Investment Fraud Lawyer Blog

“[I]nvestors face a perfect storm – risky assets priced to achieve dismal long-term returns (except in comparison to equally dismal alternatives), coupled with the risk of an oncoming recession,” according to John Hussman (“John Hussman: Nearly every asset class set for ‘miserably low’ returns,” InvestmentNews).

Continue reading "Investors Have Few Attractive Investment Opportunities at Present" »

Global liquidity is about to dry up, and “the effect on the real economy will soon be felt,” according to Mark Carney, Chairman of the G-20 Summit’s Financial Stability Board and Governor of the Bank of Canada. European banks are afraid to lend to one another because they do not know the extent of their counterparty’s exposure to weak European sovereign debt. Lack of transparency of banks’ holdings and financials is a global problem.

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Investors, especially in retirement accounts, are pouring money into so-called “stable value funds” but the stability of those funds is not as advertised. The funds are often sold as higher-yielding money market funds, but they lack the safety and stability of a money market fund. Also, the higher-than-money-market yield and stability come at a price - locking up investors’ money and imposing hefty surrender charges on certain withdrawals.

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In “Would a Greek default be automatic doom?” Mark Hulbert of MarketWatch makes the point that both those who predict that a Greek default would be like the Lehman disaster and those who predict that it would be more like the stock market advances after the last four sovereign debt crises (Mexico 1994, Thailand 1997, Russia 1998, and Argentina 2001) are on equally shaky statistical ground and are just speculating. But the conclusion that no one has a valid statistical basis for predicting the systemic effect of a Greek default is unsettling in itself.

Continue reading "A Greek Default Could Impact Money Market Funds" »

Bank of America expects to face legal losses this year for anywhere from $145 million to $1.5 billion. And that is just what it can reasonably estimate. Most of these losses stem from the underwriting of mortgage-backed securities.

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Money market funds are accepting more risk in reaching for better yields only two years after the $62 billion Reserve Primary Fund “broke the buck,” according to a recent Wall Street Journal article by Eleanor Laise, “Money Funds Try Risk Again.” This despite new SEC safety rules requiring that 30% of money fund assets must be invested in assets maturing in seven (7) days. The increasing risk in money market funds is attributable to various factors.

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Pennsylvania regulators have charged TD Ameritrade with fraud in selling its Reserve Yield Plus Fund, according to an August 4, 2010 Wall Street Journal article by Daisy Maxey, “TD Ameritrade Faces Civil Fraud Complaint Over Reserve Fund.” The Reserve Yield Plus lost money in the midst of the financial crisis in September 2008.

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Another asset class is “feeling the heat” of the unstable investment market. The historically reliable asset class of money funds has been hit by the financial crisis, providing minimal yields, at best. The money fund, typically investing in short-term, high-grade IOUs, was once considered “a pillar of safety.” In the past, even if the fund invested in commercial paper, it would only do so in extremely creditworthy corporations, thereby preserving an investors’ principal and paying interest, minus expenses, by investing in highly rated securities. Recent practices of money funds have left investors questioning the integrity of and regulators debating an overhaul of these funds.

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Auditors find themselves on the “hot seat” as a result of the SEC’s recent mandate that corporations and other institutional investors report investment holdings based on a “market value” basis. As 2008 came to a close, many companies and institutional investors were hoping that the SEC would suspend the “fair-value” accounting rules that require companies to report actual market values for illiquid securities. Last week, those hopes were dashed. On December 31, 2008, the SEC announced that it would require mark-to-market valuations for these holdings and many companies are now facing significant write-downs. Under FAS 157 (the fair-value accounting rule), market value is defined as the price that would be receive to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

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There have been various developments over the past several weeks which investors may consider relevant in allocating their resources or evaluating alternatives that are available to them. Some of the more significant developments include, but are not limited to, the following:

• On Monday, the Dow Jones Industrial Average jumped up by 275 points.

• On Tuesday, the Dow Jones Industrial Average fell 232 points.

• On Wednesday, the Dow Jones Industrial Average plunged 514 points.

• On Thursday, the Dow Jones Industrial Average rose 172 points.

• On Friday, the Dow Jones Industrial Average dropped another 312 points and closed the week at 8378.

Continue reading "Page Perry's Market Monitor - October 24, 2008" »

There have been various developments over the past several weeks which investors may consider relevant in allocating their resources or evaluating alternatives that are available to them. Some of the more significant developments include, but are not limited to, the following:

• As expected, late last week Congress passed a revised financial bailout bill.

• On Monday, the Dow Jones Industrial Average dropped 369.88 points.

• On Tuesday, the Dow Jones Industrial Average dropped 508.39 points.

• On Wednesday, the Dow Jones Industrial Average dropped 189.01 points.

• On Thursday, the Dow Jones Industrial Average dropped 678.91 points.

Continue reading "Page Perry's Market Monitor - October 10, 2008" »

There have been various developments over the past several weeks which investors may consider relevant in allocating their resources or evaluating alternatives that are available to them. Some of the more significant developments include, but are not limited to, the following:

• The Bush Administration proposed a $700 billion bailout plan to purchase bad mortgage investments from financial companies.

• On Monday, September 29, Congress rejected President Bush’s proposed $700 billion bailout plan.

• On Monday, September 29, the Dow Jones Industrial Average plunged 778 points.

• Later in the week, the markets rebounded somewhat as Congress decided to reconsider a modified bailout proposal. Indications are that some form of this bailout will pass.

Continue reading "Page Perry's Market Monitor -October 3,2008" »

It’s time for the American people to demand accountability from Wall Street firms that abused the trust of both their clients and the capital markets and from those regulators responsible for overseeing their conduct. The unprecedented bailouts of U.S. financial institutions and their reckless conduct will have a sweeping impact on the U.S. economy and on American taxpayers for years to come. These bailouts that have involved literally trillions of dollars worth of exposure and risk assumption by U.S. taxpayers have to be paid for at some point in time. Unfortunately, the only source of repayment will ultimately lie with the U.S. taxpayer. It is indeed sad that hardworking Americans will be called upon to pay for Wall Street’s excesses and abuses while many of the culprits remain in ivory towers living off their ill-gotten gains.

Continue reading "Government Bailouts Place Significant Risks on U.S. Economy and Taxpayers" »

Two noted money market funds, Reserve Primary Fund and Reserve International Liquidity Fund LTD, managed by Reserve Management Corporation, have “broken the buck.” “Breaking the buck” means that investors in a money market fund lose their invested principal. Stated another way, the net asset value of money market fund falls below the $1/share price paid by investors to invest in the fund.

This development could have significant ramifications for the entire money market mutual fund industry, which is based on confidence in the complete safety of the “buck.” Jeff Bobroff, mutual-fund consultant in Rhode Island, stated, “This is going to unsettle investors and probably create further runs on other money funds.” Experts fear that investors’ concern about the sanctity of money market funds could result in widespread withdrawals that would further aggravate the global credit crisis. Money market funds are major buyers of short-term debt issued by corporations and financial companies and significant withdrawals from money market funds could severely disrupt that market.

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A review of recent market events suggests that there may be far more risk in money market funds than was previously thought. In an article in the Business section of today’s New York Times, Eric Dash reported that, during the last year, many of our country’s largest brokerage firms have been forced to contribute more than $10 billion to prop up money market funds that are threatened by the mortgage crisis. In recent months, the following firms, among others, have taken action to bolster their affiliated money market funds: Legg Mason, Credit Suisse, Bank of America, SunTrust, Morgan Stanley, Lehman Brothers, and Wachovia.

The Big Question is: How long will these firms be willing and able to provide this support? All of these firms have reportedly sustained billions of dollars in financial setbacks over the past twelve months. At some point, will their financials become so tenuous that they cannot afford to continue spending billions to support faltering money market funds? Is there risk associated with this $3.5 trillion market?

Continue reading "Could the Unthinkable Happen- Could Money Market Funds Lose Value?" »

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.

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According to analyst Richard Bove, Bank of America may take a $6.5 billion loss provision in the first quarter of 2008. Bove anticipates that this loss provision would be established to cover possible future losses in Bank of America’s subprime mortgage portfolio and home equity portfolio.

Recent reports have predicted that both of these segments of the market are likely to experience serious difficulties in 2008 and 2009. In late January, Business Week published an article, “The Home Equity Crisis Ahead” by Mara Der Hovanesian which described the deterioration of the $850 billion home equity market. In this article, Amy Crews Cutter deputy chief economist at Freddie Mac, was quoted as stating “The home-equity lender is going to get hosed.” Similar opinions have been expressed regarding the subprime mortgage market. In its March 31, 2008 edition, Fortune quotes Princeton economist Paul Krugman stating “I think there’ll be $1 trillion of losses on mortgage –backed securities showing up somewhere.” To date, securities firms and banks have disclosed only about $195 billion in losses related to the mortgage markets.

Continue reading "Bank of America: More Subprime Problems Ahead?" »

An old Wall Street adage says that you should never plan to bring a new offering to market right after a three-day weekend because you never know what could happen from Friday night to Tuesday morning. US markets were closed today for the Martin Luther King, Jr. holiday but it was an event-filled weekend that will cause further market turmoil on Tuesday when the markets re-open.

On December 18, 2007, The Wall Street Journal wrote “Credit Crunch Could Worsen if . . . Bond Insurers Sink, ‘Buck Breaks’.” According to Dennis K. Berman of the Journal, the two events that are of most concern to Wall Street bankers, traders, and regulators are ratings downgrades of bond insurers and money market funds losing value below $1. Unfortunately, recent events suggest that this very scenario may be playing out.

First, on Saturday, January 19, 2008, Christine Richard of Bloomberg.com reported that Fitch Ratings announced that it had downgraded the credit rating of Ambac Assurance Corporation from AAA (the highest rating available) to AA after Ambac abandoned plans to raise new equity. This in turn caused a downgrading by Fitch of approximately 140,000 municipal and non-municipal bonds insured by Ambac.

Continue reading "Is The Market's Doomsday Scenario Here?" »

On December 4, 2007, Wall Street Journal reporter Shefali Anand reported that some money market funds may be invested in risky debt securities issued by structured investment vehicles, or SIVs, that were recently downgraded or put on review for possible downgrade by Moody’s Investors Service. These money market funds include Charles Schwab Advisor Cash Reserves, as well as similar funds from Morgan Stanley, Barclays PLC, UBS AG, Deutsche Bank AG, and others, according to the article. While these funds hold only 1% to 2% of their investments in such debt, even a small amount poses a risk that has analysts paying attention. If a SIV debt obligation held by a money fund lost all its value, that could cause the money fund to “break the buck” – i.e., violate a requirement to maintain a $1 per share value.

The review and downgrade of SIV debt was reported by Carrick Mollenkamp in the December 1st edition of the Wall Street Journal. Moody’s downgraded $14 billion in SIV debt and placed under review another $105 billion, according to the article. Moody’s said this action reflected “the continued deterioration in market value of SIV portfolios combined with the sector’s inability to refinance maturing liabilities,” reported Mollenkamp.

The liabilities in question are commercial paper. Commercial paper is a short-term debt obligation sold by banks and other businesses to investors. The proceeds are commonly used to meet short-term operating needs. Commercial paper is generally bought by money funds and has been regarded as very safe. SIV commercial paper is another matter, though.

Continue reading "Moody's Downgrades SIVs; Money Market Funds At Risk; SIVs Unable To Meet Debt Obligations Without Selling Assets At Fire-Sale Prices" »