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Auction-Rate Victims `Fit to Be Tied' as Accords Ebb (Update1)
By Michael McDonald and Darrell Preston
Oct. 24 (Bloomberg) -- Settlements between regulators and banks over the improper sale of auction-rate securities have slowed to a trickle, raising concern among investors holding $135 billion of the debt that they will be left out.
Ed Dowling, a 53-year-old clothing manufacturer from Huntington, New York, bought $2.6 million of the securities from Oppenheimer & Co. on the belief that the investments were as safe as money-market funds and easy to buy and sell. He's been stuck with most of the debt since the $330 billion auction-rate market collapsed in February, sparking a series of regulatory probes into how brokerages marketed the long-term securities.
State and federal regulators including New York state Attorney General Andrew Cuomo vowed to pursue dozens of brokerages in August after they forced eight Wall Street banks, including Citigroup Inc. and UBS AG, to agree to buy back about $45 billion of auction-rate securities. Since the initial flurry, 12 mostly smaller firms have agreed to redeem $8 billion in debt.
``It's great that they got money back for those investors,'' said Dowling, who was planning to use the money to build a new house in Huntington, on Long Island. ``A large portion of the problem hasn't been resolved, the portion I'm involved with.''
States, student-loan agencies and closed-end mutual funds sold the securities, locking in short-term rates on obligations due in 20 years or more. The long-term bonds had interest rates set at weekly or monthly auctions run by New York-based Citigroup, UBS in Zurich and the other large underwriters.
February Collapse
Municipal auction-rate securities yielded three-quarters of a percentage point less, on average, than long-term, fixed-rate bonds in 2007, according to industry indexes. The yields were a quarter of a percentage point or more above conventional money- market funds, indexes show.
The market unraveled in February. Dealers who supported auctions for two decades with their own money suddenly pulled back to preserve capital amid the mortgage slump that led to $662 billion of credit losses and writedowns worldwide.
That left investors unable to sell securities that were pitched as cash equivalents and borrowers paying penalty interest rates as high as 20 percent after auctions failed to find enough buyers.
To escape the high rates, borrowers refinanced or offered to buy back at least $142 billion of the securities, according to data compiled by Bloomberg News. Regulators forced brokerages to agree to redeem another $53 billion, leaving individuals and institutional investors stuck with about $135 billion.
Corporations owned $41 billion of auction-rate debt at the end of September, according to a survey by Chicago-based Treasury Strategies Inc. These large institutional investors were excluded from the buybacks required in the settlements.
`More Complicated'
Getting large Wall Street underwriters to buy back securities was easier because they managed the auctions and created the products, said Massachusetts Secretary of State William Galvin, who led probes into UBS and Merrill Lynch & Co. of New York. Investigations into brokerages that essentially resold the bonds will take longer, he said.
``It's obvious that we haven't had anything to announce recently,'' Galvin said. ``It's a more complicated fact pattern. It's more complicated, but it's not impossible.''
New York's Cuomo, who announced almost all the settlements with the large Wall Street banks over three weeks in August, said at the time his office had subpoenaed about 25 firms, including Oppenheimer's parent, Toronto-based Oppenheimer Holdings Inc., TD Ameritrade Holding Corp. and Charles Schwab Corp. ``We're working our way down the list,'' he said on Aug. 15.
Other Probes
TD Ameritrade, based in Omaha, Nebraska, continues ``to cooperate with regulators and other industry officials regarding their inquiries related to this issue,'' spokeswoman Kim Hillyer said. Greg Gable, a spokesman for Charles Schwab in San Francisco, declined to comment.
Cuomo also said in August he was investigating individuals at the firms that sold the securities. Alex Detrick, a spokesman for the New York state regulator, declined to comment on the status of the probes.
In the two months since the first auction-rate settlements, Cuomo has opened investigations into financial markets amid the global credit crisis that led to the collapse of Lehman Brothers Holdings Inc. on Sept. 15. He's probing short-selling of financial-company shares, the market for credit-default swaps and spending at New York-based insurer American International Group Inc., which received an $85 billion federal bailout.
Short sellers attempt to profit by selling borrowed securities and repurchasing them later at a lower price and returning them to the holder.
`Task Force'
Massachusetts still has people committed to auction-rate probes, Galvin said. Rex Staples, the general counsel of the North American Securities Administrators Association in Washington, said states are still coordinating investigations, an effort that began earlier this year.
``We still have a task force constituted, and there are still ongoing investigations,'' Staples said.
The effort to force regional brokerages to buy back securities stalled because firms are under pressure to preserve capital after Lehman's fall prompted a meltdown in credit markets, said Mike Nicholas, co-chief executive of the Regional Bond Dealers Association in Alexandria, Virginia. The group estimates regional dealers resold $60 billion of the debt.
Interest on some of Dowling's holdings soared as high as 12.5 percent two weeks ago, as average yields on municipal auction-rate debt surpassed the records reached when the market imploded in February. For him, that's cold comfort.
`My Money'
``Listen, it's my money, it was sold to me as liquid cash,'' said Dowling, who has $2 million of the securities left after $600,000 was refinanced. ``What it's paying is totally irrelevant.''
Brian Maddox, an outside spokesman for Oppenheimer with Financial Dynamics in New York, said the firm continues ``to explore all options available'' for its customers.
Greg McNelley, a 56-year-old investor from San Juan Capistrano, California, remains stuck with $350,000 of student- loan auction-rate securities he bought from San Francisco-based Wells Fargo & Co., which hasn't agreed to buy back auction-rate securities.
``I am just fit to be tied,'' said McNelley, who retired from his job at a health-maintenance organization. ``I was counting on this money to supplement my income.''
Wells Fargo is working ``closely with our clients to address their liquidity needs'' by offering holders loans, spokeswoman Kathleen Golden said.
Latest Accords
The Financial Industry Regulatory Authority announced yesterday that a Bank of New York Mellon Corp. unit and two brokerages in California and Illinois will buy back more than $60 million of the securities.
Finra, a self-regulatory agency based in Washington, revealed settlements with five firms on Sept. 18 and opened more than 50 additional investigations, and ``more are expected.'' The regulator has questioned more than 200 companies and conducted sweeps of firms distributing the bonds, it said. Nancy Condon, a spokeswoman, declined to elaborate.
The U.S. Securities and Exchange Commission participated in the settlements with the large underwriters.
``Distributing dealers that were not part of underwriting or managing the auctions didn't know any more about the market than the investors,'' said Nicholas of the Regional Bond Dealers Association.
To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net; Darrell Preston in Dallas at dpreston@bloomberg.net.
Last Updated: October 24, 2008 10:14 EDT
http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=a_j9F3BQ48fI
The wrong kind of bail-out?
22 Sep 2008 02:08 am
An excellent column by Sebastian Mallaby looks at the unfolding Fed-Treasury plan and finds it wanting:
The plan is being marketed under false pretenses. Supporters have invoked the shining success of the Resolution Trust Corporation as justification and precedent. But the RTC, which was created in 1989 to clean up the wreckage of the savings-and-loan crisis, bears little resemblance to what is being contemplated now. The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.
The first is whether the bailout is necessary. In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC's job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that preemption will avert the mass destruction of banks. There are cheaper ways to stabilize the system.
In the 1980s, the government did not need a strategy to decide which bad loans to take over; it dealt with anything that fell into its lap as a result of a thrift bankruptcy. But under the current proposal, the government would go out and shop for bad loans. These come in all shapes and sizes, so the government would have to judge what type of loans it wants. They are illiquid, so it's hard to know how to value them. Bad loans are weighing down the financial system precisely because private-sector experts can't determine their worth. The government would have no better handle on the problem.
In practice this means the government would make subjective choices about which bad loans to buy, and it would pay more than fair value. Billions in taxpayer money would be transferred to the shareholders and creditors of banks, and the banks from which the government bought most loans would be subsidized more than their rivals. If the government bought the most from the sickest institutions, it would be slowing the healthy process in which strong players buy up the weak, delaying an eventual recovery. The haggling over which banks got to unload the most would drag on for months. So the hope that this "systematic" plan can be a near-term substitute for ad hoc AIG-style bailouts is illusory.
I'm a little reluctant to second-guess the proposal put together by Bernanke and Paulson because I don't know everything the Fed knows about the fragility of the credit markets and the urgency of the case. But I agree that the RTC analogy is wrong, and the column is surely right about the problems the Fed-Treasury plan faces. The article goes on to mention separate alternative proposals by Charles Calomiris and Raghuram Rajan. Both stress the need to recapitalise the banks. Calomiris would do it through government purchases of equity, Rajan through mandatory rights issues and a prohibition of bank dividend payments.
You can read fuller statements of these interesting proposals here and here on Martin Wolf's FT economists' forum. (Be sure to read Willem Buiter's comments on each article as well.) These ideas definitely have attractive features--but, to put it mildly, they are not without difficulty and involve complications of their own. For instance, Rajan says:
I suggest restricting the rights requirement only to well-capitalised entities. This may seem like penalising shareholders of well-performing companies. But in fact these are institutions that could use more capital very profitably in buying underpriced assets, and taking over weaker financial companies. Authorities could also reward these companies by facilitating acquisitions, possibly through favourable tax treatment. By contrast, forcing weak companies to issue rights risks tanking an already fragile share price, and is not a risk worth taking at this juncture.
Agreed: but how do we define a "well-capitalised entity" for the purposes of this mandate? If the bar is set too low, the "risk not worth taking" in that last sentence comes into play. Calomiris says:
To ensure that MPS [Matched Preferred Stock--his proposal for government purchases of equity] is only supplied as truly needed from a systemic standpoint, and to limit any abuse of the taxpayer-provided subsidy, the private sector would also be required to act collectively to help recapitalize undercapitalized banks, and share the risks associated with recapitalizing banks.
Specifically, to qualify for MPS assistance from the government, a bank would have to first obtain approval from "the Syndicate" of private banks (including the major institutions who would benefit from the plan as well as others who would benefit from the reduction in systemic risk) to commit to underwrite common stock of the institution receiving MPS in an amount equal to, say, at least 50 per cent of the amount of MPS it is applying for (at a price agreed between the Syndicate and the bank at the time of its application fro MPS). The Syndicate would share the underwriting burden on some pro rata basis. To support that underwriting, the Syndicate would have access to a line of credit from the US government (and from other countries' governments, if non-US banks participate in the MPS system)... For banks participating in the MPS plan that are based outside the US, foreign governments would have to provide the MPS investments. Presumably, those foreign governments would also provide the credit line commitment to the syndicate for its underwriting of common stock.
Much as I like this plan in principle, I don't think I would celebrate simplicity as one of its chief virtues.
It will be interesting to see whether Congress insists on a debate of these and other alternative strategies, or concentrates merely on larding the Paulson-Bernanke approach with additional subsidies for distressed home-buyers.
Strong Push for an RTC-Type Solution to the Crisis
The U.S. once purged bad S&Ls for $85 billion. How much would it cost to clean up a much bigger financial crisis? No one seems to know
by Jane Sasseen
As Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met on the evening of Sept. 18 with congressional leaders, momentum was building for a new Resolution Trust Corp.-style entity. The vehicle would be set up to stem the slide in the markets and halt the erosion of the financial sector.
Just two days earlier, Treasury officials had said no broader entity was needed. But rather than easing market woes, the $85 billion federal bailout of insurer American International Group (AIG) sent new waves of fear through the market, as investors tried to assess what other corporations might suddenly turn up insolvent. With the markets down through midday Sept. 18, and lending among institutions all but grinding to a halt, regulators and lawmakers decided a more systematic approach was needed to keep more institutions from buckling under the strain.
At the hastily called Capitol Hill meeting, Paulson and Bernanke met with House and Senate Republicans and Democrats to discuss current market conditions. Paulson and Bernanke "began a discussion with them on a comprehensive approach to address the illiquid assets on bank balance sheets that are the underlying source of the current stresses in our financial institutions and financial markets," said Treasury spokeswoman Brookly McLaughlin in a statement. "They are exploring all options, legislative and administrative, and expect to work through the weekend with congressional leaders to finalize a way forward."
A Chorus of Demands
With the policy measures taken by Washington so far unable to stop the slide, there had been growing calls in recent days for a more systematic approach modeled on the RTC, which was set up in the late 1980s to restructure the underwater mortgages held by nearly 750 insolvent savings and loan institutions. "Lesson No. 1 from that era is: Move quickly. Troubled assets don't become more valuable over time; they become less valuable," said Richard Breeden, the RTC's architect and a former Securities & Exchange Commission chairman.
The idea has drawn powerful supporters: ex-Treasury Secretary Lawrence Summers and former Federal Reserve chairmen Alan Greenspan and Paul Volcker have recently backed it, while lawmakers ranging from Representative Barney Frank (D-Mass.), the influential head of the House Financial Services Committee, to Senator Richard Shelby (R-Ala.), the top Republican on the Senate Banking Committee, said early in the week that a new RTC should be considered.
Both Presidential contenders have also said such an approach was needed. "I am calling for the creation of the Mortgage & Financial Institutions Trust—the MFI," Senator John McCain (R-Ariz.) said Sept. 18. "The priorities of this trust will be to work with the private sector and regulators to identify institutions that are weak and take remedies to strengthen them before they become insolvent. For troubled institutions, this will provide an orderly process through which to identify bad loans and eventually sell them." Senator Barack Obama's (D-Ill.) rhetoric was similar: "I'll call for the passage of a Homeowner & Financial Support Act that would establish a more stable and permanent solution than the daily improvisations that have characterized policymaking over the last year."
How would an RTC-like entity help? The original RTC sold off the restructured loans as the market improved, rather than in a quick-fire sale, thus lessening the cost of the savings and loan crisis to the economy and to taxpayers.
An Undercapitalized System?
One key difference between the 1980s S&L affair and today's financial crisis is that the government had already taken over the insolvent banks by the time it created the RTC. In effect, Uncle Sam already owned the assets and set the agency up to facilitate a smooth liquidation.
COMPETITION: GUESS THE SIZE????????
My Guess 4 trillion
Yes folks, step right up,
Our US Congress is about to write its largest check in this toilet flush.An RTC or RESOLUTION TRUST CORP is finally being talked about up at the Hill.
This RTC if/when passed by Congress grants a solid victory to the Hedgehogs who proved the point, to the lost jobs on Wall Street who assisted in the systematic 'picking apart' and selling of US and some of the global wealth.
********Some huge guys made huge legit bank in the last year. To some that was watching, the bets were obvious.
The derivative boys and girlies who made filthy lucre and ill gotten gains will be looking over their shoulders for a long time to come IMO ; >
GUESS THE RTC 2 -- MY GUESS $4trillion
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Resolution Trust Corporation
This article does not cite any references or sources. Please help improve this article by adding citations to reliable sources. Unverifiable material may be challenged and removed. (July 2008) |
The Resolution Trust Corporation (RTC) was a United States Government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision, as a consequence of the savings and loan crisis of the 1980s. It also took over the insurance functions of the former Federal Home Loan Bank Board. It was created by the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), adopted in 1989. In 1995, its duties were transferred to the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation.
Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion. [1]
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The Resolution Trust Corporation pioneered the use of so-called “equity partnerships” to help liquidate real estate and financial assets which it inherited from insolvent thrift institutions. While a number of different structures were used, all of the equity partnerships involved a private sector partner acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC reflective of the RTC’s retained interest.
The RTC used equity partnerships to achieve a superior execution through maintaining upside participation in the portfolios. Prior to introducing the equity partnership program, the RTC had engaged in “bulk sales” of asset portfolios. The pricing on certain types of assets often proved to be disappointing because the purchasers discounted heavily for “unknowns” regarding the assets, and to reflect uncertainty at the time regarding the real estate market. By retaining an interest in asset portfolios, the RTC was able to participate in the extremely strong returns being realized by portfolio investors. Additionally, the equity partnerships enabled the RTC to benefit by the management and liquidation efforts of their private sector partners, and the structure helped assure an alignment of incentives superior to that which typically exists in a principal/contractor relationship.
The following is a summary description of RTC Equity Partnership Programs:
Under the MIF Program, the RTC established limited partnerships (each known as a “Multiple Investor Fund” or “MIF”) and selected private sector entities to be the general partner of each MIF. The MIF structure contemplated the following:
Each of the MIF general partners was a joint venture among an asset manager with experience in managing and liquidating distressed real estate assets, and a capital source. There were two MIF transactions involving over 1000 loans having an aggregate book value of slightly over $2 billion and an aggregate DIV of $982 million .
The “N-Series” and “S-Series” programs were successor programs to the MIF program. The N-Series and S-Series structure was different from that of the MIF in that (i) the subject assets were pre-identified by the RTC—under the MIF, the specific assets had not been identified in advance of the bidding—and (ii) the interests in the asset portfolios were competitively bid on by pre-qualified investors and the highest bid won (the RTC’s process for selecting MIF general partners, in contrast, took into account non-price factors).
The N-Series structure contemplated the following:
Each of the N-Series bid teams was a joint venture between an asset manager with experience in managing and liquidating distressed real estate assets, and a capital source. There were a total of six N-Series partnership transactions in which the RTC placed 2,600 loans with an approximate book value of $2.8 billion and a DIV of $1.3 billion. A total of $975 million of CMBS bonds were issued for the six N-Series transaction, representing 60% of the value of N-Series trust assets as determined by the competitive bid process (the value of the assets implied by the investor bids was substantially greater than the DIV values calculated by the RTC). While the original bond maturity was 10 years from the transaction, the average bond was retired in 21 months from the transaction date, and all bonds were retired within 28 months.
The S-Series program was similar to the N-Series program, and contained the same profile of assets as the N-Series transactions. The S-Series was designed to appeal to investors who might lack the resources necessary to undertake an N-Series transaction, and differed from the N-Series program in the following respects:
There were nine S-Series transactions, into which the RTC contributed more than 1,100 loans having a total book value of approximately $1 billion and a DIV of $466 million. The RTC purchase money loans, aggregating $284 million for the nine S-transactions, were all paid off within 22 months of the respective transaction closing dates (on average, the purchase money loans were retired in 16 months).
The RTC Land fund program was created to enable the RTC to share in the profit from longer term recovery and development of land. Under the Land Fund Program, the RTC selected private sector entities to be the general partners of 30-year term limited partnerships known as “Land Funds.” The Land Fund program was different from the MIF and N/S-Series programs in that the Land Fund general partner had the authority to engage in long-term development, whereas the MIFs and N/S-Series Trusts were focused on asset liquidation. The Land Fund structure contemplated the following:
Land Fund general partners were joint ventures between asset managers, developers and capital sources. There were three land fund programs, giving rise to 12 land fund partnerships for different land asset portfolios. These funds received 815 assets with a total book value of $2 billion and DIV of $614 million.
Under the JDC Program, the RTC established limited partnerships and selected private sector entities to be the general partner of each JDC Partnership. The JDC program was different from the MIF, N/S Series and Land Fund programs in that (i) the general partner paid only a nominal price for the assets and was selected on a “beauty-contest” basis, and (ii) the general partner (rather than the partnership itself) had to absorb most operating costs. The JDC Partnership structure contemplated the following:
JDC general partners consisted of asset managers and collection firms. The JDC program was adopted by the FDIC and is still in existence.
Mere talk of a possible government solution to the credit crisis weighing down the U.S. and global markets provided enough hope to investors to support a mammoth rally in the U.S. stock market this week.
When the first reports of a federally funded bailout for the sector leaked Thursday afternoon, the market rallied large in the last hour of trading. The market expanded that rally Friday with gains large enough to effectively wipe out the week's earlier losses.
As Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke work with members of Congress over the weekend to hammer out specific details of the bailout plan, market player are already speculating about what the plan could look like and if it could really provide an effective solution to the financial crisis.
Essentially, the
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