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It took nearly five days, a phone call to billionaire investor Warren Buffett and unexpected concessions from Republicans and Democrats alike, but consensus was finally reached Sunday, Sept. 28 on landmark legislation designed to save Wall Street from a total financial break-down. The long-awaited bailout plan, which goes to the House floor on Sept. 29 for a vote, followed a weekend of late-night sessions and seemingly endless in-fighting between both parties and the Bush administration over specific components contained in the historic rescue plan.

The end result is the “Emergency Economic Stabilization Act of 2008” - a $700 billion taxpayer-funded bill that will be remembered as the largest financial bailout in history, as well as one of the most dramatic interventions enacted on the part of the U.S. federal government since the Great Depression.

Highlights of the new proposal - which is still considered in draft form - include the following:

Amount of money: Treasury Secretary Henry Paulson initially requested an up-front sum of $700 billion to allow the government to buy up bad loans from Wall Street investment banks and other financial services firms. The new bill will provide an immediate $250 billion, with the remaining money given to the federal government in installments.

The government also will receive a stake in any company that participates in the bailout program under the new proposal, with the intent for taxpayers to potentially benefit if those companies prosper in the future.

Accountability: Paulson’s initial bailout plan essentially gave the government carte blanche in terms of administering the bailout program. Now, however, an independent oversight board will be established, with members to include Democratic and Republican lawmakers and a special inspector general. Any transactions that the board takes in regard to the bailout funds will be made known to the public.

Executive compensation: The new bill puts strict pay limits on “golden parachutes” for executives whose firms seek help through the bailout. Certain tax breaks for companies also will be removed if they benefit from the bailout. In addition, the bill requires that unearned bonuses for executives be returned.

Homeownership preservation: The new bill requires the U.S. Treasury to modify troubled loans wherever possible in order to help families keep their homes. The bill also directs other federal agencies to modify loans that they own or control.

Number of pages in bailout proposal: The first proposal was a mere three pages in length. The new version spans a total of 106 pages.

In announcing the agreed-to bailout plan at a 5 p.m. EST press conference on Sunday, Senate Banking Committee Chairman Chris Dodd called the occasion a “sad day,” adding that the impetus for the legislation “wasn’t a phenomenon or an act of God, but rather the result of excesses and irresponsible and reckless behavior on the part of Wall Street.”

The rescue bill now heads to House of Representatives on Monday morning, with the Senate to vote on it by Oct. 1. President George W. Bush is expected to sign the bill into law shortly thereafter.“

Emergency Economic Stabilization Act of 2008” can be read in its entirety at: http://www.house.gov/apps/list/press/financialsvcs_dem/press092808.shtml

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.

Comparing the country’s financial crisis to an “economic pearl harbor,” billionaire investor Warren Buffet is backing U.S. Treasury Secretary Henry Paulson’s $700 billion proposal to bail out Wall Street and rid financial institutions of toxic mortgage-related debt.

Buffet also is buying a $5 billion stake in Goldman Sachs, a company in which Paulson - who reportedly is worth some $700 million - served as chairman and chief executive officer until taking his federal post in 2006.

On Tuesday, Paulson began another day of intense grilling by Senate Banking Committee members, as he fervently tried to sell them on his bail-out plan for the nation’s wrecked financial system. His proposal potentially could cost every man, woman and child in the United States $2,300, according to Reuters.

As for Buffett’s announcement to put $5 billion into Goldman Sachs, the news lifted the company’s shares nearly 7%. Over the past year, shares have fallen more than 40% in value.

Buffett’s cash infusion into Goldman entails his investment company, Berkshire Hathaway, buying $5 billion worth of perpetual preferred stock via a private offering. Buffett will then receive a 10% dividend, plus warrants to purchase $5 billion of common stock at a strike price of $115 a share.

Meanwhile, angry protestors are continuing to march in front of the New York Federal Reserve this week, with banners proclaiming: “Bail out Main Street, not just Wall Street.”

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.

Only 48 hours after the federal government refused to be a financial backstop for Lehman Brothers, U.S. Treasury Secretary Henry Paulson announces at 9:02 p.m. EST Tuesday evening that the Federal Reserve will take over American International Group (AIG). In exchange for providing an $85 billion bridge loan to the ailing insurance giant, the federal government will receive an unprecedented 79.9% stake in the company.

The Fed’s decision to rescue a private business is nothing short of historic. Previously, Treasury Secretary Paulson had been adamant in saying Wall Street must solve its own problems. With no private-sector support forthcoming for AIG, however - and its potential bankruptcy considered too damaging for the nation’s already battered financial markets - the government had no alternative but to provide a bailout.

Its decision is a costly one. As reported Sept. 16 in the New York Times, AIG initially approached the Federal Reserve and the U.S. Treasury on Sunday, Sept. 14, seeking a $40 billion bridge loan to prevent additional downgrades to its credit ratings. The Fed’s response was a resounding “no.” Two days and two debt downgrades later, the price tag for the bail out went up to $85 billion.

AIG, which is the nation’s biggest insurer, has more than $1 trillion in assets, 74 million clients in 130 countries and 103,000 employees. Its demise potentially could have cost the financial industry $180 billion, according to Bloomberg, in that AIG provides insurance on more than $441 billion of fixed-income investments held by the world’s major institutions, including nearly $60 billion in securities connected to subprime mortgages.

As part of its deal with the federal government, AIG will sell various business assets to repay the $85 billion loan, which is due in 24 months.

In recent weeks, AIG has been caught in a downward financial spiral. With mounting losses on sales of credit default swaps and subprime mortgage-backed securities holdings, the insurer has seen its shares plummet more than 95% this year, closing at less than $4 on Sept. 16. Aggravating AIG’s financial troubles still further was a decision by Moody’s Investors Service and Standard & Poor’s to cut the insurer’s credit ratings on Sept. 15, which required AIG to post billions of dollars of additional collateral for its mortgage derivative contracts - money the insurer was sorely lacking.

Like a number of institutions to falter lately, poor management decisions played a central role in AIG’s financial issues. After two quarters of record losses from overexposure to toxic mortgages, Martin Sullivan, then-CEO, was ousted in June. The company also is the subject of an investigation by the U.S. Securities and Exchange Commission (SEC) on whether it overvalued the derivatives responsible for more than $20 billion in write-downs.

In 2005, Maurice R. Greenberg, who built the AIG empire and ran the company for nearly 40 years, was forced to retire amid an accounting scandal. The case against him is still pending.

On Sept. 11, 2008, a $115 million settlement was reached in a lawsuit by AIG shareholders against former AIG executives. Specifically, a Louisiana pension fund alleged that hundreds of millions of dollars in commissions were paid by AIG to C.V. Starr & Co., a privately held company controlled by former AIG CEO Maurice Greenberg and other AIG executives.

Now AIG’s current CEO Robert Willumstad is on his way out, and will be replaced by Edward Liddy, former CEO of Allstate Corporation. Under the terms of Willumstad’s contract with AIG, he could receive an exit package worth as much as nearly $9 million.

Meanwhile, American taxpayers now own an 80% stake in yet another company whose failings are the direct result of poor management, lack of corporate governance, and continued bad bets on highly risky investments.

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.

Hit hard by the subprime crisis fallout, Asset Management Fund’s Ultra Short Fund is going the way of a number of ultra short bond funds this year: down the tubes.

Pitched as a conservative, low-risk investment that mimics the safety of money-market funds, the AMF Ultra Short Fund proved to be the opposite for investors. Heavily invested in toxic subprime-backed securities - in this case, hybrid adjustable rate mortgages (ARMs) - the fund plummeted in value when things began to go haywire in the housing market.

Most unsettling to irate investors who put their money into the AMF Ultra Short Fund is the fact that it did not begin to truly decline in value until May 2008, yet until that time, its managers - Shay Assets Management, Inc. - continued to invest heavily in the risky hybrid ARMs.

A hybrid ARM offers a combination of adjustable-rate and fixed-rate features. For an initial period - typically one to three years - it carries a fixed rate, followed by rate adjustments once every year for the balance of the loan term. Many people who sign up for hybrid ARMs do so to reap the benefits of the fixed-rate period. However, at the end of the fixed-rate period, many of these same homeowners are unprepared to see their monthly mortgage payment jump upwards of 30 percent or more.

In its product literature, AMF Asset Management describes its Ultra Short Fund as designed to provide current income with a very low degree of share-price fluctuation. Instead, the fund has declined more than 15% this year.

Several investors who suffered losses in the AMF Ultra Short Fund are going to court, charging the fund’s managers and AMF with not only misrepresenting the fund but also for knowingly keeping information from them about the concentration of risky mortgage-backed securities that the fund contained.

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.

Shares of Fannie Mae and Freddie Mac fell to their lowest levels in more than 17 years on Friday, July 11, amid growing concerns that a government bailout plan was part of the mortgage giants’ future.

Fannie Mae and Freddie Mac control nearly half of the entire mortgage market in the United States. Speculation of a government takeover has sent the companies’ publicly traded shares in downward spiral this week. Fannie Mae’s stock fell to $10 at the end of the day on July 11; last year, at this time, it was trading at approximately $70.

Shares of Freddie Mac closed at $8.05, after falling to an earlier low of $3.89.

Earlier in the day, Treasury Secretary Henry Paulson tried to play down fears that a government takeover was imminent, but his reassurances had little impact. If such action does happen, however, it would be unprecedented - and costly. Shareholders would likely be wiped out, with the losses on the home loans that Fannie Mae and Freddie Mac own or guarantee - half of all U.S. mortgages - paid by taxpayers.Â

In a news conference, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) also tried to calm fears regarding the financial state of the two mortgage companies, suggesting they could be given access to Federal Reserve’s emergency lending program. The program, which was created in March as part of the Fed’s role in facilitating the purchase of Bear Stearns by JP Morgan Chase, provides direct loans to investment banks at a discount.

Who Are Fannie Mae and Freddie Mac?

Fannie Mae, short for Federal National Mortgage Association, and Freddie Mac, short for Federal Home Loan Mortgage Corporation, are shareholder-owned companies mandated by Congress to provide funding to the U.S. housing market.

Fannie Mae was founded in 1938. Until 1968, it was a government sponsored agency. Freddie Mac was established in 1970. Fannie Mae and Freddie Mac do not lend directly to homebuyers; instead, they buy mortgages from approved lenders and then sell them to investors.

The financial health of Fannie Mae and Freddie Mac is critical because of the momentous role they play in the U.S. housing market. The companies hold or guarantee more than $5 trillion worth of mortgages - roughly half of the $9.5 trillion debt of the United States. If one or both of the companies were to fail, it could unleash untold damage on the country’s financial system and the broader economy.

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 several months, rumors have been percolating that Lehman Brothers Holdings could be teetering on the verge of becoming the next Bear Stearns. Speculation over troubles at the nation’s fourth-largest investment bank reached a near-boiling point in early July when rumors leaked that some of Lehman’s biggest trading partners had plans to scale back their business with Lehman. Both of the firms in question - Pacific Investment Management Co. and SAC Capital Advisors LLC - denied the claims and issued statements to that effect.

Nonetheless, Lehman, like every other Wall Street firm, is vulnerable. Rumors, after all, played a major role in bringing on the near collapse of Bear Stearns in March - a situation that ultimately created an unprecedented move by the Federal Reserve to facilitate an 11th hour sale of the 85-year-old company to JPMorgan Chase.

In Lehman’s case, however, there certainly seems to be some uncanny similarities to Bear Stearns in the works.

Concerns about Lehman’s liquidity and leverage came to light in June, after the Wall Street bank reported a larger-than-expected $3 billion loss in its second quarter from exposure to subprime mortgages and other credit derivatives. On July 11, Lehman’s already battered shares plummeted to a 10-year low, falling as much as 21% as unfounded rumors circulated that some of its trading partners were cutting back their dealings with Lehman. Year-to-date, Lehman’s shares are down 73%.

Following the dismal second-quarter loss, Lehman announced key leadership changes within the company, demoting Erin Callan - one of the highest profile female executives on Wall Street - from the position of chief financial officer and Joseph Gregory from the chief operations officer post.

Adding to Lehman’s credibility problems was news that spreads on its credit-default swaps had widened as much as 40 basis points on July 10, a sign that traders were requiring higher returns on insurance against the possibility of bankruptcy.

More fuel to the rumor fire for Lehman turned up courtesy of comments from Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson, both of whom testified before the House Financial Services Committee that the government’s proposed overhaul of regulators will help increase oversight but doesn’t guarantee financial institutions are too big to fail.

Whether or not Lehman Brothers is indeed headed down a path reminiscent of Bear Stearns remains to be seen. But as was witnessed in the case of Bear Stearns, when the lines between perception and reality become increasingly blurred, anything can and will happen.

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.

Investors in auction-rate securities have quickly discovered that all things are not created equal. While the dark clouds surrounding auction rate securities are slowing lifting for investors in auction-rate securities sold by municipalities or closed-end mutual funds, investors who own any of the $85 billion of auction debt backed by student loans continue to face a perpetually stormy forecast.As reported in the May 28 issue of Business Week, student-loan-backed auction-rate bonds have ended up as one of the worst-performing areas of the auction bond market. Trading for as little as 75 cents on the dollar in limited secondary market trading, investors in these securities have taken huge losses on what they thought were low-risk, cash-equivalent investments.

The main problem facing investors who hold student-loan-backed debt is that the government-run and private student loan lenders responsible for issuing the securities do not have the ability to generate additional financing to redeem their bonds at par. Moreover, the penalty rates on many of the student-loan-backed auction bonds have temporarily fallen to 0% and by law, the trusts that issue student-loan-backed bonds cannot pay out more than they receive as interest payments from borrowers.

How It Began

Auction-rate securities - which are long-term bonds sold by issuers such as municipalities, student loan companies, hospitals and closed-end funds - have interest rates that reset every seven, 14, 28 or 35 days. For decades, the auction-rate market operated relatively smoothly, with only 13 auction failures reported between 1984 through 2006.

In February 2008, however, everything changed. The credit ratings for the bond agencies responsible for backing the auction bonds were unexpectedly downgraded. In turn, new investors were no longer willing to bid in the auctions, leaving existing investors holding securities for which there were no buyers. The Wall Street investment banks, which once prevented the auctions from failing by stepping in with their own capital to buy the bonds, pulled back their support entirely.

Following the collapse of the auction-rate market, a number of “rescue plans” were put in motion. Some municipalities began redeeming or announcing plans to redeem more than $60 billion of the $165 billion of auction-rate bonds they issued. Closed-end fund issuers also began making some headway, redeeming about 23 percent of the auction-rate preferred stock shares they have backed.

As for student loan issuers - and the investors holding the student-loan-backed debt - the picture remains grim. Thus far, only the Missouri Higher Education Loan Authority (MHELA) has announced a rescue plan, according to the Business Week article. Reportedly, MHELA has plans to buy back approximately $30 million of its $3.5 billion of outstanding debt at a discount.

Meanwhile, investors who hold student-loan-backed debt can only sit and wait. To date, almost all of the auctions in the student-loan auction rate market continue to fail and only $1 billion of the $85 billion outstanding has been refinanced. For now anyway, it appears these investors are permanently sucked into the auction-rate vortex - and have little chance of getting out.

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

The financial woes haunting the nation’s financial markets are far from over, predict Morgan Stanley analysts. On Monday, the company advised clients to “sell the rally” in financial stocks, as it slashed forecasts for big bank earnings and warned that the credit crunch is just beginning.

In aggregate, Morgan Stanley reduced its estimates for 2008 large bank earnings by $17 billion, or 26 percent, and reduced 2009 forecasts by $13 billion.

The investment bank forecast higher loan losses and expenses, saying profits could fall even further if the Federal Reserve stops lowering interest rates. Analysts led by Betsy Graseck wrote in a report that “more capital hikes and dividend cuts (are) coming as our credit deteriorates and forward earnings decline.

“We think we are only in the third inning of the credit cycle and expect this credit cycle will be worse than (the slump in) 1990-91.”

Many on Wall Street have believed that the markets are closer to the end of the current mortgage and corporate credit crisis than to the beginning. The latest forecast by New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value, means the light at the end of the credit-crisis tunnel may not be as bright as we first thought. The turmoil of the markets is here to stay for now.

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 an effort to raise cash, Lehman Brothers recently repackaged $2.8 billion of unsold loans into bonds, using some of the securities as collateral to borrow from the Federal Reserve. The bank transferred loans that included some risky leveraged buyout debt into a new investment entity - called Freedom - which then issued securities. About $2.26 billion of the securities were rated investment-grade.

The move has some market observers questioning if Lehman took unfair advantage of the Fed, which following the collapse of Bear Stearns has allowed investment banks unprecedented access to cash.

Skeptics also argue that Lehman’s actions are eerily reminiscent to subprime lending in which risky securities were repackaged into “safe” investments. The safe investments, of course, plummeted in value when the housing bubble burst.

Moreover, with their balance sheets already strained, banks could become more inclined to take on additional risks if they believe the Federal Reserve will come to their rescue.

Regardless, the latest actions by Lehman Brothers may very well signal just how far the Federal Reserve is willing to step out of the box as it tries to restore profitability financial markets.

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

Are you investing in conservative U.S. bond funds?  Watch out for “credit default swaps”— basically a futures contract influenced by whether the bond issuer’s credit rating increases or decreases. Although part of many bond fund portfolios, credit default swaps aren’t subject to strict regulation by the Securities and Exchange Commission. In addition, many bond funds neglect to include details of the related risks in their prospectuses.

Credit default swaps help fund managers realize a slightly higher yield – but with significant risks. First, if the bond issuer defaults, the fund must pay for the loss. In some cases, that means selling other assets that negatively impact the fund’s overall performance. Second, because the price of credit default swaps is based on a “fair value estimate,” the full cost may not be recouped when sold. This makes the stated value of credit default swaps inherently unreliable and pulls the bond fund’s overall Net Asset Value into question. Finally, if the firm on the other side of the transaction, the “counter party,” runs into financial problems, they may not be able to pay the premium for bond insurance.

Because of these risks, credit default swaps can cause major issues with a bond fund’s share price. The higher the percentage of credit default swaps, the greater the risk. Bond fund investors need to examine the level of credit default swaps permitted in their funds, as well as how the fund’s manager handles the associated risks. Funds that neglect full disclosure or appropriate management could be liable for losses.

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