According to Anne Szustek, the Whitefish Bay School Board is now filing a lawsuit alleging misrepresentation against Royal Bank of Canada and Stifel Nicolaus, the companies that sold them Synthetic CDOs.
David W. Noack, an investment banker who had been giving guidance to school boards in Wisconsin for some 20 years, suggested that the Whitefish Bay school board should buy into a series of European investments that he said could only mean steep returns.
The Whitefish Bay School District and four other local school systems spent $35 million and borrowed an additional $165 million from Irish bank Depfa to buy up synthetic collateralized debt obligations, or synthetic CDOs. Synthetic CDOs are a form of insurance that guarantees corporate bonds. Should a company default on its debt, the synthetic CDO steps in to cover that loss.
The only way it would fail? “There would need to be 15 Enrons,” Noack said. It turns out that $200 million of the districts’ pooled funds were used to back $20 billion in corporate bonds. The synthetic CDOs turned out to have been toxic, and the money the Whitefish Bay School District put up is now going toward covering that debt.
Both companies being sued maintain that the school board signed documents knowing what it was getting into. Click here for full article.
Thursday, November 6, 2008
Friday, January 25, 2008
New York City Sues Countrywide's Underwriters for Allegedly Helping the Home Lender Defraud Investors.
New York's city and state comptrollers and their pension funds have sued Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and 23 more underwriters of Countrywide Financial Corp. for allegedly helping the home lender defraud investors.
The state and city pension funds' combined losses due to Countrywide's declining stock price were as much as $100 million, according to City Comptroller William Thompson Jr.
``Investors lost millions and New Yorkers lost their homes,'' New York State Comptroller Thomas DiNapoli said in a statement. ``We need to recover the pension fund's losses and find a way to help all those families.''
Click here for full article.
The state and city pension funds' combined losses due to Countrywide's declining stock price were as much as $100 million, according to City Comptroller William Thompson Jr.
``Investors lost millions and New Yorkers lost their homes,'' New York State Comptroller Thomas DiNapoli said in a statement. ``We need to recover the pension fund's losses and find a way to help all those families.''
Click here for full article.
Friday, January 4, 2008
Merrill Lynch & Co. probed in connection with sales of CDOs to the city of Springfield
Merrill Lynch & Co. was subpoenaed by Massachusetts regulators after the value of collateralized debt obligations the brokerage firm sold to the city of Springfield plunged 91 percent because of losses tied to subprime mortgages.
Click here for the full article.
``There are a whole range of concerns, including how the investments were presented to the city of Springfield and whether these were inappropriate investments for a city,'' Secretary of State William Galvin said. ``We don't want to pre-judge but just want to assess the information.''
The Springfield finance board said it ``believes that Merrill Lynch can and should be held fully accountable for any potential losses.''
Click here for the full article.
``There are a whole range of concerns, including how the investments were presented to the city of Springfield and whether these were inappropriate investments for a city,'' Secretary of State William Galvin said. ``We don't want to pre-judge but just want to assess the information.''
The Springfield finance board said it ``believes that Merrill Lynch can and should be held fully accountable for any potential losses.''
Wednesday, December 19, 2007
Barclays sues Bear Stearns over CDO hedge funds
Barclays Bank Plc (BARC.L) on Wednesday accused Bear Stearns Co Inc (BSC.N) of using two hedge funds that collapsed last summer as places to unload troubled assets.
Clickhere for full article.
The London-based bank's allegations appear in a lawsuit filed in U.S. Court for the Southern District of New York in Manhattan.
Barclays described the collapse of two Bear Stearns-run hedge funds as one of the most shocking in the last decade.
"Bear Stearns ... used the enhanced fund as a place to unload excessively risky or troubled assets that could not be sold to other investors at the prices paid by the enhanced fund," Barclays said in its complaint.
At the end of May, for example, Bear Stearns Asset Management had the enhanced fund buy about $500 million of the riskiest classes of securities in a deal that it managed, Barclays' complaint says.
"BSAM did so despite the fact that investment restrictions it had promised Barclays did not permit those securities to be held in the fund," the complaint said.
(Reporting by Tim McLaughlin; Editing by Jeffrey Benkoe, Leslie Gevirtz)
Clickhere for full article.
The London-based bank's allegations appear in a lawsuit filed in U.S. Court for the Southern District of New York in Manhattan.
Barclays described the collapse of two Bear Stearns-run hedge funds as one of the most shocking in the last decade.
"Bear Stearns ... used the enhanced fund as a place to unload excessively risky or troubled assets that could not be sold to other investors at the prices paid by the enhanced fund," Barclays said in its complaint.
At the end of May, for example, Bear Stearns Asset Management had the enhanced fund buy about $500 million of the riskiest classes of securities in a deal that it managed, Barclays' complaint says.
"BSAM did so despite the fact that investment restrictions it had promised Barclays did not permit those securities to be held in the fund," the complaint said.
(Reporting by Tim McLaughlin; Editing by Jeffrey Benkoe, Leslie Gevirtz)
Wednesday, November 14, 2007
The Subprime Meltdown: For CDO Investors There is a Remedy
Click here for full article.
While each CDO is unique, certain tendencies in the formation of both the rated and unrated tranches have emerged. By 2006, data was available showing a dramatic increase in the risk of subprime mortgages comprising many pools of CDO collateral. The quality of loans, the rate of default, the loan-to-value ratios, and the level of documentation were known to be in decline.
CDO issuers could have taken defensive steps, including rejecting risky loans, adding more loans to cushion against loss, and fully and timely disclosing declining creditworthiness of their CDOs. Rating agencies also could have demanded changes. But, as the market for CDOs expanded and financial institutions discovered that they could pass off mortgage risk to investors, underwriting standards collapsed to irresponsible levels--with the full knowledge of the rating agencies. Both groups reaped enormous profits.
Historically, Wall Street has responded to criticism of product sales with two powerful arguments, neither of which applies to mortgage-backed CDOs.
The first defense is that independent ratings agencies such as S&P, Moody's, and Fitch evaluated and blessed each CDO before it was sold. But in the past few years, rating agencies were paid only on condition that the CDO went to market, received large continuing fees for periodically re-evaluating the products, and also collaborated with managers in structuring many CDO investments. In short, the rating agencies were not independent, and now many 2006 and 2007 CDOs are facing defaults and downgrades, effectively an acknowledgment that the original ratings issued only months earlier were deficient.
The second defense typically offered is that CDOs were purchased by institutions and sophisticated individuals with access to their own financial professionals, who were fully capable of evaluating the risks. This isn't rocket science. Caveat emptor.
But structured investment vehicles are rocket science, and not just any institutional investor or high net worth individual has the capacity to engage the army of math Ph.D.s and MBAs that Wall Street employs to create and value these products.
In 2006, the Law Offices of Alan W. Sparer won an award of $5.8 million against Deutsche Bank for its role in connection with the sale of CLOs and CDOs.
While each CDO is unique, certain tendencies in the formation of both the rated and unrated tranches have emerged. By 2006, data was available showing a dramatic increase in the risk of subprime mortgages comprising many pools of CDO collateral. The quality of loans, the rate of default, the loan-to-value ratios, and the level of documentation were known to be in decline.
CDO issuers could have taken defensive steps, including rejecting risky loans, adding more loans to cushion against loss, and fully and timely disclosing declining creditworthiness of their CDOs. Rating agencies also could have demanded changes. But, as the market for CDOs expanded and financial institutions discovered that they could pass off mortgage risk to investors, underwriting standards collapsed to irresponsible levels--with the full knowledge of the rating agencies. Both groups reaped enormous profits.
Historically, Wall Street has responded to criticism of product sales with two powerful arguments, neither of which applies to mortgage-backed CDOs.
The first defense is that independent ratings agencies such as S&P, Moody's, and Fitch evaluated and blessed each CDO before it was sold. But in the past few years, rating agencies were paid only on condition that the CDO went to market, received large continuing fees for periodically re-evaluating the products, and also collaborated with managers in structuring many CDO investments. In short, the rating agencies were not independent, and now many 2006 and 2007 CDOs are facing defaults and downgrades, effectively an acknowledgment that the original ratings issued only months earlier were deficient.
The second defense typically offered is that CDOs were purchased by institutions and sophisticated individuals with access to their own financial professionals, who were fully capable of evaluating the risks. This isn't rocket science. Caveat emptor.
But structured investment vehicles are rocket science, and not just any institutional investor or high net worth individual has the capacity to engage the army of math Ph.D.s and MBAs that Wall Street employs to create and value these products.
In 2006, the Law Offices of Alan W. Sparer won an award of $5.8 million against Deutsche Bank for its role in connection with the sale of CLOs and CDOs.
Florida Agency Holds $2.2 Billion of Debt Cut to Junk Status
November 14, 2007 - Bloomberg reports that the Florida agency that manages about $50 billion of short-term investments for the state, school districts and local governments holds $2.2 billion of debt that was cut below investment grade. Florida rules require the state's short-term investments to only be top-rated, liquid securities, so taxpayer funds aren't placed at risk.
Former SEC Chairman weigh in...
``Investment of public money needs to be carefully conducted and thoroughly researched,'' said Harvey Pitt, former chairman of the U.S. Securities and Exchange Commission. ``This is not the place for seat-of-the-pants judgments. It requires a lot more than jumping on the latest investment du jour to improve your results.''
Florida isn't the only government whose short-term investments have been affected by rising mortgage defaults in the U.S. and investors' diminished appetite for the securities tied to them.
``I think there are other communities that are going to follow, probably a lot of them,'' former U.S. Securities and Exchange Commission Chairman Arthur Levitt said today in an interview.
``I think we've got to pay more attention,'' Levitt said. ``They're playing with pensioners' money. That's serious. That's more serious than a brokerage firm or a bank losing money on a bad bet. We're talking about pension losses, and I think the fact that this is spreading is something that we've got to watch very, very carefully.''
According to the report, nearly 1,000 school districts, cities and counties invested in the fund, and have now been informed of its downgraded debt. Click here for full article.
Former SEC Chairman weigh in...
``Investment of public money needs to be carefully conducted and thoroughly researched,'' said Harvey Pitt, former chairman of the U.S. Securities and Exchange Commission. ``This is not the place for seat-of-the-pants judgments. It requires a lot more than jumping on the latest investment du jour to improve your results.''
Florida isn't the only government whose short-term investments have been affected by rising mortgage defaults in the U.S. and investors' diminished appetite for the securities tied to them.
``I think there are other communities that are going to follow, probably a lot of them,'' former U.S. Securities and Exchange Commission Chairman Arthur Levitt said today in an interview.
``I think we've got to pay more attention,'' Levitt said. ``They're playing with pensioners' money. That's serious. That's more serious than a brokerage firm or a bank losing money on a bad bet. We're talking about pension losses, and I think the fact that this is spreading is something that we've got to watch very, very carefully.''
According to the report, nearly 1,000 school districts, cities and counties invested in the fund, and have now been informed of its downgraded debt. Click here for full article.
"Breaking the buck?" Money Market Funds are Spending Millions to Ensure a Dollar is Still Worth a Dollar
Bank of America announced Tuesday, November 13, 2007 that it planned to set aside $600 million to cover potential losses in tis money market funds and an institutional cash management fund. This is the largest step by a financial institution to ensure that its money funds aren't forced to reduce the value of their shares. Click here for the full article.
"Money funds have long appealed to people as super-safe investments. And they've kept their share prices fixed at $1 a share. But unlike banks' money market deposit accounts, money funds are not federally insured. The crisis in subprime mortgages has jolted the market for the short-term securities that money funds invest in. Even so, assets in money funds recently hit a record $3 trillion.
...
Several other financial institutions have also bolstered their money funds:
- SEI, an insitutional money manager in Oaks, Pa., has set aside $129 million to support two of its money funds.
- Legg Mason, a Baltimore money management firm, has set up a $238 million line of credit for two money funds. It also invested $100 million to buoy an offshore money fund.
- SunTrust (STI) has received SEC permission to set up credit lines for two money funds.
"Money funds have long appealed to people as super-safe investments. And they've kept their share prices fixed at $1 a share. But unlike banks' money market deposit accounts, money funds are not federally insured. The crisis in subprime mortgages has jolted the market for the short-term securities that money funds invest in. Even so, assets in money funds recently hit a record $3 trillion.
...
Several other financial institutions have also bolstered their money funds:
- SEI, an insitutional money manager in Oaks, Pa., has set aside $129 million to support two of its money funds.
- Legg Mason, a Baltimore money management firm, has set up a $238 million line of credit for two money funds. It also invested $100 million to buoy an offshore money fund.
- SunTrust (STI) has received SEC permission to set up credit lines for two money funds.
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