Archive for the “Municipalities” Category

When investment bank Morgan Keegan and its managing director, Joseph Ayres, teamed up with representatives from Nashville based Bass Berry and Sims to teach seminars on financial derivatives and interest rate swaps from 2001 to 2007, local commissioners in small towns like Lewisburg, Tennessee, became some of their “students.” What these students failed to realize, however, was that in addition to serving as a teacher and investment adviser of derivative instruments, Morgan Keegan also acted as an underwriter of the complex deals, a fact that is now being scrutinized by Tennessee officials.

The New York Times initially reported on the conflict of interest issue surrounding Morgan Keegan and its dual role of teacher, adviser and underwriter of financial derivatives for Tennessee cities and counties in an April 7 article. According to the story, Lewisburg’s saga into derivatives and interest rate swaps began in 2005, when Bob Phillips, the city’s part time mayor, attended a state sponsored seminar taught by Morgan Keegan to learn about municipal bond derivatives. Phillips wanted the information because Lewisburg needed a way to fund a new sewer bond. On the advice of Morgan Keegan, Lewisburg turned to municipal bond derivatives, and the deal eventually was underwritten by none other than the Memphis based bank.

By January 2009, the annual lower interest rates initially touted by Morgan Keegan in the 2005 seminar class had skyrocketed, quadrupling to $1 million. Making matters worse: The deadline to pay off the debt had shortened dramatically, to seven years from the original 20 years.

Claiborne County, Tennessee, faced a similar predicament. In 2007, Morgan Keegan advised county officials on an interest rate swap involving an existing $18 million bond. As in Lewisburg, the deal was underwritten by Morgan Keegan.

Once interest rates began to climb, however, Claiborne County found itself with only a few weeks to refinance the entire bond or make a quadrupled payment of $700,000.

Tennessee’s State Comptroller Justin Wilson is now calling for a possible overhaul of state rules overseeing municipal bond derivatives. On April 8, Wilson enacted a freeze on any applications for financial derivatives like interest rate swaps until the State Funding Board re-evaluates its guidelines this May.

As for Morgan Keegan, the company continues to maintain that Tennessee towns and counties were properly advised about the potential risks of derivatives and that the seminars its representatives taught on the subject were unbiased presentations.

Officials in Lewisburg, Claiborne County and many other municipalities might feel otherwise, as their governments face skyrocketing interest rates fees and little time to make good on the complex derivative arrangements advised and orchestrated by Morgan Keegan.

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. 

Lewisburg, Tennessee, is a quaint, affable town known for rich farmland and friendly neighbors. Now, thanks to investment bank Morgan Keegan & Company, Lewisburg is becoming known for something else: municipal bond derivative deals gone bad.

The small city’s introduction to Morgan Keegan and the derivative instruments occurred five years ago, when Lewisburg was trying to lower the interest on a bond for a new sewer system. Bob Phillips, Lewisburg’s part-time mayor, approached Morgan Keegan for advice and quickly became immersed in the complex world of derivatives.

As reported April 7 by the New York Times, that world soon soured for Lewisburg an hundreds of small cities just like it. Municipalities that bought derivatives were much like homeowners, securing fixed-rate mortgages and then refinancing with lower interest, variable rate mortgages, says the New York Times article.

In the case of the municipalities, however, many officials now say they were never told or didn’t understand that interest rates on derivatives can go much higher if economic conditions turn sour.

When the inevitable happened and the economy, in fact, worsened, Lewisburg paid the price. The cost of interest paid on its sewer bonds has quadrupled to an astounding $1 million. As for Lewisburg residents, they face a 33% increase in water and sewer rates.

And the added costs couldn’t come at a worst time. Unemployment in Lewisburg currently stands at more than 10%, as a slew of established businesses close their doors. Even longtime employer Sanford Pencil, the Sharpie pen maker, is preparing to relocate to Mexico. 

At the time Lewisburg officials entered into their municipal derivative contract with Morgan Keegan, the Memphis based investment firm dominated nearly the municipal bond derivative business in Tennessee, both in terms of acting as an adviser and as an underwriter. According to the New York Times article, data compiled by Tennessee’s comptroller’s office show Morgan Keegan sold some $2 billion worth of municipal bond derivatives to 38 cities and counties since 2001.

Many of the deals orchestrated by Morgan Keegan have resulted in similar predicaments like happening in Lewisburg. In nearby Claiborne County, Tennessee, for instance, officials there are desperately trying to get out of a municipal bond derivative contract with Morgan Keegan. Doing so, however, will cost the county $3 million, money the county can ill afford.

The same is true in Mount Juliet. Located about 17 miles from downtown Nashville, city leaders recently learned that payments on their bonds had increased by 500% to $478,000, according to the New York Times story.

Meanwhile, as Lewisburg, Mount Juliet and many other Tennessee municipalities struggle to find a way out of their derivative messes, Morgan Keegan is counting the millions and millions of dollars in fees it’s collected by serving in the dual, and questionable, role of underwriter and adviser.

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.