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 " »

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Posted In: Market Developments , Subprime Mortgage & Collateralized Debt Obligation Problems

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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 " »

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Posted In: Brokerage Firms , Citigroup/Smith Barney , Morgan Stanley , Subprime Mortgage & Collateralized Debt Obligation Problems , UBS , Wachovia

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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 " »

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Posted In: Market Developments , Subprime Mortgage & Collateralized Debt Obligation Problems

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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 " »

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Posted In: Bonds , Market Developments , Subprime Mortgage & Collateralized Debt Obligation Problems

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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 " »

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Posted In: Bear Stearns , Bear Stearns Hedge Funds , Regulatory Developments , Subprime Mortgage & Collateralized Debt Obligation Problems

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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? " »

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Posted In: Charles Schwab , Schwab YieldPlus Fund , Subprime Mortgage & Collateralized Debt Obligation Problems

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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 " »

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Posted In: Auction Rate Securities , Bank of America , Citigroup/Smith Barney , Subprime Mortgage & Collateralized Debt Obligation Problems , UBS

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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 " »

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Posted In: Morgan Keegan , Morgan Keegan Bond Funds , Subprime Mortgage & Collateralized Debt Obligation Problems

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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 " »

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Posted In: Bear Stearns , Bear Stearns Hedge Funds , Regulatory Developments , Subprime Mortgage & Collateralized Debt Obligation Problems

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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? " »

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Posted In: Citigroup Hedge Funds , Citigroup/Smith Barney , Subprime Mortgage & Collateralized Debt Obligation Problems

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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 " »

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Posted In: Bonds , Market Developments , Regulatory Developments , Subprime Mortgage & Collateralized Debt Obligation Problems

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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 " »

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Posted In: Market Developments , Subprime Mortgage & Collateralized Debt Obligation Problems

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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 " »

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Posted In: Market Developments , Subprime Mortgage & Collateralized Debt Obligation Problems

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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 " »

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Posted In: Auction Rate Securities , Citigroup/Smith Barney , Subprime Mortgage & Collateralized Debt Obligation Problems , UBS

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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 " »

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Posted In: Auction Rate Securities , Citigroup/Smith Barney , Goldman Sachs , J. P. Morgan Chase , Merrill Lynch , Regulatory Developments , Subprime Mortgage & Collateralized Debt Obligation Problems , UBS

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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 " »

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Posted In: Employment Issues

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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 " »

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Posted In: Subprime Mortgage & Collateralized Debt Obligation Problems

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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 " »

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Posted In: Auction Rate Securities , Bank of America , Merrill Lynch , Regulatory Developments , Subprime Mortgage & Collateralized Debt Obligation Problems , UBS

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