Archive for the “Mortgage Backed Securities” Category

The past 12 months have not been pretty for mutual fund manager Ronald Fielding and the Oppenheimer Rochester National Municipals fund he oversees. After losing nearly 50% of its value, the fund ended up as the worst performer in the open-end municipal bond fund category in 2008, according to Morningstar, Inc.

Problems for the Rochester National Municipals fund add to a slew of setbacks for New York-based OppenheimerFunds. In recent months, the company has encountered a lengthy losing streak with several of its bond funds, including the Champion Income fund. After making bad bets on risky mortgage-backed securities, the Champion fund plummeted nearly 80% last year, making it the worst-performing taxable high-yield bond fund of 2008. On Dec. 12, the fund’s manager, Angelo Manioudakis, abruptly resigned from his position with OppenheimerFunds.

Meanwhile, several investors who unexpectedly lost huge amounts of their money in the Champion Income fund have filed complaints with the Financial Industry Regulatory Authority (FINRA), charging that Manioudakis and Oppenheimer failed to disclose the fund’s risks to them.

As for Oppenheimer’s Rochester National Municipals fund, its financial woes began in 2007, following the onset of the subprime mortgage debacle. As of Dec. 31, 2008, the fund had $3.6 billion in assets; three months earlier it was valued at $6.7 billion, according to a Jan. 8 article by Bloomberg.

The losses are yet another black mark against OppenheimerFunds, which owns the hedge fund firm Tremont Group Holdings. In late December, Tremont revealed it had gambled and lost more than $3 billion in the Bernie Madoff Ponzi scheme.

Now it’s Ron Fielding who’s in the hot seat for his questionable management decisions with the Rochester funds. For years, Fielding made his mark in the municipal bond world by buying up the riskiest and least desirable portions of the bond market, including sectors like tobacco and airlines. His gambles failed to pay off, however, when he bought airport bonds secured with airline company revenue following the terrorist attacks of Sept. 11. Another bad bet included the purchase of municipal bonds backed by a 1998 settlement with tobacco companies. A combination of anti-smoking efforts and lawsuits against cigarette manufacturers later proved to drastically reduce demand for the debt.

As a result, Fielding’s funds took on a lot more credit risk. Oppenheimer’s Rochester family offers 18 different bond funds - many of which have 25% of their assets invested in tobacco bonds. In the case of the Rochester National Municipals fund, its most notable holdings are tobacco and airline bonds. One key danger for the fund is the possibility of heavy redemptions in the future. If that happens, the fund would be forced to sell some of its holdings. And in the current market environment, that means selling at well below par value.

In what may be a sign such action is looming, the fund substantially increased its credit line with Citibank last month from $1 billion to $3 billion.

The bottom line: Fielding took on risk - and a lot of it. His contrarian style in the municipal bond arena may have worked at one time, but market conditions are no longer what they used to be. Now, investors are paying the ultimate price for Fielding’s “misguided” behavior.

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.

Many parents with money tucked away in 529 college savings plans are shocked to learn that their children’s future education could be at risk because of massive losses tied to the Oppenheimer Core Bond Fund (OPIGX). The bond fund, which is offered by 529 plans in Oregon, Texas, Maine and New Mexico, fell nearly 40% last year. By comparison, similar funds posted 4% gains.

Problems for the Oppenheimer Core Bond Fund are tied to bad bets made by the fund’s management team on high-risk mortgage-backed securities and credit-default swaps. When the housing market hit a wall last year and credit froze up, those investments essentially became worthless.

As reported Jan. 1 by USA Today, the Texas College Savings Plan’s had 50% of its assets in the Oppenheimer Core Bond Fund. As a result, the portfolio fell 21% in 2008.

Faring even worse is the state of Maine. Its NextGen College Investing Plan had 40% of its assets in the Oppenheimer Core Bond Fund. As of Nov. 28, 2008, the portfolio had fallen more than 42% in value.

Parents, many of whom have students either about to enter college or currently enrolled, are now feeling the repercussions of the fund’s unexpected losses. Making matters even worse, the fund was marketed as ultra-safe and a conservative investment.

In Oregon, OppenheimerFunds manages the portfolios of three plans under the 529 College Savings Network. Parents who invested in some of the college savings plans most conservative portfolios have now lost thousands of dollars because of the Oppenheimer Core Bond Fund. Currently, Oregon’s state attorney general’s office has launched an investigation to determine if Oppenheimer misrepresented the bond fund to investors.

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.

In the wake of more $1 trillion in write-downs and losses at financial institutions in 2008, mark-to-market, or fair-value, accounting has become a hotbed for controversy. Critics of the accounting standard, which banks use to determine the market value of their assets, say it is unfair that they are required to use the rule when reporting hard-to-value assets such as mortgage-backed securities. Proponents say changes to mark-to-market accounting puts investors at risk and allows banks to resort to “mark-to-make-believe” accounting.

A recent study by the U.S. Securities and Exchange Commission is weighing on the side of investors, and says mark-to-market accounting should be maintained. The 259-page report does, however, provide several recommendations to improve transparency, including the development of additional guidance from regulators for determining the fair value of investments in inactive markets. Currently in an illiquid market, an asset’s value is based on an estimate provided by management and/or computer models.

In October, following the government’s approval of a $700-billion bailout package for U.S. financial institutions, Congress instructed the SEC to examine the impact of fair-value accounting on 2008 bank failures and the many financial problems affecting Wall Street.

Apparently, the accounting rule was not a major factor in creating either issue. Instead, the report attributed the collapse of 25 banks in 2008 to be the result of “growing probable credit losses, concerns about asset quality, and, in certain cases, eroding lender and investor confidence.”

A summary of the SEC’s report can be found at http://www.sec.gov/news/press/2008/2008-307.htm

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

A growing debate among financial institutions has been decided once and for all. Following the collapse of some 25 banks in 2008, along with a financial breakdown on Wall Street, many bankers called upon Congress to suspend mark-to-market accounting. Critics of the accounting rule say its suspension would give financial institutions more leeway to determine the value of hard-to-sell assets in illiquid markets. On the flip side, proponents contend fair-value accounting increases financial reporting transparency and facilitates better investment decision-making.

On Dec. 31, 2008, the Securities and Exchange Commission (SEC) issued its opinion in a 259-page report, stating that mark-to-market accounting will remain in place. The report went on to say that the accounting rule did not play any meaningful role in the collapse of 25 banks last year.

Mark-to-market accounting requires companies and financial institutions to value their assets based on current market values. For institutions that own certain assets like mortgage-backed securities, the practice can wreak havoc on their bottom line when the assets’ values decrease.

The SEC report did call for some changes to mark-to-market accounting, including a standardization process for dealing with impaired assets and issuing more guidance on how to determine asset values when markets are inactive.

The SEC created its report, SEC Report to Congress on Mark-to-Market Accounting, at the request of Congress. In October, following the passage of a $800 billion bailout for Wall Street, lawmakers mandated that the SEC explore the impact of mark-to-market accounting on the recent financial troubles of banks and lenders.

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

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

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

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

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

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

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

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

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

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

After a string of bad bets on high-risk mortgage-backed securities and credit-default swaps, OppenheimerFunds’ Senior Vice President Angelo Manioudakis has left the company. On Manioudakis’ watch, the Oppenheimer Champion Income Fund has lost more than 80% of its value this year - the biggest decline of any bond fund tracked by Morningstar, Inc. By comparison, the average junk-bond fund fell 32%.

Manioudakis’ departure may be the least of the issues for OppenheimerFunds, however. OppenheimerFunds owns Tremont Capital Management, an investment-management business that placed hundreds of millions of dollars of investors’ money in funds run by Bernard (Bernie) L. Madoff, who was arrested last week for operating a $50 billion Ponzi hedge fund fraud scheme.

Meanwhile, Jerry Webman will temporarily take over for Manioudakis as head of OppenheimerFunds’ Core Plus team.

Problems for the Oppenheimer Champion Income Fund began shortly after Manioudakis and his team took over management responsibilities for the fund in 2006.  The fund’s demise was then hastened by too many derivative bets gone bad and, in particular, something called total-return swaps. As reported Dec. 16 in the Wall Street Journal, total-return swaps are agreements between parties to exchange cash flows in the future based on how a set of securities performs. In the case of the Oppenheimer Champion Income Fund, the fund was betting that top-rated commercial mortgage-backed securities would recuperate this year. It was a gamble that failed miserably.

Credit-default swaps (CDS) and mortgage securities tied to financially ailing companies like Washington Mutual and mortgage giant Freddie Mac also became a major source of trouble for the Oppenheimer Champion Income Fund. Compounding the fund’s problems were purchases in Lehman bonds between June and September with nearly $30 million in principal value. When Lehman filed Chapter 11 bankruptcy protection on Sept. 15, those bonds plummeted in value to $144,000.

Moving forward, other OppenheimerFunds offerings that held the Oppenheimer Champion Income Fund could be headed for their own set of financial problems. One of the funds includes the Oppenheimer Conservative Investor Fund, which had 4% in the Champion Income fund through November, according to the Wall Street Journal. Year to date, the Oppenheimer Conservative Investor Fund is down an astonishing 40%, making it one of the worst-performing conservative allocation funds followed by Morningstar.

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 past 12 months may well be remembered as the year in which losses connected to hard-to-value securities reached unheard-of levels, as investment firms and financial institutions disclosed nearly $700 billion in write-downs for mortgage-backed securities, leveraged loans and other assets that plunged in value. Still, the coming new year could give 2008 a run for its money. That’s because of something called off-balance sheet financing.

For some time now, financial institutions have made profits hand over fist by financing business deals with off-balance sheet entities. In simple terms, off-balance sheet refers to when companies transfer certain projects, investments or underperforming assets such as collateral debt obligations (CDOs), subprime-mortgage securities or credit default swaps from the parent company to an off-balance-sheet subsidiary.

Once the assets have been removed from a company’s primary balance sheet, it gives the appearance that the parent is carrying less debt - and thereby less risk. And, because off-balance sheet entities are largely unregulated, there is no one to question otherwise.

As the concept of off-balance sheet financing gained favor with Wall Street, so too did massive leveraging. Collateral debt obligations, subprime securities, credit default swap contracts - all have increased exponentially in recent years. What Wall Street failed to consider as it took on these added risks was the possibility of failure, not to mention the systemic damage that the failure potentially could unleash on the nation’s financial system as a whole.

Case in point: Credit default swaps. Credit default swaps are privately negotiated contracts between two parties - a buyer and a seller. The buyer of a credit default swap pays a fee to the seller. In exchange for that fee, the seller agrees to cover the buyer’s losses in the event that the underlying financial instrument defaults. The problem is the credit-default swap market itself. It is a $60 trillion unregulated market where contracts are traded without any federal oversight to ensure buyers actually are capable of covering losses.

When credit markets began to freeze up this year, that’s exactly what happened to institutions like Bear Stearns, Lehman Brothers, American Insurance Group and Citigroup. At the time, all of the firms were holding high concentrations of mortgage-backed securities - the same assets they once used as collateral to get credit and had to now significantly mark down in value.

A domino effect ultimately took hold, as creditor institutions turned up the heat via margin calls on the institutions that wrote the credit default swap contracts. Unable to meet those calls, Bear Stearns, Lehman, AIG, Citigroup and others quickly found themselves in trouble. Some of the companies like Lehman filed for bankruptcy protection; others were forced into a firesale; and some turned to the federal government for a bail-out to the tune of billions of dollars.

Now, countless other financial institutions are holding their breath, hoping they won’t meet a similar fate. Unfortunately, off-balance-sheet excesses already may have put them on a path to failure. There are literally trillions upon trillions of dollars of outstanding debt obligations residing “off-balance sheet” today for nearly every Wall Street institution around. When reality finally sets in, and the off-balance-sheet assets come back on balance sheet, watch out. It could make the nation’s current fiscal crisis look like child’s play.

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’s a familiar refrain on Wall Street: “too big to fail.” We heard it with Bear Stearns, Fannie Mae and Freddie Mac, American Insurance Group and Lehman Brothers. And each case, the opposite proved to be true. Government rescues in the form of multibillion-dollar bailouts prevented some of those supposed fail-proof businesses from going under. Now Citigroup, once the nation’s largest financial institution, is joining the ranks, as well, after succumbing to more than $65 billion in losses.

The government’s plans to prop up Citigroup were revealed on Sunday, Nov. 23, and include an additional $20 billion of taxpayer money for the bank, along with a guarantee on more than $300 billion of the firm’s most risky assets. In exchange for the guarantee, Citigroup will issue $7 billion in preferred stock to the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC).

So how did things get so bad for one of the country’s premiere financial services firms? In three words: reckless business bets.

Over the years, Citigroup created a multibillion-dollar business in mortgage-backed securities and collateralized debt obligations (CDOs). As profits grew, Citigroup got bolder, taking more and more risks. At the same time, the company employed tricky accounting practices that allowed it to move troubled assets into off-balance-sheet trusts that could then market the debts to other institutions. Once the assets had been moved off Citigroup’s balance sheets, it made it appear the bank was carrying less risk.

Appearances can be deceiving, however, for the simple fact they often mask the truth. To date, Citigroup has suffered four quarters of consecutive multibillion-dollar losses. It still holds $20 billion of mortgage-linked securities on its books, the majority of which have been marked down to between 21 cents and 41 cents on the dollar, according to a Nov. 22 article in the New York Times.

But the worst may be yet to come. Citigroup has another $1.2 trillion that is held “off balance sheet.”  When it begins to move those questionable assets back onto its books, get ready for a whole new firestorm of losses to ignite.

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.

Yet another U.S. bank bites the dust. This time it’s Houston-based Franklin Bank, founded by Lewis Ranieri, the man who pioneered mortgage-backed securities.

Federal regulators seized Franklin Bank late Friday evening, Nov. 7 - its downfall attributed to the market its creator helped launch. As reported Nov. 8 in the Washington Post, Franklin Bank funded billions of dollars in home mortgage loans, as well as made billions of dollars worth of loans to residential developers in California, Arizona, Florida and Michigan - all areas where foreclosures are among the highest in the nation. When defaults began to skyrocket, Franklin Bank reportedly tried to conceal its losses. By October, reality struck: The bank simply was running out of money.

As of Sept. 30, 2008, Franklin Bank had assets of $5.1 billion and deposits of $3.7 billion, the latter of which will be assumed by Prosperity Bank of El Campo, Texas. Prosperity will purchase $850 million of Franklin’s assets, with the Federal Deposit Insurance Corporation (FDIC) to retain the rest. The FDIC estimates that the cost to its Deposit Insurance Fund for the transaction could be up to $1.8 billion. The failure of Franklin Bank - the 18th bank failure so far this year - marks the first bank to fail in Texas since the Bank of Sierra Blanca, which went under on Jan. 18, 2002.

The demise of Franklin Bank is a dramatic setback for Ranieri, whose professional story is the stuff of Wall Street legend. He started his career at Salomon Brothers in 1968, working for $70 a week as a night-shift mailroom clerk. Over the next two decades, he secured stints on Salomon’s trading desk and eventually became vice chairman and head of the firm’s mortgage finance division. Then, in 1987, Ranieri was abruptly fired.

Ranieri, now 61, went on to forge a second career for himself, which included launching Hyperion Capital Management, a fund that invests primarily in mortgage-backed securities. In 2002, Ranieri formed Franklin Bank in Houston, Texas. In May 2008, he was named as its interim chief executive officer. He resigned from that post in August 2008, but remained on as chairman of the bank’s parent company, Franklin Bank Corp.

In June 2008, the Securities and Exchange Commission began an investigation of Franklin Bank, following a lengthy internal probe that had uncovered numerous accounting errors related to residential mortgage loans, as well as improper lending practices.

Shares of Franklin Bank have lost more than 90% of their value this year, after peaking at a high of $21.88 in October 2006 to 26 cents on Nov. 3, 2008.

Now it seems Ranieri truly has come full circle, with the bank founded by the so-called father of the securitized mortgage market itself a victim of the product Ranieri helped create.

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. 

Safe havens in the investing world have become an oxymoron. Amid the dismantling of Wall Street and other centers of financial engineering, investments once characterized as “cash alternatives” are vanishing overnight. What investors thought was a safe, secure liquid-as-cash investment is no more.

Case in point: Ultra short bond funds. Ultra short bond funds are mutual funds that typically invest in fixed-income securities with short maturity dates before they become due for payment. Like other bond funds, ultra short bond funds can invest in a wide range of securities, from corporate debt, to government securities, to mortgage-backed securities and other asset-backed securities.

Often described as a cash-alternative investment, ultra short bond funds are attractive to investors who want higher yields than traditional cash accounts with only marginally higher risk. That’s the theory, anyway. In the past year, the average ultra short bond fund has lost about 5% versus a 2.6% average gain for taxable money funds. And, in some cases, investors have seen their ultra short bond fund investments obliterated entirely.

The Schwab YieldPlus Fund is one example. Marketed by Charles Schwab as an alternative to cash, the one-time $14 billion fund has seen its value plummet, falling nearly 34% in 2008 alone. Another ultra short bond fund to implode this year is Evergreen Investments Ultra Short Opportunities Fund. That ultra short bond fund has lost than 20% of its value and was deemed the second-worst performing - behind the Schwab YieldPlus Fund - of the ultra-short bond funds tracked by Morningstar Inc.

So how did it go so wrong for these supposed “cash-like” investments? In a word: subprime.

In addition to mischaracterizing their funds and failing to offer adequate explanations of their potential risks, the companies behind the Schwab YieldPlus Fund and the Evergreen Ultra Short Opportunities Fund apparently omitted key information about what their managers really were investing in. In short, the words, subprime or high concentrations of mortgage-related investments, came up missing entirely at the time the funds were marketed and sold to investors.

As a result, investments made in risky illiquid mortgage-backed securities caused many ultra short bond funds to tank in value following the onset of the subprime crisis. Making the carnage even worse was the fact that the funds’ managers had to get rid of the toxic securities at fire-sale prices in order to come up with the cash for investors wanting to bail out.

The bottom line: With the country’s financial crisis playing out before us, safe, conservative investments are becoming harder and harder to find. One thing is for sure: In today’s market, investors who are considering ultra short bond funds may want to think long and hard. Lessons of the past year concerning fallen funds like the Schwab YieldPlus Fund, Evergreen Investments Ultra Short Opportunities Fund and others serve as definitive proof that ultra short in no way means ultra safe.

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.