Archive for the “Rating Agencies” Category

The year of 2008 has ushered in its share of bad news for closed-end fund investors. The latest fund to join that bandwagon: Pacific Investment Management Company’s High Income Fund. The fund, which invests in corporate debt rated below investment grade, has plummeted in value recently, falling to $5.10 on Nov. 6 in mid-day trading from a high of nearly $15 in June 2007.

Now because the value of the securities in the Pimco High Income Fund’s portfolio has fallen below what is required by law, the fund says it plans to suspend the declaration of its next dividend payment to shareholders, which is scheduled for December. On Oct. 11, the fund postponed a payment of 12.1875 cents per share to shareholders because of adverse market conditions.

Allianz Global Investors Fund Management LLC serves as the investment manager of the Pimco High Income Fund.

On Oct. 17, 2008, Fitch Ratings, one of the three big credit-rating agencies, placed a negative ratings watch on the auction-rate preferred shares of three Pimco closed-end funds, including the Pimco High Income Fund. The other two Pimco funds were the Pimco Floating Rate Strategy Fund (PFN) and the PIMCO Floating Rate Income Fund (PFL).

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. 

Conflicts of interest and gross incompetence were just two of the descriptions that lawmakers used to characterize credit rating agencies for their off-base assessments regarding the risks of Wall Street investment products backed by subprime mortgage loans.

At an Oct. 22 meeting on Capitol Hill, the House Committee on Oversight and Government Reform had harsh words for Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, with one lawmaker quoting from a compilation of e-mail messages sent by an S&P employee that said “a product would be rated even if it were structured by cows.”

The cow comment was just one of several accusations levied by members of Congress throughout the day-long hearing in which the three credit rating agencies were grilled on how and why they assigned top AAA ratings to complex mortgage-related securities without first thoroughly understanding the risks of the products. Later, a number of those products turned out to be totally worthless.

The answer may have to do with money. Moody’s Investors, Standard & Poor’s, and Fitch all raked in huge profits by giving various Wall Street products superior ratings. During the Oct. 22 testimony, Henry Waxman, who is chairman of the House Committee on Oversight and Government Reform, said total revenue from the three firms doubled from $3 billion in 2002 to more than $6 billion in 2007.

Meanwhile, investors who relied on the so-called “objective” ratings of certain financial products lost millions upon millions of dollars when the agencies’ assessments proved to be categorically wrong.

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.

Unresolved financial issues over a $3.2 billion sewer debt in Jefferson County, Alabama, have caused the project’s bond insurers - Syncora Guarantee and Financial Guaranty Insurance Co. - to file a lawsuit in U.S. District Court in Birmingham and ask the judge to strip Jefferson County Commissioners of their duties and appoint an independent receiver to take charge.

The lawsuit is the latest controversy in an ongoing battle between county commissioners and creditors over how to resolve Jefferson County’s outstanding sewer debt obligations. In August, Alabama Governor Bob Riley convened a meeting with the county’s creditors in which he offered a plan to restructure the debt at a lower, fixed rate over a longer term. The banks, led by JPMorgan Chase, agreed that the county could delay interest payments on the debt until the end of September.

Now that deadline is fast approaching. If a resolution is not reached soon, Jefferson County will be forced to declare Chapter 9 bankruptcy. It would be the biggest bankruptcy by a municipality government since 1994 when Orange County, California, filed for protection from a $1.7 billion debt.

For years, the sewer project in Jefferson County has been an ongoing source of frustration for Birmingham residents. A combination of risky financing arrangements and complex interest-rate swaps ended up creating a fiscal nightmare for local officials, with sewer debt payments spiraling out of control and residents forced to pay sewer rates that have gone up nearly 330% since 1997.

More troubles unfolded when local officials - including Birmingham Mayor Larry Langford - were accused of accepting money under the table in exchange for awarding bonds and swaps businesses when Langford headed the Jefferson County Council. At least two lawsuits also have been filed against banks by taxpayer groups.

In 2007, former Jefferson County Commissioner Chris McNair, who oversaw the county’s sewer department, pleaded guilty to conspiracy and bribery for accepting money from a contractor.

In a related development, Standard & Poor’s Ratings Services recently lowered its rating three notches on some of Jefferson County’s sewer bonds. According to a statement from the agency’s credit analyst, the downgrade reflects the likelihood that the county will be unable to meet its future payment obligations.

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.

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.

When Merrill Lynch - one of the world’s largest brokerage houses - announced plans to sell $31 billion of collateralized debt obligations (CDOs), it put a price tag on the sale at $6.7 billion. Less than two weeks earlier, the Merrill Lynch CDOs had been valued at $11.1 billion.

The value inconsistency of the Merrill Lynch CDOs is troubling on several fronts, a fact that investors are all too aware of. Not only does it create controversy regarding the accuracy of the Merrill Lynch balance sheets but also begs the question of whether the write downs haunting Wall Street will ever be put to rest.

The Merrill Lynch CDO sale was a pivotal moment for the financial world - one that is sending a loud and clear message that the problems plaguing CDOs and other mortgage-backed securities is not liquidity in the market but rather how the underlying assets are being valued by investment firms.

A July 30 article in the Wall Street Journal highlights the increasing difficulty that investors face in deciphering fact from fiction when it comes to the valuations of CDOs touted by Wall Street. “Are executives basing valuations on realistic market prices, rather than a rosy, ‘trust us – these will be good money’ view,” says the story.

Valuing complex, asset-backed securities like CDOs is a tricky and oftentimes convoluted process. That’s because investment firms employ their own statistical models, not market prices, to assign value. And that can spell trouble - in this case, trouble comes in the form of write downs. Investment banks and securities firms have posted nearly $500 billion in losses and write downs after the subprime crisis unfolded last year.

Since then, dozens of Wall Street’s biggest players have dug themselves into the proverbial CDO hole based on the simple fact they failed to acknowledge the true scale of their CDO exposure. Others overvalued their CDO assets so they could prolong the period of time before they eventually had to take the losses onto their books. And still others have simply chosen to believe the market for CDOs will eventually return to normal.

That hasn’t happened, as evidenced by the Merrill Lynch CDO sale, July 29, and its subsequent write down of $5.7 billion. Some analysts predict other financial firms will soon follow Merrill’s lead and rid themselves of their own toxic CDO holdings to free up their balance sheets once and for all. When all is said and done, the extra losses could potentially double the write downs that financial institutions have taken thus far.

The Wall Street Journal article cites the example of Citigroup, which at the end of the second quarter had nearly $30 billion in gross CDO holdings, of which $9.8 billion was hedged. According to the article, a portion of the bank’s net holdings are valued in line with Merrill’s recently announced CDO sales price. But about $14.4 billion are asset-backed commercial paper CDOs valued at approximately 62 cents on the dollar.

Citigroup stands behind the higher value, saying it hasn’t suffered cash-flow losses on the holdings and that they are high quality. However, in a report issued July 30, a Morgan Stanley analyst harshly criticized Citigroup’s pricey valuation, stating the bank may need to reduce the value of the CDOs by an additional 21%.

The same scenario is being played out at Bank of America, which has $11 billion in CDOs backed by subprime mortgages. Of that amount, $5.1 billion are CDOs made up of other CDOs. These are called “CDOs squared,” and are considered the most toxic of debt products. Nonetheless, Bank of America has valued these “CDOs squared” at 35 cents on the dollar, which is far more than what Merrill Lynch received for its higher-grade and better-quality CDOs.

Again, is it any wonder investors are growing more and more leery every time Wall Street talks?

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

Wachovia’s new chief, Robert Steel, delivered a record loss of $8.9 billion for its second quarter, along with plans to slash dividend payouts to shareholders and cut thousands of jobs, disappointing news for the nation’s fourth-biggest U.S. bank.

Wachovia’s net charge-offs - loans it doesn’t believe it can collect - soared to 1.10% of total loans from 0.14% a year ago and 0.66% in the first quarter. Loans nearing default rose to 2.41% from 0.49% and 1.70%, respectively.

Wachovia’s performance results are far worse than what Wall Street analysts originally predicted. Much of the bank’s financial problems stems to the fallout from its 2006 acquisition of Golden West Financial Corp.

At the height of the subprime crisis, Wachovia paid more than $25 billion for the Oakland, California-based lender, which specialized in risky “pay-option mortgages” that essentially allowed borrowers to skip some of their payments.

The Golden West acquisition proved to be an ongoing source of trouble for Wachovia and ultimately cost former CEO Kennedy Thompson his job. In April 2008, Wachovia moved to tighten up its underwriting standards, and last month made the decision to stop offering negative amortization mortgages altogether.

Adding to a disappointing second-quarter are Wachovia’s plans to slash its stock dividend to 5 cents per share from 37.5 cents. The company also will eliminate about 10,750 jobs, as it attempts to become a leaner Wachovia.

In the wake of its earnings announcement, three rating agencies – Moody’s Investors Service, Standard & Poor’s and Fitch Ratings - downgraded their ratings on Wachovia’s debt, citing increased expectations of losses in the bank’s mortgage portfolio and its reduced flexibility to raise more capital.

Things have gone from bad to worse for Wachovia this year. On July 17, Securities regulators from several U.S. states raided the St. Louis headquarters of Wachovia Securities, which is part of Wachovia Corp., seeking documents and records on the firm’s sales practices of auction-rate securities.

Both Wachovia Corp. and Wachovia Securities also are named in a lawsuit filed this past March, which seeks class action status for customers say they were misled about the quality, risk and characteristics of auction-rate securities.

Meanwhile, Wachovia’s $8.9 billion second-quarter loss marks the first time the bank has posted consecutive losses in at least two decades. This time, however, the loss is unprecedented - more than 12 times that of Wachovia’s first-quarter loss.

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.

Profits before quality control - that’s the conclusion of a 10-month investigation by the Securities and Exchange Commission (SEC) into how the nation’s three largest credit-rating firms failed to protect investors because of their reviews of subprime mortgage-backed securities.

SEC Chairman Christopher Cox announced the findings at a news conference on July 8, revealing that the SEC found “serious shortcomings” in the business practices and quality control standards of Moody’s Investor Services, Standard & Poor’s Ratings Services and Fitch Ratings.

The three major rating agencies found themselves under fire earlier this year after having given top credit ratings to securities based on toxic subprime mortgages. When thousands of the securities were subsequently downgraded following the subprime meltdown, the value of the investments plummeted, forcing investment banks and securities firms to take billions of dollars in losses and write-downs onto their balance sheets.

In its final report, the SEC said the rating agencies had struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The report showed that none of the rating agencies examined had specific written or comprehensive procedures for rating RMBS and CDOs.

Moreover, significant aspects of the rating process were not always disclosed or even documented by the ratings firms, and conflicts of interest were not always managed appropriately.

“We’ve uncovered serious shortcomings at these firms, including a lack of disclosure to investors and the public, a lack of policies and procedures to manage the rating process, and insufficient attention to conflicts of interest,” said SEC Chairman Christopher Cox in a press release issued by the SEC.

Last month, the SEC proposed a series of reforms designed to regulate conflicts of interests, disclosures, internal policies, and business practices of credit rating agencies.

• The first segment of the reforms would address conflicts of interest in the credit ratings industry and require new disclosures designed to increase the transparency and accountability of credit ratings agencies.

• The second portion would require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds through the use of different symbols or by issuing a report disclosing the differences.

• The third part of the SEC’s proposed rulemaking would clarify for investors the limits and purposes of credit ratings and ensure that the role assigned to ratings in SEC rules is consistent with the objectives of having investors make an independent judgment of credit risks.

In June, Moody’s, S&P, and Fitch reached an agreement with New York state Attorney General Andrew Cuomo in an attempt to overhaul the firms’ incentives for providing their services.

The SEC report can be viewed in its entirety at:http://www.sec.gov/news/studies/2008/craexamination070808.pdf

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.

Proposed new regulatory changes by the Securities and Exchange Commission (SEC) are likely to come as an unwelcome reality for the nation’s credit rating agencies. The plans, which are expected to be announced June 25, would diminish the importance of credit ratings across various markets, and make ratings serve more as a guide on what investors can and cannot hold.

The SEC’s proposal comes after months of criticism over the workings of the three main credit rating agencies - Moody’s Investor Service, Standard & Poor’s and Fitch Ratings – and, specifically, their handling of the subprime crisis.

For years, critics have questioned the role credit rating agencies play in the nation’s financial markets. Last year, the SEC launched its own investigation into the rating industry when thousands of mortgage-backed securities were downgraded, causing the value of the investments to nosedive and forcing billions of dollars in losses and write-downs at major investment banks and securities firms.

As reported June 23 in the Wall Street Journal, the SEC’s proposed changes would include the $3.4 trillion money-market industry, making it possible for U.S. money-market funds to invest in short-term debt without regard to ratings placed on the securities by credit rating agencies.

Regulators hope the new changes, if approved, will reverse the over-reliance that investors place on ratings, which became evident during the subprime mortgage debacle.

Regulators also rely on ratings. In arranging the sale of Bear Stearns to J.P. Morgan Chase in March, the Federal Reserve reportedly said it would take some illiquid, beaten-down assets from investment banks, but only if the assets were rated highly by the rating firms, according to the Wall Street Journal article.

Meanwhile, in an effort to create more competition in the credit-ratings industry, the SEC recognized a 10th bond-rating firm, Realpoint LLC, on June 22.

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

In a move that many on Capitol Hill say has been a long time coming, the Securities and Exchange Commission (SEC) is now one step closer to tightening disclosure rules for Wall Street’s credit ratings firms and creating much-needed transparency in the $5 billion-a-year industry.

On June 11, the SEC voted 3-to-0 to tentatively approve new rules relating to disclosure requirements and conflicts of interest issues for the nation’s rating agencies.

Beginning last year, the three major ratings firms - Standard & Poor’s, Moody’s Investors Service and Fitch Ratings - found themselves as one of the untold chapters in the subprime story for their failure in identifying risks related to subprime mortgage investments. When the subprime debacle eventually went into overdrive and a rush of homeowners began to default on their home loans, thousands of securities backed by the mortgages were downgraded by the rating agencies, causing the value of the investments to nosedive.

Shortly thereafter, the downgrades became a major factor leading to hundreds of billions of dollars in losses and write downs at major investment banks and securities firms. It was then that Congress and others began to publicly criticize the credit-rating agencies, calling for more federal oversight regarding their relationships with the debt issuers, which pay the agencies to grade their debt.

The SEC’s new rules are an attempt to curtail these conflicts of interest. Among other things, the rules would ban the rating agencies from giving advice to investment banks on how to package securities to secure favorable ratings. Any “gifts” of more than $25 from companies or others that receive ratings to the credit raters also would be prohibited.

In addition, the proposed rules will require the rating agencies to make their ratings publicly available to allow performance comparisons. They agencies also would have to disclose how much research goes into assigning ratings on structured finance transactions.

The SEC’s efforts to make the credit ratings business more transparent is a step in the right direction for Wall Street. As reported in a June 11 article on CNN Money.com, these agencies have a critical role to play as public financial gatekeepers. Their job of assessing the creditworthiness of companies and securities is often a deciding factor in whether a company is able to raise or borrow capital or may determine at what cost securities are purchased by investment banks, pension funds, mutual funds or local governments.

In short, the agencies’ word - i.e. the quality of their grade analyses - should be above reproach.

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.