Archive for the “Morgan Stanley” Category

It survived a stock market crash and the Great Depression, but Lehman Brothers could not triumph over the subprime mortgage problems of the 21st century.

Seconds before midnight on Sunday, Sept. 14, the 158-year-old investment banking firm agreed to file for Chapter 11 bankruptcy, officially ending a weekend of rumors and speculation on its demise. As employees began arriving for work on Monday morning, many were told not to return the following day.

Lehman Brothers was the nation’s fourth-largest investment bank, and the biggest underwriter of mortgage-backed securities. Its historic collapse is attributed to some $60 billion in toxic real estate holdings, along an inability to raise much-needed capital in recent weeks. In its filing for bankruptcy protection, Lehman reported total debts of $613 billion against total assets of $639 billion.

Lehman’s debt ratings were another key source of its problems. All three rating agencies had warned last week that rating downgrades were likely unless Lehman could come up with a solid restructuring plan or a buyer.

Many people are asking why the U.S. federal government, which intervened in the Bears Stearns case in March to orchestrate its sale to JP Morgan Chase and, more recently, prevented mortgage giants Fannie Mae and Freddie Mae from going under, failed to save Lehman Brothers. Reportedly, U.S. Treasury Secretary Henry Paulson was unwilling to use taxpayer money once again to resolve a Wall Street banking crisis.

For the time being, only Lehman’s parent company, Lehman Brothers Holdings, will seek Chapter 11 bankruptcy protection. The filing does not include any of Lehman’s subsidiaries or investment banking and asset management operations. Those units will continue to operate as usual for now. Analysts say Lehman is likely to either find a buyer - or buyers - for those business segments or unwind them gradually.

In addition, Wall Street’s major banks have created a $70 billion fund to ease the effects on the financial markets from the Lehman bankruptcy. Among the firms participating: Citigroup, Barclays, UBS, Bank of America, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch and Morgan Stanley.

By 9:30 a.m. on Monday, Sept. 15, Lehman’s shares had fallen more than 90%, from $3.65 last Friday to just 29 cents. It was only six days ago that Lehman’s CEO Richard Fuld said the investment firm was poised for a comeback and that it had ample capital and liquidity.

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

It seems Wall Street’s leading investment banks - Lehman Brothers, Citigroup, Morgan Stanley, and Merrill Lynch - are unable to escape the glare of scrutiny over questionable business practices these days. Now a U.S. Senate committee investigation reveals that several top firms are raking in millions of dollars in profits by using complex derivatives and stock schemes to help foreign hedge funds illegally avoid paying billions in U.S. taxes.

In its 77-page report, to be released Sept. 11, the Senate Permanent Subcommittee on Investigations calls the tax-avoidance schemes another example of a “privileged few” benefiting at the expense of millions of American taxpayers who are left to shoulder a disproportionate share of the tax base.

The report says that $100 billion a year is lost to offshore tax abuses.The report names several hedge funds involved in the schemes, including Moore Capital, Highbridge and Maverick Capital.

Foreigners who invest in the United States are exempt from many U.S. taxes - they don’t pay taxes on interest earned on money deposited in a U.S. bank, nor do they pay taxes on capital gains. However, if they invest in a U.S. company and the stock pays a dividend, U.S. law requires them to pay a tax on the dividend. Dividends sent abroad are supposed to be taxed at a rate of 30% in most countries.

In reality, however, it’s a different story, and many non-U.S. stockholders never pay the dividend taxes that they owe. According to the Subcommittee’s report, the fault lies with U.S. financial institutions.

According to the report, each of the institutions investigated developed and marketed “dividend-dodging products” that disguised dividend payments to clients as nontaxable ones. The products involved complex equity swaps or loans that the banks described as offering a “dividend enhancement,” “yield enhancement,” or “dividend uplift.”

For the investment firms, the practice is a profitable one.

The Senate investigation shows that from 2000-2007 Morgan Stanley helped clients dodge payments of U.S. dividend taxes of more than $300 million. Lehman Brothers estimated that in one year alone, it helped clients avoid U.S. dividend taxes amounting to $115 million. From 2004 to 2007, UBS enabled clients to dodge $62 million in dividend taxes.

As was seen in the FBI’s investigation of Bear Stearns’ executives Matthew Tannin and Ralph Cioffi, as well as in several other recent Wall Street scandals, emails are at the center of the Senate Committee’s probe over dividend tax dodging.

As reported Sept. 11 in The New York Times, the Committee’s report cites an internal e-mail message in which an employee from Lehman Brothers refers to Microsoft’s announcement of a special dividend as “the cash register is opening!” A senior Lehman official is then quoted as saying, “Outstanding. Let’s drain every last penny out of this [market] opportunity.”

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.

Just when you thought the auction rate securities ordeal might be nearing an end - and investors who’d been pitched the instruments by Wall Street as cash alternatives finally would receive their money back - think again.

In the past two weeks, New York Attorney General Andrew Cuomo has succeeded in getting several major Wall Street players - Citigroup, UBS, JP Morgan Chase, Morgan Stanley and Wachovia, among them - to pony up billions of dollars to buy back the auction rate securities they sold to investors. The catch is in the fine print of the agreements orchestrated by Cuomo: The Wall Street firms only have to pay back the auction rate bonds they sold, not the billions more they actually underwrote.

That small detail could have big repercussions for millions of investors holding illiquid auction rate securities bought through mutual fund firms or individual brokers. As reported Aug. 18 on CNBC.com, a number of regional firms and discount brokerage houses say the blame for the auction rate securities scandal rests firmly with the major underwriters of the securities - Wall Street powerhouse firms that decided to no longer support the auction rate market and dropped out entirely in February.

According to the CNBC article, the Regional Bond Dealers Association, a brokerage trade association, has written a letter to Cuomo and the Securities and Exchange Commission (SEC) in which it claims the real auction rate fraud was conducted by the underwriters of auction rate securities. The Wall Street firms dominated the auction rate market, the letter says, and sold the auction bonds to regional firms and discount brokerages with the promise to hold auctions. The brokers who sold the securities to customers contend they acted in good faith and relied on information about liquidity risks from those underwriters.

And that’s where problems arise. Many regional firms and brokers do not have the financial prowess of major Wall Street banks. Forcing them to buy back auction rate securities from investors at par value could financially bury many of them. The Regional Bond Dealers Association, in its letter to the SEC, said that the only practical solution for making investors whole is to include ARS customers of distributing firms in the settlements with large lead managers.

For his part, Cuomo reportedly stated in an Aug. 16 interview with CNBC that he has no plans to become involved in what could be a he said/she said dispute between brokers and the big Wall Street firms over who is culpable for misleading investors.

“I represent the investor,” he said, “and that’s why I’m treating this as a sales practice issue.” That’s all well and good. But until the fine print in the settlement agreements involving auction rate securities is worked out, thousands of ARS investors are no better off today than they were six months ago.

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.

When it rains, it pours. After a streak of bad luck that includes staggering losses tied to mortgage debt and massive job cuts, Wachovia Corp. could be forced to sell its asset management unit, Evergreen Investments, to raise much-needed capital.

Speculation of the Evergreen Investments sale first surfaced following an announcement that the nation’s fourth-largest bank has agreed to buy back $8.5 billion in auction rate securities as part of a fraud investigation led by Missouri Secretary of State Robin Carnahan.

Wachovia’s agreement with Carnahan, as well as New York Attorney General Andrew Cuomo and the Securities and Exchange Commission (SEC), is the latest in several recent settlements by Wall Street investment banks and securities firms as they try to put claims of auction rate abuses behind them. As part of its deal, Wachovia will pay a $50 million fine, and must buy back all illiquid auction rate securities from retail customers, charities and small businesses by Nov. 28.

In addition, Wachovia is required to make no-interest loans immediately available for any investor who needs liquidity before the auction buyouts are finalized.

In the past week-and-a-half, Citigroup, UBS, JP Morgan Chase and Morgan Stanley all have agreed to repurchase a combined total of $32.6 billion in auction rate securities and pay fines of more than $300 million.

As with a number of Wall Street investment banks, the collapse of the auction rate securities market in February created a public relations nightmare for Wachovia. In July, after being deluged with complaints from investors who said Wachovia brokers had intentionally misled them about the liquidity risks of the auction rate bonds, securities regulators from several states launched a surprise raid at the St. Louis headquarters of Wachovia Securities.

Trouble over auction rate securities sales may be minuscule, however, compared to Wachovia’s other problems. On Aug. 11, the bank was forced to revise its second-quarter loss from the prior month to $8.92 billion from $8.66 billion. It is the worst loss in the company’s history. Wachovia also plans to cut nearly 7,000 jobs, 600 more than it said three weeks ago.

Wachovia attributes much of its recent difficulties to the disastrous purchase of Golden West Financial, a California mortgage company specializing in loans that enabled borrowers to pay less than their full mortgage payment. Wachovia purchased Golden West in 2006 for $25 billion.

The acquisition of Golden West turned out to be anything but golden for Wachovia following last year’s collapse of the housing market. Wachovia’s stock is down 53 percent this year.

And now Evergreen Investments potentially could be on the selling block. Evergreen made headlines in June, when it announced plans to liquidate its Ultra Short Opportunities Fund. The fund, which had more than 70% of its assets tied to toxic subprime mortgages, lost 20% over a period of 16 days. In 2008, it was named as one of the two worst-performing ultra short bond funds of the year.

Investors in the Ultra Short Opportunities Fund say the fund’s managers purposefully kept information from them about the extent of investments made by the fund in risky mortgage-backed securities. Several investors have since filed lawsuits against Evergreen and Wachovia.

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.

New York Attorney General Andrew Cuomo, the self-appointed cop of Wall Street for his aggressive efforts to right the wrongs of investment banks over deceptive sales of auction rate securities, hailed another victory today.

Two more Wall Street investment banks - JPMorgan Chase and Morgan Stanley - have agreed to Cuomo’s terms and will buy back the illiquid instruments from investors. The banks, which are two of the largest underwriters of auction rate securities, will pay fines totaling $60 million and redeem at face value more than $7 billion of auction rate securities sold to individual investors, charities and small to mid-sized businesses.

The agreement with Morgan Stanley, which is paying a $35 million penalty, and JPMorgan, a $25 million penalty, brings the total number of Wall Street firms to settle state investigations of fraudulent auction rate securities sales to four. Last week, Citigroup, followed by UBS, agreed to buy back nearly $30 billion of auction rate securities and pay fines of $250 million. Merrill Lynch later voluntarily said it would repurchase about $10 billion. In Merrill’s case, however, no deal was reached with state or federal regulators.

At the time that Citigroup agreed to settle with Cuomo and other state regulators and the Securities and Exchange Commission (SEC), Morgan Stanley said it would buy back $4.5 billion in auction rate securities. Cuomo immediately dismissed the offer as insufficient.

As part of the Aug. 14 agreement with JPMorgan and Morgan Stanley, JPMorgan will repurchase the auction rate securities it sold to nearly 10,000 clients by Nov. 12. In addition, the bank will buy back any securities sold by Bear Stearns, which it acquired in May.

Morgan Stanley will repurchase its securities by Dec. 11. About 20,000 customers are involved in that deal.As is the case with Citigroup and UBS, JPMorgan and Morgan Stanley did not admit or deny any wrongdoing over how they marketed or sold auction rate securities to investors.

The SEC is not part of the settlement agreement with JPMorgan or Morgan Stanley.

Cuomo’s office is pursuing about 30 Wall Street banks as part of an investigation into the alleged mishandling of auction rate dealings. Other states and the SEC are investigating the issue, as well.

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 Federal Reserve’s Primary Dealer Credit Facility (PDCF) is supposed to serve as a ‘lender of the last resort’ - intended to keep the country’s financial markets functioning properly by providing loans to securities firms at a discount.

Now the Fed’s facility could be tapped for an entirely different purpose: lending money to investment banks that are buying back illiquid auction rate securities (ARS) from investors.

According to an Aug. 11 article on Bloomberg.com, some analysts predict that Wall Street banks will turn to the Fed and its discount interest rates to finance the billions of dollars in auction securities they’ve agreed to repurchase, even using some of the ARS paper as collateral. Ultimately, banks might borrow upwards of $100 billion from the Federal Reserve, according to the article.

Last week, Citigroup and UBS became the first two firms to pony up approximately $30 billion to buy back auction rate securities from investors, as well as pay $250 million in fines. Merrill Lynch voluntarily announced its own auction rate plans shortly thereafter, agreeing to purchase $10 billion of the securities.

For the past five months, New York Attorney General Andrew Cuomo has led a nationwide investigation into the February collapse of the auction rate securities market, targeting Wall Street firms that allegedly deceived investors about ARS liquidity risks.

On Aug. 11, Cuomo turned up the heat on his investigation by strongly encouraging three major underwriters of auction rate securities - JPMorgan Chase, Morgan Stanley and Wachovia Corp - to take immediate actions to resolve investigations into their auction rate securities sales. Later that same day, Morgan Stanley agreed to repurchase some $4.5 billion of auction rate securities from investors. The offer, however, was disregarded by Cuomo, who called it “too little, too late.”

Reportedly, Cuomo, along with multiple state regulators and the Securities and Exchange Commission (SEC) are close to reaching a settlement with a number of other banks.

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.Â

When several Wall Street investment banks recently agreed to buy back billions of dollars of illiquid auction rate securities from investors, some closed-end fund firms that were first on the scene to bail out investors by redeeming their auction rate preferred shares (ARPS) are now wondering if they did the right thing.

Their puzzlement is because some closed-end funds resorted to using expensive lines of credit and syndicated bank loans to finance the redemptions of auction rate preferred shares for investors. Now, those funds could be facing potential financial issues of their own.

An Aug. 12 article in the Wall Street Journal highlights the dilemma confronting closed-end funds that that initiated plans on their own to help disgruntled investors get rid of their auction securities when the market seized up six months ago.

Auction rates securities are long-term bonds but act like short debt, with interest rates that reset at auctions held every seven, 14, 28 or 35 days. Issuers of auction rate securities include municipalities, student loan companies and closed-end funds, the latter of which uses preferred shares in auction bonds to provide create higher returns for common shareholders.

Following the collapse of the auction market in February, investors holding auction rate preferred shares, or ARPS, found themselves in the same boat as thousands of other auction rate investors: unable to access their cash. Some closed-end funds, including Nuveen Investments, BlackRock and Eaton Vance, were quick to address investors’ concerns about their illiquid, auction rate preferred shares and voluntarily began developed redemption plans. Other closed-end funds simply have waited it out.

At the start of 2008, closed-end funds had about $64 billion of auction rate securities outstanding. Now, the figure is closer to $40 billion, a 37% decline, including what various closed-end funds have said they plan to redeem, according to an Aug. 11 article in Barron’s.

Such help could come at a cost for a few funds, however.

As reported in the Wall Street Journal article, some of the auction-rate preferreds issued by closed-end funds were pitched by Wall Street investment banks - many of which are the same banks at the center of state and federal investigations for marketing auction rate securities to clients as cash-alternative investments. Last week, Citigroup, UBS and Merrill Lynch agreed to buy back nearly $40 billion in auction rate securities. The settlement offers are expected to create a template for other firms to make amends with auction rate customers and resolve alleged claims of auction rate deception.

The recent turn of events means closed-end funds that waited on the sidelines rather than seek alternative or expensive forms of financing to help their investors out of auction-rate preferreds might be better off now financially.

Meanwhile, the auction rate scandal continues on. On Aug. 11, New York Attorney General Andrew M. Cuomo announced that his office is expanding its investigation, and notified JPMorgan Chase, Morgan Stanley and Wachovia that he will be looking into the their behavior and whether the firms sold auction rate securities to investors as safe, cash-equivalent products, when in fact the market was headed for disaster.

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.Â

Morgan Stanley is now the latest Wall Street firm to try and cut a deal in the auction rate securities investigation. Late Monday evening, the nation’s second-biggest U.S. securities firm offered to buy back up to $4.5 billion worth of the securities from retail investors, reaching its decision only hours after New York Attorney General Andrew Cuomo sent a letter to Morgan Stanley, Wachovia and JP Morgan Chase that demanded the firms begin negotiations over their sales of auction rate securities.

As part of its offer, beginning Sept. 30 Morgan Stanley would repurchase auction rate securities for up to 30 days from individuals, charities and businesses. It also would make whole those investors who bought the securities before Feb. 12 and then were forced to sell them for a loss.

However, a spokesman for Cuomo said in a statement that the Morgan Stanley’s offer came “too little, too late,” and that the New York attorney general would continue his investigation, according to an Aug. 11 article in the New York Times.

As of last week, settlements had been reached between Cuomo’s office and Citigroup, UBS, and Merrill Lynch. On Aug. 7, Citigroup agreed to repurchase about $7.3 billion of the securities and pay a fine of $100 million. UBS is paying a $150 million fine and buying back $18.6 billion. Merrill Lynch announced its own auction rate buy back program on Aug. 8, saying it will repurchase some $10 billion in the securities.

Separately, on Aug. 8, Morgan Stanley agreed to pay $1.5 million to reimburse two Massachusetts cities, New Bedford and Hopkinton, for their auction rate securities investments.

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.Â

On the heels of New York Attorney General Andrew Cuomo’s announcement he is planning to sue the nation’s biggest bank on fraud charges over auction rate securities sales and destruction of subpoenaed documents, Citigroup, Inc. apparently decided that resolving the matter with Cuomo might be the best solution.

As reported in the Wall Street on Aug. 6, Citigroup is in talks with state regulators and the Securities and Exchange Commission (SEC) in an attempt to put to rest allegations of wrongdoing over its marketing and sales of auction rate securities. If an agreement is reached, Citigroup may spend more than $5 billion to buy back the illiquid securities from investors whose funds have been frozen when the auction market seized up seven months ago. In addition, Citigroup could face a fine of up to $100 million.

Citigroup, which is one of the largest underwriters of auction rate securities, has been the subject of an investigation by New York Attorney General Cuomo for the past five months. On Aug. 1, Cuomo threatened to file charges against the New York-based bank, alleging that it destroyed critical documents and telephone recordings of its auction rate desk that were under subpoena by his office.

In addition, Cuomo contends Citigroup “repeatedly and persistently committed fraud” by falsely representing auction rate bonds as safe, liquid and the equivalent of cash to investors.

Citigroup also revealed on Aug. 1 that the SEC has opened a formal probe into its sales of auction rate securities.

Following the collapse of the $330 billion auction rate market in February, state and federal regulators have been busy examining a number of financial services institutions - including Bank of America Corp, Merrill Lynch, UBS, Wachovia, Morgan Stanley and Goldman Sachs - and their marketing practices regarding auction rate securities. Investors currently hold more than $200 billion in the frozen instruments - investments they had been led to believe were similar to money-market funds and “cash-alternatives.”

Should Citigroup reach an agreement with Cuomo’s office, it might very well open the door for other investment banks and securities firms to settle their own mishandling of auction securities with state and federal regulators.

Meanwhile, for the thousands investors who were pitched auction rate securities as cash equivalents and then kept in the dark about their liquidity risks, the latest news gives them reason to be cautiously optimistic.

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.