Archive for the “Merrill Lynch” Category

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.

Corporate and institutional investors with significant holdings in collateralized debt obligations (CDOs), auction-rate securities and other structured finance products will be feeling the repercussions of a recent fair-value accounting ruling by the Securities and Exchange Commission (SEC). On Dec. 31, 2008, the SEC announced that it would not suspend FASB 157, the much-maligned measurement standard of “mark to market” accounting.

FASB 157 initially evolved as a result of the Enron scandal and various regulations contained in the Sarbanes Oxley Act. In October 2008, following the federal government’s approval of a $800 billion bailout package for U.S. financial industry, the SEC was asked to conduct a study on FASB 157 and its possible role in the recent failures of several large Wall Street investment banks and financial services firms.

On Dec. 31, the SEC recommended against suspending fair-value accounting standards. Rather, the 211-page report suggested making improvements to existing practices, including the development of additional guidance for determining the fair value of investments in inactive markets.

For corporate and institutional investors, this means they will be forced to value certain securities like CDOs and auction-rate holdings at their actual market values. In other words, they can no longer simply accept valuations provided by their brokerage firm or value holdings based on “guesstimates” by management.

In many instances, the value of these securities will be much lower than originally reported. For example, to determine the true market value of their CDO holdings, institutional investors must consider Merrill Lynch’s CDO sale in July of 2008 to Lone Star Funds. At the time of the sale, Merrill Lynch sold $30.6 billion of CDOs for 22% of their face value.

Moreover, the majority of the sale was funded via a loan from Merrill Lynch.

The bottom line: Investors are likely to be in for a rude wake-up call when they discover how little their holdings are actually worth today in the open market. Many of these investments were poorly structured from the outset, with investment firms failing to conduct due diligence on behalf of clients and downplaying the true risks of the products. Now, it appears a whole new can of worms has been opened.

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. 

Years of egregious actions on the part of Wall Street - from corporate arrogance, to incompetent accounting principles, to lax regulatory rules and oversight, to blatant criminality - are now taking their toll on the nation’s financial markets, and it’s Main Street paying the ultimate price. With the bankruptcy of Lehman Brothers Holdings, the fall of Fannie Mae and Freddie Mac, the IndyMac Bank failure, and now an $85 billion government bailout for insurance giant American International Group (AIG), investors and consumers alike are growing increasingly concerned about what lies ahead.

And they have good reason. The insanity happening on Wall Street means borrowing just went up in price. Financing a new car, paying for college, starting a business, building a hospital - all are likely to become more challenging in the months, even years, ahead.

Then there’s the psychological effect of Wall Street’s meltdown. As the financial crisis deepens and taxpayer-supported bailouts apparently becoming more commonplace, more investors - already distrustful of Wall Street and whose very existence they deem synonymous with greed and excess - will be prone to jump ship entirely, dumping their stocks, halting contributions to 401Ks and liquating mutual funds and other securities for safer investment vehicles.

Investors’ need to “do something,” anything, in the face of a crisis is warranted. At the same time, the ramifications of letting emotions guide decisions can often lead to even more uncertainty - in this case, for individual investors and the economy at large, say a number of financial experts.

“It’s like planning a road trip to California but then jumping in a car and heading east,” says one UBS broker, who requested anonymity. “Everyone is running to do something - which is understandable given the state of the markets and the 24/7 media coverage on the subject. Clearly, though, the ‘something’ that people need to do should be given much more forethought.”

Surprisingly, it’s not retirees who seem to be panicking, but rather younger 40-somethings, according to this UBS broker. “The older investors have been through this before,” she explains. “They remember the events of the past.”

Cases in point: On Oct. 19, 1987 - otherwise known as “Black Monday” - the Dow Jones Industrial Average was down 22.61% in a single day. On Oct. 26, 1987, it fell 8.04%; Oct. 13, 1989, 6.91%; Sept. 17, 2001, 7.13%.

By comparison, the Dow fell 4.4% on Sept. 16, 2008.

Still, when news that 158-year-old Lehman Brothers, one of the most established and respected investment firms on Wall Street, has filed for bankruptcy or that major money market funds - long considered to the safest of investments – are breaking the buck and falling below $1 a share, it’s almost impossible for investors not to feel powerless.

What’s Next?

Now the question on everyone’s mind is how do we get out of this mess? As reported Sept. 19 in a Wall Street Journal commentary by William Isaac, former chairman of the Federal Deposit Insurance Corporation, fixing the current financial crisis obviously will be a long-term process, but nonetheless contingent on a radical facelift for Wall Street.

Isaac contends that the financial problems gripping the country today are a direct result of something called Fair Value Accounting practices. Simply put, Fair Value Accounting means financial institutions that have financial instruments to sell - i.e. mortgage-backed securities - must mark those assets to market. “But what do we do when the already thin market for those assets freezes up and only a handful of transactions occur at extremely depressed prices,?” writes Isaac.

So far, says Isaac, the answer from the Securities and Exchange Commission (SEC) and the federal government has been to mark the assets to market even though no meaningful market exits.

Indeed, in his speech to the National Black MBA Association on Sept. 19, Bank of America CEO Kenneth Lewis strongly urged federal regulators to radically restructure the operating environment of Wall Street investment banks, instituting more of the oversight, capital requirements and business restrictions that are imposed on commercial banks today.

Short Selling

Another culprit behind the nation’s financial crisis: short selling, an act that until recently, the federal government has been exceedingly lax in regulating.

Short sellers make money when a company’s shares go down in price. They “borrow” shares from brokers and then resell them. When the share price on the stock becomes lower, short sellers give back the shares at the lower price and keep the difference.

While legal, critics of short selling say the method is at least partially to blame for the downfall and financial troubles of several Wall Street mavericks and other banking heavyweights in recent months, including Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual and Morgan Stanley.

On Sept. 18, New York Attorney General Andrew Cuomo announced that his office would be launching an investigation into the practice of short selling and, specifically, into the activities of short sellers regarding shares of Lehman Brothers and American International Group (AIG).

The SEC is cracking down on short sellers, as well. On Friday, Sept. 19, the regulatory agency issued a temporary ban on short selling in shares of 799 financial institutions. The ban will be in effect until Oct. 2, and could be extended pending market conditions.

Meanwhile, also on Friday morning, Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke unveiled a series of billion-dollar rescue plans aimed at salvaging the nation’s financial markets. Among the initiatives: creating a temporary asset relief program that would remove illiquid mortgage securities from the balance sheets of financial institutions and a federal guarantee on assets in money-market mutual funds whose values fall below $1 a share.

Officials are still working out details of the overall plan, and expect to meet with various members of Congress this weekend.

Keep in mind that Paulson’s plan - while no doubt a much-needed move in light of the current financial crisis - is a taxpayer-funded plan. Its cost doesn’t come cheap. The anticipated price tag: a whopping $1 trillion.

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.

Sometimes arranged marriages work out for the best; sometimes they don’t. In the case of Bank of America’s purchase of 94-year-old investment firm Merrill Lynch, a weekend of high-speed discussions and unprecedented market conditions culminated in their $50 billion union. The arrangement surprised Wall Street and investors alike, and has many people asking whether the pairing of these two very distinctly different financial operations will yield long-term success for BofA in the future.

The challenges facing Bank of America are significant to say the least. Before the acquisition this past weekend, Merrill Lynch was swimming in troubled financial waters. The company has taken some $40 billion in write-downs - with another $8.8 billion potentially to come - from failed investments, and reported losses for four consecutive quarters. Its stock has fallen nearly 70 percent this year. And in August, Merrill’s CEO John Thain announced a liquidation of $30.6 billion of toxic collateralized debt obligations (CDOs) at fire-sale prices in an attempt to shore up the company’s strained balance sheet.

With its purchase by Bank of America a seemingly done deal, the threat that Merrill Lynch might meet a similar fate of Lehman Brothers, which declared bankruptcy on Sept. 15, is removed entirely. The deal also positions BofA, a retail-focused bank, to enter the world of global investment banking, making it the nation’s largest financial services company with more than 20,000 financial advisers and $2.5 trillion in client assets.

Still, many perceive the strategy to be a big gamble on the part of Bank of America. On Monday, the day that the acquisition was announced, shares of Bank of America fell more than 20%.

“The market reaction is very clear: The market is absolutely appalled by the deal,” said James Ellman, head of San Francisco hedge fund Seacliff Capital, in a Sept. 15 story in the Houston Chronicle. According to the story, Ellman, who does not own shares of either Bank of America or Merrill Lynch, says the market believes BofA paid too much for Merrill Lynch, a move that ultimately could lead to a number of scenarios, including an attempt to renegotiate the sale price.

The apparent skepticism on the wisdom of the BofA-Merill Lynch union also was seen in recent actions taken by Standard & Poor’s Ratings Services. The ratings agency lowered its long-term credit rating on Bank of America, saying the purchase of Merrill Lynch carries integration risk for the bank, and puts further pressure on BofA’s capital.

Meanwhile, two of the top men in charge at Merrill Lynch stand to make a tidy profit from the firm’s sale to Bank of America. A Sept. 16 story on Bloomberg.com reports that CEO John Thain could pocket $11 million if he does not stay on once the purchase is finalized. Thomas Montag, who’s in charge of Merrill’s global sales and trading division, may be looking at a payout of $30 million in accelerated stock awards and $6.4 million in options.

Both of the payouts are in addition to a $15 million signing bonus Thain received last December and a nearly $40 million bonus Montag is guaranteed to receive this coming January.

Moving forward, a lot is riding on Bank of America’s CEO Kenneth Lewis and his high-stake gamble to acquire the world’s largest and most widely recognized brokerage firm. Only time will tell whether his decision leads to a match made in financial heaven or becomes a union doomed to fail because of incompatibility.

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

As it became more apparent that the 158-year-old investment firm of Lehman Brothers would succumb to bankruptcy, Merrill Lynch’s CEO John Thain saw the writing on the wall. Already pummeled by toxic mortgages, falling stock prices and nearly $20 billion in losses over the past four quarters, Merrill Lynch was likely next in line to fail.

To prevent a fate similar to Lehman, within 42 hours Thain and others orchestrated a plan to sell the 94-year-old brokerage firm - the world’s largest - to Bank of America in all-stock deal worth $50 billion. The transaction is the seventh-largest bank acquisition to be announced, according to Thomson Reuters.

The deal itself is expected to close in early 2009. Under the terms of the transaction, three directors of Merrill Lynch will join Bank of America’s Board of Directors. Bank of America will retain the Merrill Lynch name for the retail brokerage.

For Bank of America, already the largest retail bank and credit card issuer in the country, the acquisition of Merrill Lynch is viewed as strategic business move. The combined company will now have leadership positions in retail brokerage and wealth management. By adding on Merrill Lynch’s 16,000 financial advisers, Bank of America becomes the largest brokerage in the world, with more than 20,000 advisers and $2.5 trillion in client assets.

The acquisition of Merrill Lynch is not the first major purchase for BofA this year. In January, the company agreed to buy troubled mortgage lender Countrywide Financial Corp. for $2.5 billion. As in the purchase of Merrill Lynch, it was an all-stock transaction.

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 Lehman Brothers headed into liquidation territory late Sunday evening, Sept. 14, another dramatic event was unfolding on Wall Street: the sale of Merrill Lynch to Bank of America for $44 billion.

The boards of directors of both companies have approved the deal, and Bank of America will pay nearly $30 for each share of Merrill Lynch stock.

The surprise announcement arrived on the heels of a flurry of weekend meetings between officials at the New York Federal Reserve Bank, the U.S. Treasury, the Securities and Exchange Commission (SEC) and various Wall Street banks regarding a rescue plan for Lehman Brothers.

Like Lehman, Merrill Lynch has been mired down by toxic real estate holdings this year. In total, the 94-year-old firm has posted more than $45 billion in losses. In August, Merrill’s financial crisis became so severe that CEO John Thain announced the liquidation of $31 billion in collateralized debt obligations (CDOs) for pennies on the dollar. The CDOs were sold to the private equity firm of Lone Star Funds for $6.7 billion. Fourteen days prior to the sale, Merrill stated the assets to be worth $11.1 billion.

The sale of Merrill Lynch to Bank of America was unexpected on Wall Street. Over the course of the weekend, BofA was thought to be one of the lead suitors for Lehman Brothers. As of late Sunday afternoon, however, Bank of America apparently walked away from those discussions - reportedly because U.S. Treasury Secretary Henry Paulson would not offer any government backstop as part of the deal.

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.

Washington Mutual’s CEO Kerry Killinger joins a growing list of executives to receive the pink slip because of company losses tied to rising mortgage delinquencies and the ongoing credit crunch. Among those on the roster: Citigroup’s Charles Prince, Bear Stearns’ James Cayne, Wachovia’s Kennedy Thompson, Merrill Lynch’s Stan O’Neal, Daniel Mudd of Fannie Mae and Freddie Mac’s Richard Syron.

Succeeding Killinger is Alan Fishman, a veteran of the financial industry who most recently served as chairman of New York-based Meridian Capital Group.

Seattle-based Washington Mutual is the nation’s largest savings and loans provider and one of the biggest subprime lenders. WaMu’s mortgage business also is heavily concentrated in risky adjustable-rate mortgages, which allow borrowers to set their own monthly mortgage payment.

Killinger joined Washington Mutual in 1982 and quickly rose through the ranks, eventually becoming president, CEO in 1990 and chairman the following year. He’s also largely blamed for allowing the company to take on massive amounts of mortgage-related risk over the years. In July, Washington Mutual disclosed a second-quarter consecutive loss of $3.33 billion - the biggest quarterly loss in its corporate history.

As of June 30, WaMu had lost more than $6 billion, with its shares down nearly 85% this year. The financial wreckage has forced the company to cut dividends twice, and lay off more than 10% of its workforce.

On Sept. 8, Washington Mutual announced that it had signed a letter of understanding with the Office of Thrift Supervision to improve its risk management and compliance practices.

Meanwhile, the person at the center of WaMu’s financial mess - Kerry Killinger - is leaving the company a very wealthy man. Analysts say the former CEO could walk away with an executive payout package worth more than $20 million.

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.

Bank of America apparently is getting ready to join Citigroup, UBS, JPMorgan and other banks that agreed to cut deals with state and federal regulators and resolve investigations into the alleged mishandling of auction rate securities sales.

On Sept. 3, Massachusetts Secretary of State William Galvin said Bank of America, the nation’s second-largest bank, must either reach an agreement with state regulators or be prepared to face legal action. On Sept. 4, New York Attorney General Andrew Cuomo followed up on Galvin’s edict, serving subpoenas to eight Bank of America executives as part of his six-month investigation on how Wall Street’s biggest banks sold auction rate securities to investors.

So far, eight Wall Street heavyweights - UBS, Morgan Stanley, Citigroup, JPMorgan Chase, Wachovia, Merrill Lynch, Goldman Sachs and Deutsche Bank - have agreed to settle claims that they marketed auction rate securities as cash-like alternatives to investors. In addition to buying back nearly $50 billion of the securities from retail investors, the banks also must pay fines totaling more than $500 million to state and federal regulators.

However, the New York attorney general says any settlements agreed to thus far do not cover any possible misconduct by individual brokers.

Meanwhile, two former Credit Suisse Group AG brokers were formally charged with violating securities laws and fraudulently selling subprime mortgages connected to auction rate securities to corporate clients.

As reported Sept. 5 on Bloomberg.com, Julian Tzolov and Eric Butler were charged on Sept. 3 for falsely representing various securities to investors as backed by federally guaranteed student loans and safe alternatives to cash or money market funds.

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 lack of mea culpa from “downstream” brokers over the state of auction rate securities and the predicament of investors stuck with the now-illiquid securities may speak volumes. At least New York Attorney General Andrew Cuomo appears to think so.

In an Aug. 20 letter to the Regional Bond Dealers Association (RBDA), the New York attorney general’s office blatantly dismissed earlier claims by the RBDA that brokerage firms such as Fidelity Investments and Charles Schwab shouldn’t be held liable for the demise of the auction rate market or the illiquidity of their clients’ auction rate investments.

In the letter, Benjamin Lawsky, deputy counselor and special assistant to the attorney general, wrote:

Attorney General Cuomo’s investigation has already begun to uncover some disturbing facts that seem to belie the innocent picture of downstream brokerages you paint . . . For example, some evidence indicates that Fidelity was actively marketing auction rate securities to its high net worth clients. . . “If downstream brokerages deliberately stuck their heads in the sand but continued to actively market these products to unknowing investors, that will certainly be relevant to our calculus of the firms’ culpability.”

In early August, Fidelity Investments and Charles Schwab were among a number of brokerages to contend that state and federal regulators should focus their investigations of abuses concerning auction rate securities solely on the major investment banks that underwrote the securities, rather than the smaller brokerages. As “supporting evidence,” the brokerages suggested they were unaware of the potential pitfalls of auction rate securities and had no prior knowledge that the auction market was in trouble.

Such excuses may not hold water, however. As licensed brokers, having knowledge and information about a particular investment product is a standard part of the job. That point was reiterated in Lawsky’s letter, in which he stated that the attorney general believes it is highly unlikely that the brokerages were, as they claim, “in the dark with investors” regarding the liquidity risks of auction rate securities.

The growing concern by secondary dealers for their auction rate securities fate stems to recent settlement announcements by Cuomo’s office - settlements that do not include some $60 billion in outstanding auction rate securities purchased through smaller brokerages. Now, the brokerages fear the onus will be on them.

Indeed, next week the Financial Industry Regulatory Authority (FINRA) is planning a series of on-site inspections at approximately 40 downstream brokerages, where it will try to determine exactly what they knew in advance of the auction market’s collapse and whether they knowingly represented auction rate securities as safe and liquid investments to clients.

Meanwhile, Citigroup, JPMorgan Chase, Morgan Stanley, UBS and Wachovia all have agreed to buy back $35 billion of auction rate securities and pay more than $360 million in fines. As reported Aug. 22 in the New York Times, three other banks - Merrill Lynch, Goldman Sachs and Deutsche Bank - also plan to buy back at least $12.5 billion in the securities and pay more than $160 million in fines as part of settlements reached late in the day on Aug. 21.

Beginning in October, Merrill Lynch will buy back at least $10 billion of auction rate securities from investors holding less than $4 million of the investments. A $125 million fine also was imposed on the firm.

Separately, the Securities and Exchange Commission (SEC) is continuing its investigation into Merrill Lynch for possible corporate and individual violations.

Goldman Sachs agreed to buy back about $1.5 billion of auction rate securities from investors by mid-November, and pay a $22.5 million fine, while Deutsche Bank will buy back $1 billion of auction rate debt by mid-November and pay a $15 million penalty.

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.