks are trimming parts of their business. Citigroup’s Australian retail brokerage unit is reported to be on the market. In addition, Citi will reportedly shut down branches in Taiwan and combine others in Singapore and Hong Kong. UBS, AG, the large Swiss bank, may sell business units to generate cash. So far, UBS denies reports of selling its U.S. PaineWebber brokerage unit.

Throughout Wall Street, job cuts continue. Because of weakening credit conditions, Wall Street firms eliminated around 10,000 jobs last year. Citigroup is expected to lay off at least 5% of its securities unit employees. In January, the firm said it plans to trim 4,200 employees. According to a report this week, Citi will fire 2,000 investment bankers and traders by the end of this month. (It’s uncertain whether these cuts were included in the plans previously announced.)  Richard Bove, a Punk Ziegel & Co. analyst, says Citigroup will drop a total of 30,000 jobs.

At Goldman Sachs, as many as 1,500 people, or 5% of the firm’s employees, may lose their jobs – but, according to the firm, not because of layoffs. Goldman Sachs maintains that these cuts only affect underperformers. UBS recently announced that it may eliminate up to 8,000 jobs across various business units, totaling 5% to 10% of its workforce. Then, of course, there are the many Bear Stearns employees who will lose their jobs after the merger with JP Morgan Chase.

For those who work on Wall Street or run a Wall Street firm, shaky times lay ahead, to say the very least. For the public, watch your investments in the coming months to see how these troubles may affect you.

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

Analysts predict it’s only a matter of time before the fallout of the subprime mortgage crisis comes full circle and unleashes a tidal wave of subprime lawsuits from investors and institutions alike.

The storm of litigation hasn’t happened as expected but, as Business Week writer Michael Orey reported March 24, 2008, all signs point to the fact it will. Industry observers say one of the reasons the litigation floodgates have been slow to open is that much of the subprime debt – particularly in the forms of Collateralized Debt Obligations and Mortgage Backed Securities – is held by institutions. Institutional investors typically take a more deliberate wait-and-see approach to litigation issues, thoroughly evaluating their options to determine if the situation improves before heading to court.

Also, the complexity of the investments and the inflated valuations assigned to many of the derivative securities means many investors are still trying to determine the full extent of their losses.

In addition, a number of investigations by both federal and state regulators – including probes by the FBI – are still ongoing. Plaintiffs could be waiting for those results before moving forth with their own cases.  Among the areas at issue are whether subprime securities were reasonably and consistently valued; how subprime securities were sold; whether investment firms performed adequate due diligence; and whether investment firms adequately disclosed certain facts and risks of which they were aware.

A report by Fortune magazine lends gives further support to the theory that a tsunami of subprime litigation is on the horizon. By the end of 2008, some 15 million homeowners will owe more on their mortgages than their home is worth and, that ultimately, more than 20 million homeowners will have negative equity in their homes. The same article estimates mortgage investors could be looking at $1 trillion in losses when all is said and done. Â

Make no mistake – the tsunami is gaining strength by the day. For those still on the fence regarding their own subprime litigation, now is the time to get your facts in order.

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

Fueled by the meltdown in the subprime mortgage market, borrowers, investors, and others filed 278 subprime-related lawsuits in federal courts in 2007 – and it’s likely just the beginning.

According to a newly released study by Navigant Consulting, Inc., subprime mortgage litigation already is outpacing the number of lawsuits that grew out of the savings and loan meltdown of the late 1980s and early 1990s.

The Navigant study showed that 43 percent of the subprime-related cases filed last year were borrower class action suits; other cases included securities investor claims, commercial contract disputes, employment class actions and bankruptcy-related cases.

Nearly every participant in the subprime collapse is being sued, according to the study. Fortune 1000 companies were named in more than half of the cases. Defendants included mortgage brokers, lenders, appraisers, title companies, home builders, servicers, issuers, underwriters, bond insurers, money managers, public accounting firms and company directors and officers, as well as others.

BusinessWeek, a number of the country’s major law firms have been preparing for the expected wave of subprime litigation for some time now, with many forming “subprime lending taskforces” to deal with the anticipated lawsuits.

According to Orey, the number of subprime lawsuits filed is just the tip of the iceberg. Many investors may purposefully be holding back taking legal action until they can determine the full extent of their portfolios’ losses or are waiting to learn the outcome of ongoing state and federal investigations into the financial institutions involved in their individual cases.

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.

It’s a familiar strategy: The federal government has lowered lending rates, given tax breaks to businesses and approved tax rebates for families to stimulate consumer spending and improve the U.S. economy. But according to Stephen S. Roach, chairman of Morgan Stanley Asia, it’s not going to work this time.

In the past six years, consumers who got incremental pay raises compensated by borrowing against the equity in their home at the low rates offered in the credit bubble. But, “That game is now over,” wrote Roach in an op-ed piece for the March 5 edition of The New York Times.

Even today’s aggressive rate cuts can’t offset the steep decline in the credit and capital markets. Moreover, such a wide gap exists between the supply of new homes and demand that we may see prices may drop another 20 percent before the market clears.

Roach believes encouraging continued consumption at this level is a mistake. This policy, fed by government aid and incentives, already has caused consumers to save far less and borrow much more than they can afford to repay. Rather than trying to motivate additional spending, Roach said, the government should give some type of income support to people who already have been hurt, and emphasize exports and investments in infrastructure to stop the trade deficit from widening further.

Obviously, Roach is one of many experts who are concerned about the double-bubble burst in the housing and credit markets. He recalled that Japan is still struggling to recover after simultaneous bubble bursts in the 1990s.

Meanwhile, as Washington seems unable or unwilling to recognize that the country is in its second post-bubble recession in seven years, Roach doesn’t have much hope that the country will avoid painful post-bubble adjustments.

And since economic crises and elections don’t go well together, it’s unlikely anyone in Washington will heed his warning.

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.

Homeowner equity dropped to 47.9% at the end of 2007, according to the Federal Reserve, as reported in a March 6 USA Today article written by Sandra Block.  Most alarmingly, based on recalculations of previous reports, homeowner equity actually registered below 50% for the last nine months of 2007.  Homeowner equity hasn’t fallen below 50% since World War II when it was first recorded by the Federal Reserve.

Homeowner equity represents the home’s market value minus the mortgage balance.  Declines in average home equity actually began as far back as 2005 when the last housing boom hit its high point.

A large part of most Americans’ wealth rests in their home—the most expensive asset they own—and their home equity accounts.  As mortgage rates increase and property values decrease, many homeowners struggle to keep their homes, making them more cautious.  This impacts consumer spending and the entire U.S. economy, which in the last quarter rose only 0.6%.

“Consumers are growing more cautious, first, because they are now worth less and they know it,” said Mark Zandi, chief economist for Moody’s economy.com. “Secondly, because they can’t borrow against their homes as aggressively as they did.”

According to economy.com, by the end of March 8.8 million homeowners, or 10% of homes, will experience mortgage balances equal to or greater than the value of their property.

Several factors contributed to the current home equity drop, including an increase in low and no down payment mortgages and the rapid rise of home equity lines of credit and cash-out refinancing deals offered in the midst of the housing boom. Â When home prices began to slump, many homeowners who took advantage of these arrangements found themselves with no cash cushion.

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.

And then the inevitable happens.Â

In this case, attempts by the US Federal Reserve to ease America’s credit crisis with a $200 billion collateral lending facility apparently has failed to stop the collapse of several hedge funds with assets of more than $4 billion.

A total of seven funds were frozen in one month – and more may be on the horizon. The funds’ demise is viewed as evidence that the Federal Reserve’s plan to allow lenders to swap their risky mortgage-backed bonds for safer Treasury debt will have no impact in the long term of solving the country’s credit crunch. Those fears were reiterated on Wall Street when the dollar fell to a new low against the euro and sterling, with the European currency reaching $1.55 for the first time.

Hedge Fund Developments

Drake Management, a New-York-based money manager, recently told investors that its $3 billion Global Opportunities Fund may be winding down. In a letter to investors, Drake wrote that closing the fund is an attempt to maintain and maximize value for investors during the current market downturn.  In 2007, the fund lost 25 percent, and already has blocked investors from withdrawing their cash.

Two other funds also are under consideration for closing by Drake: the Drake Low Volatility fund and the Drake Absolute Return. Both funds lost almost one-sixth of their value last year.

The founders of Drake Management, Anthony Faillace and Steve Luttrell, have reportedly informed investors that the closure of their fund was one of several options under consideration. Another arrangement might be created in which investors could choose to be repaid over the next 18 months or have their capital rolled over into a new fund.

In other hedge fund news, Amsterdam-based GO Capital Asset Management has frozen its $881 million Global Opportunities hedge fund, preventing investors from withdrawing their capital. And the Dutch Bank, ING, has frozen two investment trusts in New Zealand that were highly exposed to mortgage-backed bonds. The two funds held assets worth 275 million between them, according to ING.Â

It looks like the global credit crunch just keeps gaining steam.

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.

At first glance, the Federal Reserve’s announcement to lend $200 billion in treasury securities to Wall Street banks and accept AAA-rated private label mortgage-backed securities as collateral sounds like a good way to provide liquidity to failing markets. But, if you looked a little deeper, it’s likely a band-aid solution that could end up costing taxpayers billions of dollars.

The reason is simple. The majority of the AAA-rated private label mortgage-backed securities are not AAA at all. In fact, it’s just the opposite – many of them do not meet the criteria of the ratings agencies for AAA securities and should be downgraded significantly. This means these kinds of securities not only are highly overvalued but also present far more risk to taxpayers than the Federal Reserve is letting on.Â

A March 11, 2008, article on Bloomberg.com by Mark Pittman sheds further light on this issue. According to Pittman, none of the 80 AAA securities in the ABX indexes that track subprime securities meet Standard & Poor’s requirements for AAA securities. Pittman went on to cite several examples of AAA-rated bond issues that fell far short of satisfying AAA requirements.  He concluded by stating that the proper evaluation of subprime securities would “strip at least $120 billion in bonds of their AAA status.” And that’s exactly what a number of analysts predict, as many AAA mortgage-backed securities are expected to be significantly downgraded in the not-too-distant future.

This makes it all the more questionable as to why the Federal Reserve would finance Wall Street banks by providing them with highly liquid, highly valuable treasury securities while accepting poor quality, illiquid, low value securities as collateral. In the end, it’s the American taxpayers who will suffer the consequences – again.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.

Americans are facing home foreclosures at a record pace. According to a survey by the Mortgage Bankers Association (MBA), nearly 3 million homeowners – 6.3 percent – were behind on their mortgages last year. More than 1 million borrowers, who represent 2 percent of all home loans, were in foreclosure. Â

The states hardest hit include California and Florida. Homeowners there accounted for 30 percent of the new foreclosures.Â

MBA’s survey, which covered 46 million loans on one-to-four-unit residential properties, represents more than 80 percent of all first-lien residential mortgage loans outstanding. A total of 35 percent of homeowners own their home free and clear.Â

A number of factors are behind the foreclosures sweeping the country, including declining home prices and delinquency rates on mortgage loans. As reported by Amy Hoak of MarketWatch, the delinquency rate on loans considered past due but not in foreclosure currently is at its highest level since 1985. Â

And no end appears to be in sight. An estimated 1.8 million subprime adjustable-rate mortgages (ARMs) are expected to reset to higher interest rates in 2008 and 2009. Because many of these loans are projected to reset in May and June, a number of them could be in default in the third quarter and in foreclosure by the next.

Adding to the potential that homeowners could end up defaulting in the future is an overall weak economy, rising fuel prices and declining home values.

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

As the economy continues to deteriorate, reports indicate many consumers are turning to credit cards to stay afloat. Add this to rising defaults in mortgage payments and a tightening credit market, concern is spreading among those invested in credit card asset-backed securities (“ABS”).

Concerns arose when home prices began to decline as the subprime crisis developed last year, bringing an end to a long cycle of low-interest-rate credit to consumers. The major alternative to credit cards for many was a home equity loan. But with little equity left to tap, consumers turned to credit cards. According to the Federal Reserve, revolving debt – most of which is on credit cards – rose to a record $943.5 billion last year.

Magnifying concerns are rising energy and food costs, declining economic growth, and growing unemployment. As a result, many Americans are using plastic to pay for necessities, sometimes paying their credit cards before, or instead of, their mortgages.

The fear is that many people will default on their credit card payments in the same way they have defaulted on mortgages payments. If this happens, those invested in ABS, many of which are backed by credit cards, face potential losses. Â 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