Archive for the “Student Loan Bonds” Category

Like many states, Hawaii has been hit hard from investments in auction-rate securities. Two years after the market for the instruments collapsed, Hawaii has lost about $250 million in market value on $1 billion in student-loan securities initially sold by a single Citigroup broker as a “cash substitute.” The story was first reported March 4 by Bloomberg.

Hawaii can’t find a buyer for the securities, half of which were purchased eight months before the ARS market crashed from Honolulu broker Pete Thompson.

According to the Bloomberg story, the deal transpired while Citigroup was increasing brokerage commissions and traders were being told to “make sure all hands are on deck” and to “do whatever is necessary” to dispose of auction-rate bonds as signs of the market’s demise began to appear.

Auction-rate securities have been the root of financial problems for hundreds of thousands of individual and institutional investors for more than two years. The nightmare began in February 2008 when the $330 billion ARS market came to a standstill after the Wall Street banks that underwrote the securities abruptly pulled back their support.

Meanwhile, purchasers like Hawaii - which were under the impression that auction-rate securities equaled a cash substitute - have been left with few options. They could sell the instruments but only at a considerable loss.

According to Bloomberg, an end-of-the year valuation from Citigroup showed that securities with a face value of $1 billion were worth about $752 million.

“It was represented to us that these were liquid investments that we could get out every seven to 10 days,” said Scott Kami, an administrator at Hawaii’s Finance Department, in the Bloomberg story.

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.

For many institutional and individual auction rate securities investors, life remains in limbo. Their investments, once touted by Wall Street as liquid as cash, have proven otherwise, leaving investors with no where to turn.

Before the ARS market seized up, municipalities, closed-end funds, student loan companies, hospitals and other non-profit entities issued auction rate securities in the form of preferred shares or as debt instruments to companies and individual investors. Problems in the $330 billion auction rate securities market came to a head in February 2008, when auctions for the instruments stopped trading. Since then, several of Wall Street’s major brokerage firms have taken steps to redeem their clients’ ARS holdings, or face the wrath of state securities regulators.

Some brokerage firms, including Oppenheimer and Raymond James, have not gone this route, however. This means their clients are essentially in the same position as they were a year ago. In other cases, investors’ efforts to retrieve their money through class action lawsuits are coming up short, according to a Nov. 8 article by Gretchen Morgenson in the New York Times. Judges overseeing at least 23 auction rate class actions have dismissed them in recent months, the article says.

A coalition comprised of 25 companies holding approximately $8 billion in frozen auction-rate securities backed by student loans is trying to draw attention to ARS illiquidity and the broader consequences of what will happen if there’s no solution to make good on the investments. The group contends if companies and individual investors were able to cash in their securities, the result would be an immediate $58 billion to $63 billion of economic stimulus. Currently, the coalition is taking its message to members of Congress and the Treasury Department, as well as other leaders in political and financial circles.

Individual investors, however, typically don’t have this kind of clout or resources. For them, filing an arbitration claim against the brokerage firm that initially sold them their auction rate securities may hold the most promise for resolution. As reported in the New York Times article, almost 500 auction-rate securities claims have been filed by investors with the Financial Industry Regulatory Authority (FINRA) since the collapse of the ARS market. A total of 253 are pending; 242 have been closed.

Seventeen claims have gone to a final hearing. Of those, investors won in four cases; a $400 million award was handed down by a panel in one matter. But 146 of the 242 closed cases were settled by the parties involved in the dispute, the New York Times reports. Settlement terms aren’t public, but such deals typically involve refunding much, if not all, of investors’ money, the article says, citing lawyers who handle the cases.

Moreover, as the New York Times points out, some settlements involve “consequential damages” - additional money awarded to cover investors’ costs or investment opportunities they missed because they didn’t have access to their funds.

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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. 

The unexpected liquidation of a popular short-term investment fund managed by Connecticut-based Commonfund has left at least 1,000 colleges nationwide facing a potentially severe financial dilemma. The $9.3 billion Commonfund for Short Term Investments Fund - of which Wachovia Corp. had resided as trustee - served as a checking account of sorts for many institutions, allowing them to pay expenses such as salaries and supplies.

In an email sent to schools on Sept. 29, Wachovia said its decision to step down from its role as trustee of the fund was based on recent market turmoil, which has created havoc on about 20% of the mortgage and asset-backed securities held in the Short Term Fund’s portfolio.

As of Wednesday, participants in the fund were allowed to withdraw about 34% of their money; by the end of the year, the amount increases to at least 57%, with the remaining funds to be available as additional securities reach maturity.

The real problem facing colleges, however, is that as of Sept. 29, virtually none of the non-government securities held in the fund could be sold at par.

The University of Vermont is one of the participants in the Short Term Investments Fund, with nearly $80 million invested. So far, the school has withdrawn $16 million, the maximum allowed. Even though additional withdrawals are forthcoming over the next several months, those amounts won’t be enough to cover the school’s operating costs through the end of the year, according to an Oct. 2 article in the Burlington Free Press. Now, the University of Vermont needs to come up with an alternative source of financing.

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 been a bad week for nearly 1,000 higher education institutions after learning a $9.3 billion fund they had used for years like a checking account to meet payroll and other daily expenses has been frozen. On Sept. 29, Wachovia Corp. broke the news that it was resigning from its role as trustee for the Short Term Fund Investments Fund, leaving college administrators unable to access their money and wondering if or when they will be able to pay their bills in the coming weeks ahead.

Much of the fund’s demise is connected to the freeze in the credit markets, which has impaired the ability of Connecticut-based CommonFund, which manages the fund, to sell the fund’s assets at their face value. For colleges invested in the fund, that means they stand to potentially lose money.

About 85% of the Short Term Fund Investments Fund was invested in “high-quality” commercial paper from blue-chip issuers. The rest, however, was in toxic asset-backed mortgage securities. Now, those assets are estimated to be selling for about 89 cents on the dollar.

Initially schools were told they could redeem only 10% of their holdings in the fund. The amount has since gone up to 33%, with institutions allowed to withdraw at least 57% of their money by the end of 2008. Any remaining funds must be taken in installments, according to an Oct. 2 article in the Wall Street Journal.

For a number of colleges, particularly smaller schools, the reality that they cannot withdraw their entire account balance in the Short Term Fund Investments Fund is devastating. Many rely on the fund as a way to pay for day-to-day operations.

Even more disturbing is the fact that some schools may never recover their full investment in the fund - an investment they thought was safe, conservative and liquid.

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. 

UBS continues to find itself in hot water over auction rate securities. Less than a week after the Swiss-based bank agreed to settle charges by New York Attorney General Andrew Cuomo of auction rate fraud and buy back nearly $20 billion of the securities, UBS is now being sued by New Hampshire securities regulators.

In the first legal action of its kind, the state accuses UBS of hatching an elaborate plan to unload its own inventory of auction rate securities by urging the New Hampshire Higher Education Loan Corp (NHHELCO) to increase the monthly interest rates the loan corporation pays - in some cases to nearly 18% from about 3.4%.

NHHELCO says that following UBS’ advice and raising interest rates to entice more investors winded up costing an additional $25.5 million, forcing the state’s leading issuer of student loans to suspend two loan programs: the alternative student loan program and the federal consolidation loan program.

Reportedly, student loan officials in Vermont and Illinois also believe that UBS used similar tactics to persuade them to temporarily raise interest rates as a way to bring in more investors. To date, neither of those two states has filed related complaints on the issue.

Student loan entities like NHHELCO are major issuers of auction rate securities. In February, investment banks abruptly pulled out of the auction rate market, no longer willing to use their own capital to buy auction rate securities. As a result, many nonprofit student loan lenders have billions of dollars of illiquid auction rate securities outstanding that were underwritten and remarketed by investments banks like UBS and other firms.

As with other state and federal investigations into the role Wall Street firms may have played in the auction rate market’s collapse and their dealings with investors, emails are a central factor in the New Hampshire charges. Specifically, the emails contend that UBS steered NHHELCO into auction rate securities at a time when it knew the market was headed for collapse and the bank’s own auction rate inventory piling up.In one email to colleagues, Ross Jackman, an UBS official, said the following: “Clearly, student loans are the problem pushing us over inventory limits.”

NHHELCO’s complaint is the first legal action to focus on the plight of issuers of auction rate securities.

UBS has 11-year relationship with NHHELCO, underwriting $1.5 billion in auction rate securities.

In the 42-page complaint filed August 14, NHHELCO says UBS’ actions ultimately prevented the New Hampshire lender from raising $70 million to fund 6,500 loans for students. This means many students heading back to college this month - particularly those needing last-minute financing - will find fewer loan options available to them. Meanwhile, NHHELCO is still paying UBS $2.5 million a year in broker fees.

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.

First it was one, then more. Joining Citigroup, Merrill Lynch, UBS is the latest Wall Street investment bank to settle charges levied by state and federal regulators over the inappropriate sale of auction-rate securities. As part of the settlement, UBS agrees to repurchase nearly $19 billion - the largest amount to date - of the frozen securities from investors.

The agreement with UBS is between the Swiss-based firm, the Securities and Exchange Commission (SEC) and regulators in several states, including Massachusetts and New York.

Starting Jan. 1, 2009, UBS will buy back $8.3 billion of auction securities from individual investors, as well as $10.3 billion from institutional clients beginning June 2010. In addition, the firm has agreed to help its institutional clients sell $10.3 billion in securities.

UBS also will pay a fine of $150 million, which is to be split between Massachusetts and New York, both of which accused UBS of misleading clients about the liquidity risks of auction-rate securities.

Resolving its auction rate troubles will not come easy for UBS. Analysts say the firm potentially could be looking at up to nearly $2 billion in write-downs, which is on top of the $37 billion it already has taken.

Prior to the Aug. 8 settlement, UBS had been facing a tsunami of civil charges from securities regulators in multiple states, all accusing UBS of using deceptive marketing practices to pitch auction rate securities to investors as the market neared collapse. Once the market actually did seize up in February, thousands of investors were left holding millions of dollars in illiquid securities - investments they had been sold as cash equivalents.

In July, UBS reached a settlement with the attorney general of Massachusetts in which it agreed to buy back $37 million of auction rate securities sold to 18 Massachusetts cities and towns. One month later, the firm paid authorities in Massachusetts $1 million to resolve claims that it violated Massachusetts law by selling the securities to municipalities.

Despite the Aug. 8 settlement with UBS, Attorney General Cuomo apparently is not ruling out additional charges against select individuals at the firm who are alleged to have orchestrated internal campaigns to sell auction rate securities to unsuspecting investors. According to Cuomo’s complaint filed July 25, at least seven UBS executives sold $21 million of their personal holdings in auction rate securities while continuing to promote the instruments to individual investors. Among those executives is David Aufhauser, UBS’ general counsel, who quit the firm earlier this month.

UBS’ move to settle its auction rate problems follows similar actions taken earlier by Citigroup, Inc. On Aug. 7, the nation’s largest bank agreed to buy $7.3 billion of the securities from individual investors and pay a $100 million fine. Merrill Lynch, which had been sued by Massachusetts Secretary of State William Galvin, followed Citigroup’s lead and is voluntarily buying back about $10 billion auction rate securities starting in January.Â

Meanwhile, the unusual actions taken by Wall Street banks over the past several days to settle charges brought by state and federal regulators are being called unprecedented - and perhaps a strong indication that evidence of deception and fraud was indeed too extensive to deny.

Looking ahead, however, UBS could still face an uphill battle over auction rate securities. Â As reported Aug. 8 on Bloomberg.com, one of the higher costs UBS must address is liquidating the auction securities sold by student loan companies. Less than $3 billion in student loan-backed auction debt has been refinanced, which is minuscule compared with municipal and closed-end funds.

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

After months of financial and personnel setbacks, including state and federal investigations over auction rate securities sales, dismal earnings and the ouster of CEO Ken Thompson, Wachovia Corp. has another issue to weather. As of the close of business on Aug. 7, the North Carolina-based bank officially stopped accepting applications for private, undergraduate student loans.

Private student loans are considered more profitable for banks over federal student loans based on the higher interest rates they carry. At the same time, private loans have greater risks, because there is no guarantee by the government.

Wachovia says it will continue to offer education loans for graduate and professional students, in addition to education loans backed by the federal government.

In recent months, the ongoing credit crunch has prompted a number of lenders to drop out of the business of making student loans. Many student loan companies raise capital by selling auction rate securities, but in February, as fallout from the subprime crisis hit a boiling point, the market for auction securities seized up, making it extremely difficult, if not impossible, for lenders to secure financing for the loans.

Compounding the problem for student lenders is last year’s change to a federal law, which cut interest rates on government-backed loans and drastically reduced the subsidies that lenders make as a profit on student loans.

As of March 2008, approximately 100 lenders had suspended their government-backed student loan programs, with about 30 others leaving the private student lending business altogether. Â In May, the federal government took steps to bolster the student loan market with the Ensuring Continued Access To Student Loans Act, which was signed into law on May 7. Among other things, the Act allows the U.S. Department of Education to buy government-backed loans from student lenders, thereby providing them with additional capital to finance new loans.

Meanwhile, Wachovia potentially has an even bigger issue to face. In July, its securities division was raided by a team of regulators from more than five states as part of a probe into the company’s sales of auction-rate bonds. With news that Citigroup, Merrill Lynch and now UBS agreeing to settle claims of deceiving investors about the liquidity risks of the securities by buying back their auction rate investments, Wachovia could be inclined to follow suit.

At the same time, however, Wachovia is looking at long-term credit problems and losses connected to its high concentration of option adjustable-rate mortgages and other risky investments. Any move to buy back the illiquid auction securities it sold to individual investors could very well put its balance sheets in serious peril.

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 nation’s largest bank, Citigroup, is the first Wall Street firm to plead a deal with federal and state regulators over claims of fraudulently marketing and selling auction rate securities to investors.

Under a settlement with New York State Attorney General Andrew Cuomo and the Securities and Exchange Commission (SEC), Citigroup will buy back approximately $7.3 billion of the illiquid securities from individual investors, charities and businesses with assets of less than $10 million, as well as pay a hefty fine of $100 million. Of that amount, $50 million is civil penalty to New York State, with a separate $50 million civil penalty to the North American Securities Administrators Association (NASAA).

The deal requires Citigroup to purchase the auction rate bonds by the end of February 2009.

Earlier this month, Cuomo and the SEC accused Citigroup of deceiving as many as 40,000 investors by downplaying the risks of auction securities during a time when the auction market was nearing collapse.

Auction rate securities are long-term, interest-bearing bonds issued by municipalities, student loan companies and others. Interest rates on the securities reset at weekly or monthly auctions, where existing investors can sell their auction bonds. In February, however, the $330 billion auction market essentially froze when Wall Street investment banks abandoned their role as a buyer of the securities. As a result, millions of investors were stuck with illiquid securities.

Citigroup is the largest underwriter of auction rate debt.

The decision to buy back the auction securities from investors follows a dismal second quarter for Citigroup, which recorded a $2.5 billion loss because of write downs on subprime mortgages and other risky debt totaling $12 billion. As of last year, the bank has incurred more than $58 billion of write downs and credit losses.

As part of its settlement agreement, Citigroup also must use its “best efforts” to help some 2,600 institutional investors sell roughly $12 billion of the frozen instruments they hold.

For months, state and federal regulators have intensified their probes of Wall Street firms over alleged wrongdoings in the auction rate market. Only hours after the Citigroup settlement was announced, Merrill Lynch - also a target of several investigations - agreed to buy back an estimated $10 billion of auction securities at full value beginning in January. Merrill’s offer is good for one year and, like Citigroup’s agreement, does not apply to institutional clients.

As reported Aug. 8 in the New York Times, the exclusion of institutional investors in the agreements with Citigroup and Merrill Lynch - and potentially other banks to follow - may be a calculated move on the part of regulators in that these investors were sold riskier securities backed by the student loan and mortgage markets and banks may not have the ability to absorb those losses.

On the same day it was announced that Citigroup and Merrill Lynch reached deals to resolve their auction rate charges, Bank of America revealed it had received subpoenas from state and federal regulators regarding its auction-rate securities practices.

Other firms under the glare of scrutiny by state and federal regulators include UBS, Goldman Sachs, Lehman Brothers, JPMorgan Chase, Morgan Stanley and Wachovia Corporation.

Moving forward, if Citigroup follows through and fulfills its commitment to buy back $7.3 billion of auction rate securities from individual investors, it will unprecedented, and one of the largest amounts recovered to date from one company.

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

The auction-rate securities market collapse in February left investors with questions of what to do with their now-illiquid auction-rate investments. So far, no one has come up with a permanent solution, and experts predict that the broken market can never fully return to its former status. In fact, Citigroup, the leading underwriter of auction-rate notes since 2000, proclaimed the future for auction-rate securities to be all but dead.

Auction-rate securities were created more than two decades ago as a way for local and state municipalities, hospitals, student loan companies and others to borrow money for the long term at short-term interest rates and resell the debt at auctions held every seven, 14, 28 or 35 days. Everything ran smoothly - for a while. Problems first started last year, in the heat of the credit crunch, and investors began fleeing the auction market. With no bidders, the investment banks, which previously prevented auctions from failing, started pulling back on their promise to buy the auction securities.

This caused an unprecedented number of auctions to fail, leaving individual investors with long-term securities they could not sell.

It’s not just the wealthy who find themselves out luck from the auction-rate securities fiasco. Small business owners, retirees, families saving for a new home or their children’s college education are in the same predicament. And, in most of the cases, the blame rests firmly with Wall Street for hiding known risks about the auction securities from investors.

Finger pointing aside, investors now want to know their escape options. The short answer: It depends on the type of auction bond investors hold.

Some auction-rate securities that failed six months ago are now trading again. In some cases, issuers such as certain closed-end funds have started to redeem shares, sometimes at par value. Other issuers of auction securities are offering to redeem only some of the outstanding shares, meaning not every share that investors hold will be redeemed.

Many investors, however, are in a far worse situation. Student loan-backed debt continues to be the poorest-performing segment of the auction market - about 99 percent of the public auctions for auction-rate securities sold by student-loan agencies and closed-end funds continue to fail, as do nearly 50 percent of municipal auctions.

For investors who need immediate access to cash, the options unfortunately are few and far between. They can elect to sell their holdings on the secondary market - albeit for a significant discount.

In some cases, investors have been allowed to “borrow” loans from their broker to cover cash-flow needs, using the frozen securities as collateral. Keep in mind, however, electing this option means you will interest and, in some cases, be required to sign a release form stating you do not plan to take any future legal action against the brokerage.

In addition, borrowing against a tax-exempt security could cause investors to lose the ability to deduct interest or a portion of the interest on the margin loan from their income taxes.

Securities regulators are aware of the problems facing investors from the collapse of the auction-rate market, and are looking into the issue. State regulators in 10 states, as well as the Securities and Exchange Commission (SEC) have launched investigations into investors’ claims that Wall Street investment banks failed to disclose the liquidity risks of the instruments to them.

The Financial Industry Regulatory Authority (FINRA), the self-regulatory watchdog of securities dealers in the United States, has created a special section on auction-rate securities and what steps investors can take on its Web site. Visit http://www.finra.org/ for more information.

Meanwhile, one additional option is gaining favor with investors who find themselves caught up in the failed auction rate securities ordeal: legal representation. The growing number of class-action lawsuits filed against brokerages that sold auction-rate securities as cash equivalents has evolved into nothing short of a phenomenon. Across the country, brokers at nearly every major Wall Street firm face legal action for their mishandling of auction-rate securities, and faith in the broker-model becomes just a memory of the past.

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.