Investment Fraud Lawyer Blog

Wall Street banks could soon cut as many as 21,000 jobs in New York alone, say Wall Street consultants and recruiters. Worldwide cuts could be even larger (“Large layoffs loom on Wall Street,” Stephen Gandel, CNN Money). While the stock market is up this year, and many smaller investment banks have been hiring, and the big banks have reported better than expected earnings for the first quarter, Wall Street executives believe they have too many employees.

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Robert Rubin, former managing partner of Goldman Sachs, former Treasury Secretary, and former Chairman of Citigroup, says there is more to worry about in today’s fiscal environment than at any other time in his life. “[I]t is absolutely prudent that we prepare for the worst,” Rubin told a New York TradeTech audience last month (See Ben Baris’s article in Institutional Investor, “’Prepare for the Worst’ Say Ex-Treasury Sec Robert Rubin”).

Continue reading "America is at a Crossroads According to Former Treasury Secretary" »

State and local issuers of municipal bonds are in trouble, but most municipal bond holders are not – at least not yet. While waves of default predicted by analyst Meredith Whitney several years ago have not yet materialized, lower revenues and unfunded liabilities are creating a slow-motion train wreck for many state and local governments. (See “Munis may take it in the teeth after all,” by Andrew Osterland, InvestmentNews).

Continue reading "The Risk of Municipal Bonds Continues to Rise" »

A recent study has concluded that investments that have higher volatility generate lower returns for investors. For many years, it has been a basic precept of modern portfolio theory that the price of opting for lower risk is lower reward. That is bunk, according to Robert Haugen, a former professor of finance at the University of Wisconsin and current president of a firm that produces quantitative investment research for subscribers. “We found that in every one of the world's markets, higher volatility equals lower returns,” Mr. Haugen was quoted as saying, adding: “Does this fly in the face of modern portfolio theory? You're damn right it does.” (See “Less risk offers more reward, study finds,” InvestmentNews).

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Congress recently passed the “Jumpstart Our Business Startups Act (“JOBS”), which contains provisions that will change the securities laws to allow what is known as crowdfunding. Crowdfunding provides a way for small businesses to raise money by pitching their stories to thousands of small-dollar investors using social media web sites with little or no disclosure. Proponents say it will result in more jobs. Critics are concerned about some unintended, but foreseeable, consequences.

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CFO.com, a publication geared specifically for finance executives, says that the JOBS Act may not be all it’s cracked up to be, as there are both more new regulations and less incentives for start-ups to go public than has previously been reported in some financial publications (“JOBS Act Turns Spotlight on Crowdfunding,” by Sarah Johnson, CFO.com, April 5, 2012).

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Harrisburg, the capital of Pennsylvania, is set to default on general obligation bonds for the first time. The city of 49,500 is in receivership and the receiver is seeking approval to raise money by selling assets, raising taxes and fees and obtaining concessions from municipal labor unions. That has not yet come to pass, however, and $5.27 million in payments on two series of general obligation bonds is due on March 15. “The city will not be making these payments to ensure sufficient cash flow so the citizens of Harrisburg continue to receive essential services,” David Unkovic, the receiver, was quoted as saying. (“GOB-smacked: Harrisburg to default on general obligation bonds”).

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Student loan debt problems are lurking on the horizon. Americans owe $1 trillion on college student loans, more than they owe on credit cards, which is too much. 2010 graduates owed $25,250 on average (up 5 percent from 2009). Parents of 2010 graduates owed $34,000 on average. More parents are going into debt to pay for their childrens’ college – 17 percent in 2010 versus 5.6 percent in 1993. The default rate is 9 percent for a two-year period ending in 2010, up 2 percent from the previous period. A student who borrows $20,000 a year for four years will have a repayment obligation of $1,000 per month, as much as a small mortgage, according to one financial advisor. (“Student loans the ‘next debt bomb’ for U.S., attorneys warn,” InvestmentNews).

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Various well-respected market followers are beginning to sound alarm bells regarding municipal bonds and municipal bond funds. Investors and financial advisers are encouraged to take heed and proceed with caution.

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An increase in corporate borrowing costs and Eastman Kodak’s recent bankruptcy filing have set off a round of speculation about whether it is the start of a growing trend in corporate bankruptcy filings. While Chapter 11 bankruptcy filings have been falling since 2009, George Putnam of BankruptcyData.com is expecting an uptick in corporate bankruptcy filings. (“Are corporate defaults set to rise?” USA Today) "We're going to see more big bankruptcies this year," Putnam was quoted as saying, adding: "We'll see a reasonable number even if the economy is pretty strong."

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The dynamics of equity investing are changing and investors need to consider these changes when making investment decisions. Investors have pulled over $400 billion out of equity mutual funds since 2008, resulting assets of some of those funds being cut in half. Money has flowed into bond funds, but even more money (eight times as much) has been deposited into bank accounts, confirming investors’ apprehensions about the stock market. (“Investors to stock funds: Get lost,” USA Today, John Waggoner).

Continue reading "More Investors Avoid Stocks - Demand for Equities Drops" »

Investors are advised to take precautions in 2012. The stage is set for the occurrence of extreme results for investors that go far beyond the normal levels of unpredictability, according to PIMCO’s Mohamed A. El-Erian (See “Investing in a ‘Fat Tail’ World”).

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MF Global’s exposure to European sovereign debt was not done through straightforward purchases of bonds. Instead, CEO Jon Corzine used a transaction known as repurchase-to-maturity (RTM). The RTMs allowed MF Global to, in essence, buy the bonds on margin, yet classify the purchase as a sale, with the bond and the repurchase liability removed from MF Global’s balance sheet, thereby concealing the risk. (“A Romance With Risk That Brought On a Panic,” New York Times, Dealbook).

Corzine started his career as a trader at Goldman Sachs and remained a trader (i.e. risk taker) at heart. “His obsession with trading was apparent to MF Global insiders over his 19-month tenure.” When he joined MF Global as CEO, he intended to turn the struggling firm into a mini-Goldman through proprietary trading largely directed by himself, according to the article. To that end, “[h]e pushed through a $6.3 billion bet on European debt – a wager big enough to wipe out the firm five times over if it went bad – despite concerns from other executives and board members” (which approved the transactions, according to Corzine).

Continue reading "Ratings Agencies Praised MF Global’s Risky Off-Balance Sheet Bet" »

Criminal acts did not play an important role in causing the mortgage crisis, according to an opinion piece in the Wall Street Journal written by Gordon Crovitz, a former publisher of the Journal. In Crovitz’s view, critically flawed policies and rules in the U.S. and abroad did so, and set the stage for the global shocks we see today. Crovitz did not say that crimes did or did not occur; he said that bad regulations were “worse than a crime.” (“Financial Regulation: Worse Than a Crime,” Wall Street Journal, Opinion). Other informed observers believe the subject of Wall Street crime is a very serious matter.

There is no doubt that, as Crovitz says, policies that subsidized bad mortgages in the U.S. and shaky European sovereign debt, and the “Basel rules” that called for big banks to place significant amounts of capital in investments like mortgages and mortgage-backed securities, were based on unwarranted assumptions that those investments were low-risk. When they imploded, many banks that held the same undiversified bad investments went down too. Crovitz concludes: “The reason prosecutors can't prove criminal intent is that in many cases the bankers were simply trading in compliance with the regulations governing them.”

Continue reading "Ignoring Financial Crimes Makes Next Financial Crisis Inevitable" »

U.S. household net worth fell 4 percent to $57.4 trillion, the sharpest drop in over two years, and Americans’ stock portfolios fell 5.2 percent in the third quarter. About 50 percent of Americans own stocks or stock mutual funds. (“Wealth in U.S. takes big hit,” Atlanta Journal Constitution).

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For the seventh straight month, equity mutual funds reported net outflows (investor withdrawals). For the week ended November 30, equity mutual funds’ net outflows consisted of $6.67 billion from domestic equity funds and $2.96 billion from foreign equity funds, according to the Investment Company Institute, the national association of U.S. investment companies (i.e., mutual funds). Overall, U.S. mutual funds lost $9.24 billion to withdrawals last week, the most in almost two months. (See InvestmentNews: “Mutual problem as stock fund investors still heading for the exits”).

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A report issued by the McKinsey Global Institute forecasts that investor allocation to equities worldwide will drop from 28 percent in 2010 to 22 percent in 2020. (“Equities Losing Appeal in Global Financial System,” InvestmentNews).

Continue reading "Investor Demand for Equities is Waning" »

Noted professor of economics, Nouriel Roubini, predicts the U.S. economy will slide into recession in 2012 primarily because of the failure to deal with fiscal problems as a result of political gridlock in Washington. Last week, Roubini tweeted: "Super-Committee: Super-Failure, Super-Pathetic, Super-Gridlock, Super-GOP-Lunacy on Taxes, Super-Fiscal Drag in 2012 that ensures double dip."

Continue reading "Dr. Doom Forsees a 2012 Recession" »

Fitch Ratings issued a report on November 16 on the U.S. banking sector saying that “the risks of a negative shock are rising” if the effects of European debt crisis keep spreading. (“Fitch’s Warning Spooks Investors, “ Wall Street Journal).

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It’s getting rough and rowdy as Occupy Wall Street protesters attempt to shut Wall Street down and police try to clear them out. Protesters marched from their former home in Zuccotti Park and blocked intersections near the New York Stock Exchange. Police hit and shoved some of them, and reporters saw one woman pinned to the ground by police, bleeding from her mouth. (“Protesters Disrupt Business Around Wall Street,” Wall Street Journal).

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