Archive for the “Structured Investment Vehicles (SIV's)” Category

Securities regulators in New Hampshire have accused a unit of UBS AG, Switzerland’s largest bank, of recommending unsuitable investments to customers who put their money into complex securities underwritten by Lehman Brothers Holdings, Inc.

According to the New Hampshire Bureau of Securities Regulation, UBS allegedly represented the securities as “safe” investments to clients, guaranteeing them “principal protection.”

As it turns out, following the September 2008 bankruptcy filing of Lehman Brothers - which is the largest in U.S. history at more than $600 billion in debt - many of these same investors will likely lose the majority of their supposed principal-protected investment. Additionally, New Hampshire regulators also contend UBS failed to warn investors about the potential risks of the structured finance products once Lehman itself began to experience financial troubles.

As reported June 4 by the Wall Street Journal, New Hampshire regulators filed the civil complaint against UBS on Wednesday, June 3.

In a statement, Jeff Spill, New Hampshire’s deputy director of securities regulation for enforcement, said UBS presented “the structured notes as simple, safe investments when in fact they are highly volatile and are subject to shifting market conditions.”

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

Structured finance products - the so-called safe alternative to riskier derivatives such as credit default swaps and collateralized debt obligations - were supposed to deliver healthy profits to investors, offering them an array of investing opportunities that carried minimal risks. Brokers eagerly pushed the instruments, wanting to cash in on the big commissions attached to their sales. Unfortunately for investors, a number of structured finance products failed to live up to their hype in 2008, with many suffering massive losses because of their ties to the financial health of troubled companies like Lehman Brothers Holdings.

As reported May 27 in the Wall Street Journal, structured finance products could be making a surprise comeback on Wall Street. According to the article, some brokers apparently are ramping up their efforts to sell the complex products to investors while they once again highlight their supposed safety factor as a key benefit.

Investors, however, might not be so eager to jump on the structured products bandwagon this time. Many are still reeling from last year’s debacle involving structured finance products, specifically reverse convertibles and principal protected notes. The latter investment in particular was responsible for causing millions of dollars in losses for investors after Lehman Brothers Holdings filed for bankruptcy protection in September 2008.

Two investors who poured their money into the Lehman principal protected notes were Jimmy and Jay Wang. According to the Wall Street Journal story, the brothers invested almost $70,000 in the notes - investments they thought to be one of the safest structured products available on the market. At least that’s how the instruments allegedly were described to the Wangs by UBS Financial Services, which sold them the notes.

Ultimately, following Lehman’s bankruptcy, the Wangs lost the majority of their investment in the Lehman principal protected notes. The two men have since filed an arbitration complaint with the Financial Industry Regulation Authority (FINRA) against UBS in an attempt to recover their money.

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.

A SIV-lite investment fund called Golden Key has turned out to be anything but golden.  Now investors are facing losses totaling hundreds of millions of dollars after the fund, initially promoted by Barclays Capital as a “super-safe” and “desirable” investment with triple AAA credit ratings, ultimately was reduced to junk status.

Created by Barclays and managed by Swiss-based Avendis Financial Services, Golden Key is a type of structured investment vehicle (SIV) that issues cheap commercial paper to buy higher-yielding assets - assets that typically are backed by risky subprime- related securities.

Barclays is now facing several lawsuits over the demise of Golden Key, including one from Oddo Asset Management, a French money manager, who says the UK bank used Golden Key as a dumping ground to move toxic investments out of its own accounts into those held by outside investors, namely Golden Key and another SIV-lite fund called Mainsail. The transfer of the toxic mortgages into the two SIV-lites occurred just as another division of Barclays was facing massive losses from its investment in two Bear Stearns hedge funds that ultimately collapsed last year.

Both Golden Key and Mainsail imploded in the summer of 2007 when they became unable to service their own debt. At the time, Mainsail had more than $2 billion of assets and Golden Key managed $1.8 billion. As for investors, they have been unable to withdraw funds from Golden Key ever since the vehicle hit a wall over restructuring plans with creditors. In April 2008, Golden Key was placed into receivership with Deloitte.

The concept of SIV-lites was the brainchild of Edward Cahill, a former manager of collateralized debt obligations (CDOs) at Barclays. Ironically, Cahill left the company in August 2007, right before two SIV-lites that he and his team created - Golden Key and Mainsail - had their ratings slashed to junk status by Standard & Poor’s.

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 problems facing structured investment vehicles (SIVs) continue to rage on. The structures have been hit hard in the turmoil sweeping the credit markets from their lack of access to funding and a massive decline in the value of the assets they hold.

Now, Moody’s Investors Service has announced that HSBC Holdings Plc and American International Group Inc. (AIG) are among those facing possible downgrades on $3 billion of SIVs. The cuts would affect capital notes, the lowest ranking debt, issued by HSBC’s Asscher Finance, WestLB’s Harrier and Kestrel, Bank of Montreal’s Links Finance, Banque AIG’s Nightingale Finance and Societe Generale’s Premier Asset Collateralized Entity.

Reportedly, holders of this type of debt are not likely to benefit from any type of restructuring proposal.

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

When subprime loans go into default, the value of the CDO holding interest in the loans and the credit-worthiness of the SIV that holds the CDOs plummets. As a result, money funds have pulled back their investment in SIV commercial paper, leaving SIVs unable to finance new investments or meet current debt obligations.

All six of the capital notes under review by Moody’s already have been rated in the “junk” category, between Ba2 and Caa3.

In announcing the potential cuts, Moody’s said its actions reflected “further deterioration in the market values of SIV portfolios, and the limited benefits to capital notes of the various restructuring proposals implemented by bank sponsors.

Meanwhile, as reported in an April 24 article on Bloomberg.com, SIVs with at least $31 billion of debt have defaulted in the past nine months after investors stopped buying their notes because of the subprime toxicity surrounding them.

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

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

Unfortunately, risk comes in many forms.

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

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

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

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

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

Auction-rate securities have officially joined the same club whose members include “subprime” and “SIVs,” among others.

Since February, the $330 billion auction-rate securities market has been in a state of collapse, following one failed auction after another because there were no bidders to buy the securities.

It appears help may now be on the way for individual investors and small businesses. On April 1, the Financial Industry Regulatory Authority (FINRA) released guidelines to help investors address cash-flow concerns. Among the suggestions: Investors could sell the securities to other secondary markets or borrow against the value of the holdings from their brokerage firms.

The caveat to this is the tax consequences that investors could face when taking out margin loans. Moreover, it is possible - make that very possible when considering how the auction-rate securities market got to its current state in the first place - the brokerage firms could sell an investor’s securities to meet a margin call without informing them beforehand.

In other auction-rate securities news, UBS AG announced plans last week to mark down the values of auction securities on its customers’ brokerage statements. Reportedly, the mark downs will be anywhere from a few percentage points to more than 20 percent.

News of UBS’ decision, which is the first confirmation that auction-rate securities have, in fact, beaten down investors’principal holdings, caused a stir with some issuers of the bonds. Some municipalities that were facing higher penalty interest rates from failed auctions are now refinancing or placing bids in their own auctions.

Whether the recent help from Wall Street makes any real difference to the thousands of auction-rate securities investors who are unable to withdraw their money from frozen accounts is yet to be seen. It could be a situation of too little, too late.Â

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.

JP Morgan’s recent filing of detailed information on the valuations of specific structured credit securities held by itself and other banks with a court in Canada caught many off guard. Perhaps the biggest surprise to come out of the filings was that some subprime mortgage-linked securities issued by groups like UBS have lost almost 95 percent of their value.

The financial community has typically kept this kind of information under wraps. It became public only now because JP Morgan is spearheading an effort to restructure a group of 20 Canadian structured investment vehicles that issued $32 billion of asset-backed commercial paper.Â

The filings revealed bad news for other securities, as well, showing that some lost almost a third of their value, despite the fact that many were considered low risk and carried top ratings from the credit ratings agencies.

According to a March 23 article in Financial Times, the price estimates will no doubt garner the attention of auditors and regulators alike, particularly since they come at a time when the issue of security pricing is under fire. Banks are feeling the heat from regulators to book the losses they’ve incurred on the instruments. But because trading has dried up in many corners of the credit markets, it’s difficult, if not impossible, to compare prices for these instruments between banks.

For their part, regulators and investors are afraid that the banks are still varying in the degree to which they have recorded losses on their credit instruments in recent months, not to mention how hard it is for auditors to compare internal estimates with external benchmarks, according to the Financial Times story.

The worst of this storm is far from over. And, the ultimate implications for the broader economy continue to change by the day.

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

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

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

Why the concern with structured investment vehicles?

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

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

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

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

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