Archive for the “Money Market & Short Term Investment Losses” Category

In what’s become a juggling act on the part of the government to reinvigorate the frozen state of the credit markets, the Federal Reserve will now provide $540 billion in financing to help money-market mutual funds swamped by investor redemptions.

Following the collapse of Lehman Brothers in September, along with other major financial upsets, nervous investors have withdrawn some $500 billion from money-market funds. On Sept. 16, one of the first and biggest money-market funds - the $63 billion Reserve Primary Fund - broke the buck after the net asset value of its shares fell below $1.

The Fed’s latest move to shore up money-market funds - a $3.3 trillion industry - entails an initiative called the “Money Market Investor Funding Facility” which, as its name implies, will provide liquidity to money-market fund investors. As part of the program, JP Morgan Chase will run five special facilities, with the Federal Reserve Bank of New York lending the facilities 90% of the purchase price of the assets that they buy. Among the assets eligible for purchase are certificates of deposit and commercial paper issued by highly rated financial institutions that has 90 days or less remaining until the mat urity date is reached.

The Federal Reserve says the Money Market Investor Funding Facility will remain in place until at least April 30.

Meanwhile, in a Bloomberg Television interview, Jim Bianco, president of Bianco Research LLC, called the government’s effort to back securities purchases from money-market funds a sign “that policy makers are trying to prevent Great Depression II.”

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 plot continues to thicken in the legal saga involving Ameriprise Financial Services and a money-market fund that broke the buck recently. Ameriprise, which is suing Reserve Management Company’s Primary Fund, wants a federal judge to hand over audio tapes that reportedly contain conversations of sales reps alerting large institutional investors in the fund to redeem their shares at full value before it was too late.

If the allegations are true, the selective disclosure would have financially devastated thousands of Ameriprise investors. As reported Oct. 21, 2008, in the New York Times, Ameriprise and its clients had more than $3.3 billion in the Primary Fund when it “broke the buck” on Sept. 16 by falling below a dollar a share. Two smaller funds broke the buck, as well.

The Primary Fund is calling the selective disclosure charge by Ameriprise “outrageous.”

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

NY Attorney general Andrew Cuomo is preparing to file civil security fraud charges against UBS. State securities regulators in Massachusetts filed charges against the Swiss-based bank for allegedly misleading investors about the risks of auction-rate securities. Seems like déjà vu all over again for UBS.

As reported July 23 in the Wall Street Journal, charges could be filed as early as this week. The lawsuit also could include allegations of misconduct by senior UBS executives, according to the Wall Street story.

Cuomo first began his investigation into the auction-rate securities market in April. Like other investigations that have been launched following the market’s collapse in February, Cuomo’s investigation focused on whether Wall Street firms knowingly misled investors about the risks inherent to auction-rate securities. As part of his probe, Cuomo subpoenaed 30 companies and 100 individuals. Among the Wall Street names on his list: Citigroup, UBS, Goldman Sachs, Merrill Lynch, JP Morgan Chase, as well as a number of high-profile financial advisors and others.

UBS customers currently hold about $25 billion worth of auction-rate securities.

UBS’ legal troubles over auction-rate securities have been gaining momentum in recent months. In May, the company reached a settlement with the Massachusetts attorney general to return $37 million to the Massachusetts Turnpike Authority and 17 municipalities that had invested in the securities.

Perhaps feeling the heat of more litigation to come, UBS agreed in mid-July to repurchase up to $3.5 billion of tax-exempt auction-rate securities from its clients, package them and sell new debt backed by the securities to money-market funds.

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.

The auction-rate securities market has dwindled to about half  of what it once was just four short months ago, after municipal borrowers moved another $3 billion of auction-rate debt late last week.

To date, states, local governments, hospitals and colleges have converted, refinanced or plan to redeem at least $81.3 billion of the $166 billion in municipal securities, according to a June 16 report by Jeremy Cooke on Bloomberg.com.

The mass exodus of borrowers from the auction-rate securities market began in earnest this February, following a lack of product demand and a move by Wall Street investment banks - which previously conducted the auctions for the securities - to pull back their financial support when there weren’t enough bidders.

As reported in the Bloomberg.com article, about 48 percent of municipal auctions are failing daily. Preferred shares of closed-end mutual funds and debt backed by student loans, which made up a significant portion of the $330 billion of auction-rate securities outstanding earlier this year, have fared far worse. Their failure rates currently stand at about 99 percent.

Until this year, failed auctions were few and far between. From 1984 through 2006, 13 auction failures have been recorded. When auction securities were first sold in 1984 for American Express Co., investment banks such as Merrill Lynch, Citigroup and UBS were on board with their own capital to prevent an auction from failing.

Beginning in February 2008, however, it became a new ballgame. With their balance sheets financially drained from taking on millions of dollars in subprime mortgage-related write downs and credit losses, the banks abruptly stopped their role as a buyer of the last resort in the auction-rate market.

Subsequently, auction after auction began to fail, and the auction-rate securities market became yet another casualty of the nation’s ongoing subprime problems. In the aftermath of the auction market’s collapse, investors had to come to terms with the reality of being stuck with what they thought was a short-term, cash-equivalent investment, while issuers of auction securities faced exorbitant penalty interest rates, sometimes as high as in the double digits.

And even though the average interest rates at weekly municipal auctions currently are in the 3.17 percent range - well below a recent record high of 6.89 percent - a growing number of issuers of auction-rate debt are getting out of the market entirely, believing auction securities are no longer a viable investment product.

In other auction-rate securities news, the U.S. Securities and Exchange Commission (SEC) apparently has cleared the way for Eaton Vance, the third-biggest U.S. closed-end fund manager, to issue “liquidity-protected preferred shares” to institutional investors and money-market funds. The new form of preferred shares, which includes a right to sell option for investors, is intended to provide some relief - though how much is unknown - to investors by helping finance the repurchase of frozen auction-rate securities, according to the company.

Similar plans have been touted by BlackRock Inc. and Nuveen Investments. The timing of when these plans will go into effect has yet to be determined.

Moving forward, however, the future of the auction-rate securities market still remains in limbo. While the municipal auction-rate market may have regained some liquidity in recent weeks, other auctions continue to be frozen. Investors who own any of the $85 billion of auction debt backed by student loans know this only too well. On the secondary market, student-loan-backed debt is trading for as little as 75 cents on the dollar. For these investors - who were marketed auction securities as a high yield alternative to money market mutual funds and who are now facing massive financial losses - the long-term view of the auction market is not a good one. .

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

When fears of a recession started in 2007, investors jumped into ultra-conservative investments such as certificates of deposit (CDs), savings deposits, and money-market funds. Now, after numerous rounds of interest-rate cuts, investors in these ultra-conservative funds face ultra-low yields.

Assets in the most conservative investments rose since last October. At the same time, the Federal Reserve tried to jump-start the economy by dropping the benchmark interest rate for banks lending money to each other from 5.25 percent in September to the current 2 percent rate.

For investors, that translates into plenty of safety but little return. As an example, Bankrate.com estimates the average yield on six-month CDs at 1.8 percent and iMoney.net calculates the average return on taxable retail money-market funds at 2 percent.

Where can investors find higher yields while keeping their money safe? The options remain extremely limited. Many investments, such as ultra-short mutual funds and auction-rate securities, proved riskier than expected. Ultra-short funds that hold large amounts of subprime, asset-backed securities shed their value over the last year. For instance, Schwab Yield Plus plummeted 28 percent. Meanwhile, the auction-rate market imploded last February when investors sold off those securities in mass.

With these low returns on safe options, investors may look at high-yield (“junk”) bonds, where the extra risk comes with much better interest rates—the average yield currently sits at 7.9 percent. But investors need to remember that firms with unstable credit issue junk bonds and defaults often come out of the woodwork in times of recession. Buyer beware.

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

Hoping to insulate themselves from volatile equity markets, countless investors have turned to money-market funds over the past year as a way to minimize their investment risks.

Unfortunately, risk comes in many forms.

The latest worries regarding money-market funds have to do with corporate debt that was exposed to mortgage-backed securities. Just as some money-market funds invested in subprime mortgage-related loans, they also lent money to structured investment vehicles, or SIVs.

Recently, Legg Mason Inc., the second-largest publicly traded asset manager in the country, agreed to provide as much as $400 million to bail out an institutional money-market fund from potential losses on debt issued by SIVs. The rescue will cut Legg Mason’s profit by $195 million for the quarter ending March 31.

Since November, the Baltimore-based company has lined up $1.97 billion to prevent losses on three money-market funds that purchased SIVs. As of March 28, Legg Mason managed a total of $176 billion in money-market funds.

Andrew Richards, an analyst with Morningstar Inc. in Chicago, calls the Legg Mason situation the “worst” of those facing money-market funds. On the bright side, however, the company is at least detoxifying its funds, he says.The bottom line: Money-market funds, once thought to be as safe as cash in the bank, can indeed pose risks for investors. As the securities issued by SIVs continue to go downhill, more money-market fund managers like Legg Mason may be stepping in with cash and bail-out plans of their own.

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

Bond funds, once a pillar of strength and stability in times of market upheaval, appear to be showing signs of trouble.

Even though the Lehman Brothers U.S. Aggregate bond index, which tracks taxable bonds, Treasury notes, corporate and some mortgage securities, is up 2.3 percent as of April 4, 20 percent of all investment-grade U.S. taxable bond funds are in the red.

As reported April 8, 2008, by Shefali Anand in the Wall Street Journal, bond funds that had substantial investments in mortgage securities are the funds most likely to be in hot water. The Regions Morgan Keegan Select Intermediate Bond Fund was down 44 percent since the beginning of the year; the State Street Global Advisors Yield Plus and Schwab YieldPlus funds fell 18 percent and 23 percent, respectively, since the start of 2008.

Other bond funds are suffering from a massive sell-off of mortgage securities related to the subprime crisis. Among them: Metropolitan West Strategic Income Fund, down 8 percent this quarter; UBS Absolute Return Bond, down nearly 15 percent over the past year; and the Principal Investors’

Ultra Short Bond fund, down nearly 7 percent this quarter.

Metropolitan West alone had more than half of its investments in mortgage securities and other asset-backed products as of Dec. 31, 2007.

As the Wall Street Journal article points out, this has been an atypical time for bond markets. And, in some instances, investors may be well served to hold on to their bond investments for the long-term. On the other hand, investors may be in a Catch 22 situation in that it’s become increasingly difficult to determine if a bond fund is really safe and if its investments are in mortgage securities or other asset-backed products.

Moreover, the average credit quality of a bond fund may not correspond to its true risks. The State Street Global Advisors Yield Plus and the Schwab Yield Plus funds showed average credit ratings of double-A or higher on recent disclosures, yet both recorded significant losses in the past year.

In the end, investors who are looking for “safe” investments may find themselves turning to old faithful - the tried and trusted investments of bank savings accounts or money-market funds.

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.

SIVs – structured investment vehicles are causing problems for many investors in money market funds today.

According to The Wall Street Journal’s Diya Gullapalli, problems with SIVs are rampant in taxable money market funds and may lead to a sharp drop in consumer confidence.

Why the concern with structured investment vehicles?

When experts see Credit Suisse Group, Janus Capital Group Inc., Northern Trust Corp. and Wells Fargo & Co. buying – or talking of buying – the assets of troubled SIVs even when doing so will likely cut into earnings, everyone takes notice.

A swell of SIV problems could result in mutual funds “breaking the buck” (meaning to fall below a dollar a share). This would shake consumer confidence to its core, and the repercussions would be felt throughout the entire financial system.

The mere possibility has spurred large firms to action. Money fund researcher Crane Data reports 12 SIV-support moves having taken place publicly already.

The bottom line? Even money market funds, once thought nearly as safe as Treasury securities, should be viewed in today’s economy as potentially high-risk investments.

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.

Structured investment vehicles, or SIVs, have been placed under the magnifying glass, after a recent downgrade by Moody’s Investors. And that has some money market fund investors — including Charles Schwab Advisor Cash Reserves, as well as similar funds from Morgan Stanley, Barclays PLC, UBS AG and Deutsche Bank AG – worried.Â

The Wall Street Journal reported Dec. 4, 2007, that even though the funds in question have a small percentage – 1 percent to 2 percent – of their investments in the SIV, it could nonetheless spell trouble. If the SIV debt obligation held by the money fund loses its total value, a “break-the- buck” scenario could unfold in which investors receive less than a dollar-for-dollar return on their investment. Â

A total of $14 billion in SIV debt was part of the downgrade by Moody’s, plus another $105 billion placed under review. According to the Wall Street Journal article, the action “reflected the continued deterioration in market value of SIV portfolios combined with the sector’s inability to refinance maturing liabilities.”The liabilities are commercial paper – money-market securities sold by banks and other corporations to investors. Proceeds from commercial paper are typically used to meet short-term operating needs. Money funds typically view commercial paper as a safe investment. Â

SIV commercial paper is a different animal.

SIV Background

SIVs are special-purpose entities that issue commercial paper and medium-term notes to buy longer-term, higher-yield securities. An example is collateralized debt obligations (CDOs), which own contract rights in mortgage securities. A SIV uses the proceeds from the sale of commercial paper to pay the principal and interest owed on previously issued, commercial paper that has matured. The mortgage securities include risky sub-prime mortgages.

When sub-prime loans go into default, the value of the CDOs that hold interests in the loans, and the credit-worthiness of the SIVs that hold the CDOs, go south. As a result, money funds are pulling back their investments from SIV commercial paper, leaving SIVs unable to finance new investments or meet current debt obligations. Their only alternative:Â sell the holdings at fire-sale prices.And that creates a whole new set of challenges for banks, which may have no choice but to carry SIVs on their balance sheets, thereby supporting the billions of dollars in debt the SIVs might have to pay in the future.

Citigroup – the largest sponsor of SIVs – apparently has come up with a plan to deal with the SIV issue. Citigroup joined with other banks to form a super fund of cash that could provide liquidity to their SIVs. The bad news: Between Oct. 19 and Nov. 23, CDOs saw a 22% drop in market value. That performance, along with Moody’s recent downgrades, has left many analysts scratching their heads on whether a super fund is a solution after all.

HSBC Holdings PLC went on record that it will shut down its SIVs and take $45 billion in asset-backed securities onto its own balance sheet.

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.