Investment Fraud Lawyer Blog

Economists have become pessimistic about the U.S. economy and fear a recession in the coming months.

On April 21, the National Association for Business Economics (NABE) said that the 109 members who responded to its quarterly survey were “notably downbeat” about their first-quarter experience as well as near-term prospects. Other economists warned the nation's homebuilders that the sinking sector may not hit bottom for another year.

"For the first time in five years, reports of falling profit margins outnumbered reports of rising margins in the first quarter of 2008, while demand . . . grew more weakly than at any time since the recession of 2001," said Ken Simonson, chief economist for Associated General Contractors of America.

Continue reading " Economists Pessimistic, Recession Expected " »

According to news reports yesterday and today in both Bloomberg.com and the Financial Times, Standard & Poor’s has lowered its assumptions for the amount of money investors will receive after defaults of subprime mortgage bonds that are part of Collateralized Debt Obligations (CDOs). This is generally regarded as a sign that S&P may be preparing to downgrade even more CDOs. The CDOs covered by this revision are at least 40% invested in subprime mortgage backed bonds.

S&P revealed that, under its new recovery assumptions, any class rated A or lower would likely suffer 100% losses and the losses on AA-rated slices would be 95%. The junior AAA-rated tranches expect to lose 65% and even the riskless super-senior AAA tranches will suffer losses of 40%.

More than 4,000 of these CDOs have been downgraded this year – amounting to about 90% of all CDO downgrades. Further ratings cuts by S&P – on top of the $351 billion in cuts over the past year – may push investment banks such as UBS and Citigroup to sell CDO debt rather than wait for demand to recover. S&P is currently reviewing the ratings of $16.3 billion in CDOs with a “a high likelihood of downgrade.”

Continue reading " S&P Predicts Massive CDO Losses " »

Noted Yale University economist Robert Shiller, who predicted the housing market bubble, recently warned in a speech at the New Haven Lawn Club that the housing slump is likely to cause prices to fall more than they did during the Great Depression. He further predicted that bailouts will be needed to stop millions from losing their homes.

Shiller is one of the pioneers behind the Standard & Poor’s/Case-Shiller home price index. The index is seen as a solid measure of home prices because it examines changes in the price of the same property over time versus calculating the median price of homes sold during a particular month.

Continue reading " Housing Slump Possibly Exceeding That Observed During The Great Depression " »

Bondholders usually do better than most other creditors in bankruptcy proceedings. The upcoming wave of bankruptcies is unlikely to be kind to such bondholders. They already face limited recoveries from companies that filed for bankruptcy.

According to Caroline Salas on Bloomberg.com on April 23, however, New York-based Fitch Ratings reports that, instead of receiving the historical average recovery of 42 cents on the dollar, in a default situation, bondholders of a third of high-yield, high-risk bonds rated B+ or lower may receive no more than 10 cents on the dollar. Another 22 percent are likely to only get 11 to 30 cents.

“When leverage was so ample, private equity firms were able to buy companies at multiples that didn't make sense,” said James Keenan, who is co-head of leveraged finance at BlackRock Inc. “Most people use the assumption senior unsecured bonds are going to recover 40 percent. I don't think you're going to see that,” Keenan advised.

Continue reading " This Time Around, Bondholders May Only Get 10 Cents On The Dollar " »

Ralph R. Cioffi, the former manager of the two Bear Stearns hedge funds whose collapse last year triggered the credit crisis, is the prime suspect in investigations by the Justice Department and the SEC as reported recently by BusinessWeek.com.

The investigations are proceeding on two fronts: first, whether Cioffi and his team deliberately misled investors about the funds' health; and second, whether Cioffi and his team placed false values on collateralized debt obligations (CDOs).

The issue of CDO valuation – valuation based on internal models rather than actual market values – had been controversial ever since the CDO market collapsed in 2007. The BusinessWeek.com article contained the following quote: "If the valuations become a criminal issue [for] Bear Stearns, it would send a warning shot across the bow of every firm that marketed these exotic products," said Steven B. Caruso, an attorney representing several Bear investors who is part of the coalition representing subprime investors in which Page Perry participates.

Continue reading " Former Bear Stearns Manager Is The Prime Subprime Suspect " »

Recent actions by Charles Schwab in offering money to investors in its Yield Plus Bond Fund are tantamount to an admission that the fund was misrepresented to investors. Schwab had marketed the Yield plus Fund as a safe, conservative short-term bond fund that was a cash equivalent and offered low volatility. It was pitched as an alternative to a money-market fund. Yet the Yield Plus Fund has lost approximately 20% of its value over the past year.

With a marketing description such as that, it is obvious that Schwab routinely recommended the Yield Plus Fund to investors whose objectives were safety and preservation of capital. The Yield Plus Fund, however, was heavily invested in mortgage-backed securities and was clearly not a safe investment. The fund’s asset base peaked last year at $13.5 billion and had dropped to $1.5 billion earlier this month. The fund has had such poor results that even the Schwab Charitable Fund has withdrawn donor investments from the Yield Plus Fund.

Continue reading " Schwab Admitting Responsibility For Mis-Marketing Its Yield Plus Fund? " »

While the sudden collapse of the auction-rate securities market was a surprise for individual investors and their financial advisors, it seems that Wall Street firms were aware of potential problems with the student loan auction-rate market months before the market freeze occurred in February 2008. According to a report by Ian Salisbury in The Wall Street Journal, broker–dealers such as UBS, Citigroup and Bank of America requested in late 2007 that student-loan authorities issues waivers that would make these auction-rate securities easier to sell.

Such a behind-the-scenes move clearly demonstrates that Wall Street firms were struggling to keep the auction-rate market afloat for months before the existence of the problems became public knowledge. In other words, the firms knew of the upcoming storm and kept the investing public in the dark. This conduct raises serious questions of what exactly Wall Street firms were telling their clients about the emerging risks in the auction-rate markets. As often happens, Wall Street firms found themselves with conflicted loyalties between the issuers and the investors. In this case, Wall Street chose to work with the issuers and not the investing public.

Continue reading " Wall Street Firms Hid Auction-Rate Securities Market Problems From Public For Months " »

Two of the worst performing bond mutual funds have fired their in-house manager in favor of an outsider. On April 21, Morgan Asset Management Inc., a unit of Regions Financial Corp., announced that it had been relieved of its responsibility to oversee seven bond mutual funds. All the funds were previously managed by James Kelsoe.

Hyperion Brookfield Asset Management Inc., a unit of Brookfield Asset Management Inc., which manages $22 billion, will manage the portfolios going forward and a new board of directors will be nominated. Hyperion Brookfield is not entirely a stranger to the funds; it had been serving as an independent valuation consultant.

Continue reading " Seven Morgan Keegan Funds Get New Manager " »

On April 23, The Wall Street Journal reported that the Securities and Exchange Commission has refused a congressional request to disclose why the investigation into Bear Stearns was dropped. The purpose of that investigation was to determine if the firm harmed investors by improperly valuing complex debt securities.

In a letter dated April 2, the ranking member of the Senate Finance Committee, Senator Charles Grassley, requested details from the SEC about the circumstances surrounding the Bear Stearns probe. The SEC cited confidentiality in refusing to provide any details about its decision regarding the investigation. "The Commission does not disclose the existence or nonexistence of an investigation or information generated in any investigation unless made a matter of public record in proceedings brought before the Commission or the courts," SEC chairman Christopher Cox explained.

Continue reading " Bear Stearns Probe Abruptly Ended By SEC " »

In an effort to stave off an exodus of wealthy clients, Citigroup recently pumped $661 million into six troubled hedge funds. The bank also devised a restructuring plan that would potentially enable investors to recoup some of their money. By requiring investors to agree that they will not sue as part of the restructuring plan, the bank is trying to “sweep the mess under the mat,” one securities attorney warned.

Sold under the brand names “ASTA” and “MAT,” the six hedge funds used extensive leverage to buy municipal bonds. Approximately $8 for every $1 raised was borrowed by the fund. When the municipal market collapsed in February, the hedge funds tanked. Despite Citi's emergency cash infusion, the funds are down 60 to 80 percent.

Citi’s hedge fund demise follows a plunge by another group of highly leveraged funds that it also managed, $1 billion Falcon Strategies. Late last year, the Falcon funds fell more than 30 percent after making a series of bad bets on the mortgage market. Declines have continued into 2008.

Continue reading " Where Will Citigroup Brokers And Wealthy Clients Go? " »

In the aftermath of the subprime crisis and resulting credit crunch, Congress is encouraging the SEC to increase its policing of the ratings agencies (Fitch, Moody’s, and Standard & Poor's). The ratings agencies have come under severe criticism since they were forced to downgrade thousands of mortgage-related investments after making overly optimistic initial calls about the quality of such investments.

The ratings agencies have been accused of having serious conflicts of interest which influenced them into giving unduly favorable ratings to many mortgage securities. Critics have suggested that the agencies’ ratings were affected by their direct involvement in structuring many of the very securities that they were rating and by the huge fees paid to them by the issuers of the securities. These accusations seem supported by recent articles in The Wall Street Journal which have reported that Moody's, on occasion, switched ratings analysts from specific deals at the request of the Wall Street firms and altered its approach on certain deals after the Wall Street firms complained.

Continue reading " Congress Is Concerned About The Ratings Agencies' Conflicts Of Interest " »

According to the Federal Reserve, economic conditions are weakening across much of the nation at the same time that food, fuel and raw material prices are increasing.

"In particular, price increases were consistently reported for food products, fuel and energy products, and many raw materials," says the central bank.

The Fed notes that spending at retailers was softening across the country. New car sales are flat or declining in most districts. Overall, economic growth has slowed in nine of the Fed’s 12 districts since February.

Continue reading " The Fed Reports A Weak Economy Coupled With Rising Prices " »

As foreclosure filings for March jumped 57 percent from a year earlier and 5 percent from February, it is clear that that U.S. housing woes have yet to slacken. One in every 538 households received a filing last month. 44 percent were households that slipped into default for the first time and more than a fifth were homes banks took back.

RealtyTrac CEO James Saccacio says that many defaulting homeowners “are simply walking away and deeding their properties back to the foreclosing lender.” As a result, bank repossessions have more than doubled while auction notices are only up 32 percent.

“In a lot of cases, banks worked something out with the owner in advance and took back the keys and deed. For a homeowner, it’s not as embarrassing and it’s a little less of a blemish on their credit record compared to a foreclosure,” says RealtyTrac’s vice president of marketing Rick Sharga.

Continue reading " March Foreclosures Jump 57% As Housing Woes Increase " »

Citigroup, the leading underwriter of auction-rate bonds since 2000, announced in its quarterly earnings report that it has taken a loss of $1.5 billion on its inventory of these securities. According to Michael Quint of Bloomberg.com, the writedown amounted to 20% of the $8.1 billion in auction-rate securities held by Citigroup at the end of 2007.

Most of the loss was in student-loan backed auction-rate securities whose value dropped $971 million. The value of municipal auction-rate debt fell $355 million while tax-exempt and other assets fell $132 million. Citigroup’s holdings of auction-rate securities were valued at $6.5 billion as of March 30, 2008.

Continue reading " Citigroup Admits That All Types Of Auction-Rate Securities Have Lost Value " »

New York State’s attorney general, Andrew Cuomo, has launched a broad investigation into the auction-rate securities debacle. Mr. Cuomo’s investigation is sweeping in nature and includes inquiries into the distribution, sales, and marketing of auction-rate securities, what municipalities or other issuers were told about such securities as an inexpensive method of financing and whether auction-rate securities were sold to investors as safe, liquid investments. Cuomo's office considers the investigation an "industry case," which means that officials are looking into all aspects of the auction-rate business.

Earlier this week, Cuomo subpoenaed 18 financial institutions including Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co. Merrill Lynch & Co., and UBS AG. Sources say that the attorney general plans to subpoena others soon.

Continue reading " New York Attorney General Launches "Industry" Probe into Auction-Rate Securities " »

Wall Street firms continue to make massive job cuts in the aftermath of the subprime securities crisis and resulting credit crunch. Unfortunately, a lot more cuts may be on the horizon. Even those who are fortunate enough to keep their jobs are experiencing reductions in compensation.

Mark Zandi, chief economist and co-founder of research firm Moody's Economy.com said, "The job prospects for Wall Street through this time next year are about as bad as for any industry in the country. And people who hang on to jobs will suffer through less compensation. The Wall Street job engine won't be going again until sometime in the next decade."

Continue reading " "Pink Slips" Flood Wall Street " »

On April 16, Federal Bureau of Investigation director, Robert Mueller, told Congress that the probe of potential fraud in the U.S. subprime mortgage industry now includes at least 19 companies. Mueller was testifying on the agency's budget request for fiscal year 2009. "When this budget was put together, the subprime mortgage cases had not grown to the point where we could see the extent of the surge and I'm not certain at this point we can see the extent of the surge," Mueller said.

"We've had a tremendous surge in cases related to the subprime mortgage debacle. We currently have almost 1,300 cases that have grown exponentially over the last several years and we expect them to grow even further," Mueller advised.

Continue reading " Companies Targeted In FBI Subprime Mortgage Investigations " »

State securities regulators are investigating auction-rate securities and are coordinating their efforts to help investors “who can’t access funds that their brokers placed in these complex investment products,” according to an article by Kevin Kingsbury in The Wall Street Journal. North Dakota Securities Commissioner Karen Tyler, the president of the North American Securities Administrators Association, said “If violations are uncovered, then state securities regulators will seek appropriate remedies, including a much stronger commitment from Wall Street to provide their retail clients with an acceptable solution.”

Several states have had investigations into the sales of auction-rate securities under way since February. They are being handled by each state individually but are being coordinated through a task force headed by Bryan Lantagne, the head of the Massachusetts Securities Division. The other states involved include Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas, and Washington.

Continue reading " States Expand Probe Into Auction-Rate Securities " »

In an effort to raise cash, Lehman Brothers recently packaged $2.8 billion of unsold loans into bonds and then used some of the securities as collateral to borrow from the Federal Reserve. The new investment entity called, Freedom, issued securities in the amount of $2.26 billion, which were rated investment-grade by Moody's Investors Service and Standard & Poor's. The transaction enabled Lehman to turn loans shunned by investors into cash to finance its operations. Transferred loans included risky leveraged buyout debt.

At this point, it is unclear how many Fed loans to investment banks have been collateralized by assets like subprime mortgage bonds or loans used to finance leveraged buyouts. With their balance sheets under pressure, banks may be inclined to take on more risks if they believe the Fed will bail them out. Alternatively, if the perception arose that the Federal Reserve's balance sheets have too many bad assets, the dollar could weaken.

Continue reading " Lehman Uses Securities Backed By Unsold Loans To Borrow From The Fed " »

Citigroup, the largest underwriter of municipal auction-rate securities in 2006, said today that the $330 billion auction-rate securities market, will “cease to exist,” according to Martin Z. Braun of Bloomberg.com. If this happens, the repercussions among investors, municipalities, closed end mutual funds and investment banks will be unprecedented. The market for auction-rate securities collapsed in February after Wall Street firms stopped using their own capital to prevent auction failures.

While the disappearance of this market will only reduce brokers’ earnings by 1 to 2 percent, investor anger over their inability to access their holdings will be significant. Most investors bought auction rate securities based on their brokers’ representations that they were safe liquid investments suitable for short term holding of cash.

Continue reading " Citibank: Auction Rate Securities Market Will "Cease To Exist" " »

As the subprime meltdown and the credit crisis deepen, the investors in collateralized debt obligations (CDOs) are fighting over the scraps, according to articles from the Financial Times On-Line by Michael Mackenzie and Aline Van Duyn. CDOs are structured credit vehicles made up of several different layers of bonds, called tranches. Each tranche has a different level of risk and a different credit rating. The senior tranches, which provide the majority of the funding of the underlying assets, are rated the highest because the smaller subordinate tranches are the first to absorb losses from problems with the underlying assets.

To juice returns, a small slice of the bottom level of the senior tranche can be split off and sold. That slice retains its AAA rating but pays out a higher return because its investors would lose money before the remaining AAA tranche above it. The remainder of the senior tranche is called the “super-senior” because selling the extra slice was deemed to have removed the marginal risk that it would suffer any losses.

Continue reading " "Tranche Warfare" Over CDOs " »

With a recession in the U.S. economy looming on the horizon, investors, in general, and investors in mortgage-related securities, in particular, need to batten down the hatches. It could get a lot worse before it gets better. While many expected problems in the mortgage debt financial markets as a result of an array of subprime abuses, the tremendous downturn in the housing market coupled with a recession could result in a “perfect storm” that would lead to substantial losses in addition to those already expected. Such losses, in turn, could put significant additional downward pressure on the financial markets.

The International Monetary Fund (IMF) forecasted that the U.S. is sliding into a recession because of subprime problems and the resulting credit crunch. "The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression," the IMF said.

Continue reading " U.S. Recession Predicted By Most Experts Increases The Risk Of Mortgage Investments " »

According to senior executives at Merrill Lynch, the company is likely to post a first-quarter loss on write-downs between $6 and $6.5 billion.

To date, Merrill has written down $24 billion worth of investments related to subprime lending. Unlike earlier write-downs at Merrill and other Wall Street investment banks, however, the latest round of write-downs is not solely tied to subprime loans. Instead, Merrill’s expected first quarter write-down is linked to commercial real-estate mortgage debt exposure and other types of loans as well as subprime loans. Unfortunately, this suggests that Merrill’s problems are expanding into other areas of its business. This does not bode well for the future.

Continue reading " Merrill Faces Additional Mortgage Losses " »

Routine failures on almost three-quarters of all auctions in the auction rate securities market tied together with the high default (auction failure) interest rates that municipal issuers of auction rate securities face have resulted in a rush to abandon the auction rate markets by both investors and many issuers.

The auction-rate market began the year at $331 billion. On April 11, Bloomberg correspondent, Jeremy R. Cooke reported that the auction-rate securities market is “shrinking by at least 15 percent, or $51 billion.” This shrinkage is attributable to U.S. municipal borrowers refinancing auction rate securities to escape higher interest rates and to a few closed-end mutual funds agreeing to redeem their outstanding auction rate securities.

Continue reading " $331 Billion Auction Rate Market Set to Shrink by $51 Billion " »

UBS AG senior economic adviser George Magnus says that if individual governments fail to take active and unorthodox steps to address the attack on credit markets, the global economy will plunge into a death spiral.

“It's impossible for central banks to resolve this on their own,” says Magnus. “In the end, all crises of this nature require active and unorthodox government intervention.”

In July, Magnus said that the U.S. subprime mortgage-market collapse might not be containable. Today, Magnus asserted, “It's too late to worry about moral hazards. There's a serious danger we could slip into a death spiral of credit contraction, economic weakness, capital destruction and credit contraction.

Continue reading " UBS's Magnus Warns Of Economic Death Spiral " »

The rating of bond insurer Financial Guaranty Insurance Co. was recently cut three levels to Baa3 from A3 by Moody's Investors Service. The insurer’s credit rating strength now teeters one step above junk status because of the company's inability to raise new capital and the likelihood it will breach regulatory requirements. Moody's also lowered its senior debt rating on the holding company to B3 from Ba1.

“The cushion above the required regulatory minimum may not be sufficient to absorb additional losses associated with FGIC's mortgage related exposures,” Moody's analysts Arlene Isaacs-Lowe and Jack Dorer stated.

Continue reading " Ratings For Bond Insurer FGIC Lowered 3 Levels To Just Above Junk " »

After several months of silence, it is apparent that money market funds aren’t “out of the woods” yet. Some funds still have exposure to investments in structured investment vehicles (“SIVs”) or similar instruments that, in turn, invested in subprime securities. SIVs use short-term borrowing to buy higher-yielding long-term assets.

For example, Legg Mason Inc. has recently entered into a capital support agreement agreeing to provide up to $400 million to bail out an institutional money market fund from potential losses incurred on debt issued by SIVs. The move will cut Legg Mason’s profit by $316 million ($195 million net of taxes) for the quarter ending March 31.

Continue reading " Money Market Funds Still At Risk " »

The financial markets wait to see how drops in consumer confidence will impact different industries and companies. Upcoming earnings announcements are expected to provide more insight into the answer to this question.

Burdened by fears about job loss, rising food prices, record-high home foreclosures, stricter lending practices, and rocketing energy costs, American’s confidence in the economy fell to a new low. According to the RBC Cash Index, consumer confidence dropped to a 29.5 mark in April, down from 33.1 in March. According to the international polling firm, Ipsos, last April, confidence stood at 85.4. Over the past year, however, consumer confidence has deteriorated with the sagging economy. The worst reading in the index’s six-year history marks the fourth consecutive month in a row where confidence has fallen to an all-time low.

"Consumers are very pessimistic," said Wachovia economist, Mark Vitner. "There are not a lot of happy campers out there."

Continue reading " With Consumer Confidence In The Economy Weakening, How Will The Market Be Impacted? " »

Emma Moody of Bloomberg.com reported on April 4, 2008 that Fitch Ratings cut MBIA’s insurance rating from AAA to AA on the grounds that the bond insurer no longer had sufficient capital to retain the top rating. According to Fitch, MBIA, the world’s largest bond insurer, would need as much as $3.8 billion in additional capital to deserve an AAA rating. Fitch also cut MBIA’s long-term rating from AA to A.

MBIA had already raised $2.6 billion in capital through a bond offering and the sale of a stake to Warburg Pincus, LLC, eliminated its dividend and stopped guaranteeing asset-backed securities for six months. These steps were enough to satisfy the other two credit rating organizations. Both Moody’s Investor Service and Standard & Poor’s affirmed the top rating for MBIA. Fitch, however, continued its review.

Continue reading " MBIA Loses AAA Rating From Fitch " »

CNBC has reported that on April 9, 2008, Morgan Stanley, the country’s second largest investment bank, announced that more of its assets either became illiquid or otherwise hard to value during the turbulent first quarter of the year. According to its quarterly filing with the SEC, Morgan Stanley had classified $78.2 billion of assets as “Level 3” as of the end of February, up from $73.7 billion at the end of November.

Level 3 assets are those that have no ready market so the firm assigns them a value according to an internal model. In other word, they make their best guess. These values do not reflect actual market prices of these assets. Investors are left to cross their fingers and hope that Morgan Stanley – and the rest of Wall Street – have guessed correctly. Their track record to date, however, does not inspire confidence.

Continue reading " Morgan Stanley: More of Its Assets Are Hard to Value " »

Kenneth Moelis, the former head of UBS’ investment bank, said recently that Wall Street firms may have to eliminate has many as 35 percent of jobs as leveraged lending dwindles and the pace of mergers and acquisitions slows. Wall Street banks hit by mortgage losses and writedowns have already cut more than 34,000 jobs over the past nine months, the most since the dot-com boom ended in 2001.

Continue reading " Wall Street May Cut 35% of Jobs " »

Many bond funds, which are supposed to be the pillars of stability during times of market upheaval, are suffering serious subprime mortgage investment losses. The Lehman Brothers U.S. Aggregate bond index, which tracks taxable bonds, Treasury notes, corporates, and some mortgage securities, is up 2.3% from January 1 through April 4 of this year. Yet, as reported by Shefali Anand of The Wall Street Journal on April 8, 2008, 20 percent of all investment-grade U.S. taxable bond funds are in the red for that same period.

The Regions Morgan Keegan Select Intermediate Bond fund is down 44% since the start of the year and 72% over the past year. Since the start of the year, State Street Global Advisors Yield Plus is down 18% and Schwab YieldPlus has fallen 23%.

Many bond funds have been dragged down by the massive sell off of mortgage securities because of the subprime crisis. Among the casualties are Metropolitan Strategic Fund (down 8% this quarter and 12% for one year), UBS Absolute Return Bond (down 8.5% year to date and nearly 15% over the past year), and Principal Investors Ultra Short Bond Fund (down nearly 7% this quarter and nearly 10% over the past year). Metropolitan West had more than half of its investments in mortgage and other asset-backed securities as of December 31, 2007.

Continue reading " "Safe" Bond Funds Get the Blues " »

The number of investors complaining that they were misled into buying now illiquid auction-rate securities must have reached a tipping point. The SEC and the Financial Industry Regulatory Authority (FINRA) have begun looking into how brokers sold these products.

Jaime Levy Pessin of The Wall Street Journal reported on April 8, 2008, that FINRA had recently sent a survey to broker-dealers seeking a breakdown of total auction-rate securities holdings by customer type, how the auction-rate securities are classified on customer statements, and how firms marketed the products, together with the number of customer complaints received since October 1, 2007. FINRA has also started a “sweep” investigation. A sweep is a broad look at an industry practice and does not automatically imply that enforcement action will be taken. The SEC has confirmed that it is working with FINRA to look into “representations made to investors when they purchase auction-rate securities.”

Continue reading " At Last, Federal Regulators Probe Misrepresentations Used to Sell Auction-Rate Securities " »

Recent news does not bode well for homeowners or investors in mortgage-backed securities. According to Mark Zandi, chief economist at Moody's Economy.com, lenders are distorting foreclosure rates and delaying the worse of the housing decline by allowing delinquent homeowners to remain in their homes long after they have defaulted on their mortgages. While such actions could appear to be positive at first blush, the lenders are effectively delaying the flood of foreclosed homes that will inevitably hit the housing markets. This is likely to extend the period of an unstable housing market.

"We don't have a sense of the magnitude of what's really going on because the whole process is being delayed,'' Zandi said. "Looking at the data, we see the problems, but they are probably measurably greater than we think.''

"Some people stay in their houses until someone comes to kick them out,'' said Angel Gutierrez, owner of Dallas-based Metro Lending. "Sometimes no one comes to kick them out.''

Continue reading " The Housing and Mortgage Markets Are Much Worse Than It Appears " »

If the predictions of Princeton economist Paul Krugman are correct, investors in mortgage-backed securities are facing a huge wave of additional losses. In a recent interview with Fortune, Krugman stated “I think there’ll be $1 trillion of losses on mortgage-backed securities showing up somewhere.” To date, Wall Street banks and others have reported only $232 billion in credit losses and asset writedowns, less than 25% of Krugman’s projected losses.

Krugman’s overall predictions for the American economy are even more gloomy. At the end of the current mortgage crisis, Krugman believes that there will be an average 25% decline in overall home prices and that approximately 20 million people will have negative equity in their homes (the homeowers will owe more on their homes than the homes are worth). Ultimately, he believes that the U.S. economy will suffer $6 to $7 trillion in capital losses in housing.

Continue reading " Noted Economist Predicts That Investors Will Lose $1 Trillion in Mortgage-Backed Securities " »

The New Jersey Supreme Court will decide whether the forfeiture provision in Smith Barney’s incentive compensation plan violates New Jersey’s wage-and-hour law. A class action brought by two Smith Barney brokers, Melvin Rosen and James Fox, alleges that the plan penalizes participants who leave the company before they are vested in violation of the public policy underlying the state’s wage-and-hour law.

In 1989, Smith Barney Inc. instituted the plan because of high stockbroker turnover. Brokers could elect to have part of their compensation diverted to purchase restricted shares of stock in Smith Barney's parent company, Citigroup Inc., at a price 25% below market price. These purchases, however, did not fully vest for two years. Participants could not sell their shares before they vested though they could receive dividends and exercise voting rights. Employees who resigned or who were let go prior to vesting forfeited their unvested stock. Class plaintiffs Rosen and Fox forfeited unvested stock under the plan when they resigned.

Continue reading " Does Broker Compensation Plan Violate State Law? " »

Investors who purchased short-term investments known as auction-rate securities through Wall Street firms are facing a financial shipwreck. The securities, many of which have turned into long term risky investments, were dubbed as “safe” and represented as cash equivalents. Until recently, auction-rate securities could be sold weekly or monthly at auctions sponsored by large Wall Street firms; however, the success of these auctions was largely dependent on the support of the very Wall Street firms that sold the auction-rate securities to begin with. As the subprime crisis evolved, the Wall Street firms stopped committing money to make sure the auctions ran smoothly. The result has been chaos and uncertainty in the auction-rate securities markets.

Of course, the primary problem that investors are encountering is that auctions are failing leaving their investments effectively frozen Investors cannot sell their securities in the manner which they expected to be available. They are being forced to hold on to these securities unless they are able to sell them in the secondary market perhaps at a substantial discount to face value. Moreover, there are significant doubts about whether the auction-rate securities markets will ever return to normalcy. If they do not, investors face the prospect of holding auction-rate securities for years unless they resort to the secondary markets.

Continue reading " Wall Street Firms Abandon Auction Rate Securities Leaving Investors Holding The Bag " »

Recent housing statistics suggest that tougher times are ahead for investors in subprime mortgage securities and related derivative products. Home prices are falling at dramatic rates and are undercutting both the performance of and the security for these investments. Additional losses seem almost inevitable.

Home prices have declined to record lows all across the U.S. Compared with a year ago in January, single-family home prices in 10 major cities fell 11.4 percent. A broader index of 20 cities shows a similar decline with prices plunging by 10.7 percent.

Data released by the S&P/Case-Shiller composite index, proves that no metropolitan has been spared from the national housing crisis. Markets with the biggest drops were Las Vegas and Miami (tied) and Phoenix where home prices slid by 19.3 percent and 18.2 percent respectively.

Continue reading " More Subprime Problems Ahead: Home Prices Hit Record Lows Across the U.S. " »

Earlier this week (April 2), a suit seeking class action against SunTrust Banks Inc., was filed on behalf of investors who purchased auction rate securities from SunTrust between April 1, 2003 and February 13, 2008. The suit alleges that the bank violated securities laws by "deceiving investors about the investment characteristics of auction rate securities and the auction market in which these securities traded."

Auction rate securities are corporate or municipal debt securities or preferred stocks, which pay interest based on rates set at periodic auctions. Auction rate securities generally have long-term maturities or no maturity dates.

Continue reading " SunTrust Sued For Auction Rate Securities " »

The outlook for subprime mortgage securities is bleak. Recent surveys by the American Bankers Association (“ABA”) establish that a slowing economy is making it harder for consumers to repay their debt obligations. Even Federal Reserve Chairman Ben S. Bernanke has acknowledged for the first time that a U.S. recession is possible.

The ABA’s studies confirmed that consumers have fallen behind on car, credit card and home-equity loans at the highest level in 15 years. The rise in consumer credit delinquencies is consistent with a rapidly slowing economy.

Continue reading " Problems Ahead For More Subprime Securities " »

It is well known in the news business that if you want to bury a story, you release it late on a Friday afternoon. UBS did exactly that with its announcement on Friday March 28 that it was forcing its clients to take a haircut on auction-rate securities that investors had been told were as safe as cash. UBS will also re-classify auction-rate securities from “cash equivalents” to “fixed-income securities” on customer statements starting in April. This reclassification alone supports the contention of many investors that they were misled when they purchased these investments.

Needless to say, the investors in auction-rate securities are not happy. They were sold these auction-rate securities as a safe place to park cash that paid higher yields than savings accounts or money-market funds. Thus they invested cash that was being stashed for immediate needs such as tuition, home down payments or medical needs. As the auctions failed when not enough buyers showed up and the investment banks stopped stepping in to support the financings, the investors got stuck in an investment they could not sell at any price.

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