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Archive for the ‘Subprime’ Category

Subprime Related Subpoenas From SEC Recieved By Citi

In Friday’s quarterly filing with regulators, the New York-based megabank says for the first time that it has received subprime-related subpoenas from the SEC.

Citi’s filing said (on page 176) that it “continues to cooperate fully in response to subpoenas and requests for information from the Securities and Exchange Commission and other government agencies in connection with various formal and informal inquiries concerning Citigroup’s subprime mortgage-related conduct and business activities.”

Not that this comes as a great shock. Citi has disclosed before that its actions in the subprime mess and the larger credit crisis are the subject of legal interest from all angles. The firm spent the better part of two pages (at pages 263-265) in its annual regulatory filing detailing the scrutiny it faces from regulators, federal agencies, and plaintiff’s lawyers.

“Beginning in the fourth quarter of 2007, certain of Citigroup’s regulators and other state and federal government agencies commenced formal and informal investigations and inquiries, and issued subpoenas and requested information, concerning Citigroup’s subprime mortgage-related conduct and business activities,” the firm said then. “Citigroup is involved in discussions with certain of its regulators to resolve certain of these matters.”

Friday’s filing adds to the year-end filing in one way: in this one, Citi mentions the SEC by name.

Indiana Charity Files Arbitration Claims Against Bond Fund Advisor Over Sub-Prime Losses

Last week, an Indiana charity that “makes wishes come true” for children with life threatening illnesses filed arbitration claims over sub-prime related losses it allegedly suffered in a bond fund managed by Regions Morgan Keegan.  The Indiana Children’s Wish Find claimed that it lost $48,000 or 22% of its $220,000 investment in the Regions Morgan Keegan Select Intermediated Bond Fund.

The Wish Fund claims that it was misled by Morgan Keegan concerning the level of risk it assumed by investing in the fund.  According to the Wish Fund Regions Bank, an affiliate of Morgan Keegan suggested that the Wish Fund move money from it’s money market account into the bond fund.  Regions Bank allegedly represented that the bond fund was an appropriate low risk alternative to a CD.  The Wish Fund alleged that the bond fund was heavily invested in risky-low rated mortgage debt.  

How Rating Firms’ Calls Fueled Subprime Mess

In 2000, Standard & Poor’s made a decision about an arcane corner of the mortgage market. It said a type of mortgage that involves a “piggyback,” where borrowers simultaneously take out a second loan for the down payment, was no more likely to default than a standard mortgage.

While its pronouncement went unnoticed outside the mortgage world, piggybacks soon were part of a movement that transformed America’s home-loan industry: a boom in “subprime” mortgages taken out by buyers with weak credit.

Six years later, S&P reversed its view of loans with piggybacks. It said they actually were far more likely to default. By then, however, they and other newfangled loans were key parts of a massive $1.1 trillion subprime-mortgage market.

Today that market is a mess. As defaults have increased, investors who bought bonds and other securities based on the mortgages have found their securities losing value, or in some cases difficult to value at all. Some hedge funds that feasted on the securities imploded, and investors as far away as Germany and Australia have suffered. Central banks have felt obliged to jump in to calm turmoil in the credit markets.

It was lenders that made the lenient loans, it was home buyers who sought out easy mortgages, and it was Wall Street underwriters that turned them into securities. But credit-rating firms also played a role in the subprime-mortgage boom that is now troubling financial markets. S&P, Moody’s Investors Service and Fitch Ratings gave top ratings to many securities built on the questionable loans, making the securities seem as safe as a Treasury bond.

Also helping spur the boom was a less-recognized role of the rating companies: their collaboration, behind the scenes, with the underwriters that were putting those securities together. Underwriters don’t just assemble a security out of home loans and ship it off to the credit raters to see what grade it gets. Instead, they work with rating companies while designing a mortgage bond or other security, making sure it gets high-enough ratings to be marketable.

The result of the rating firms’ collaboration and generally benign ratings of securities based on subprime mortgages was that more got marketed. And that meant additional leeway for lenient lenders making these loans to offer more of them.

The credit-rating firms are used to being whipping boys when things go badly in the markets. They were criticized for being late to alert investors to problems at Enron Corp. and other companies where major accounting misdeeds took place. Yet they also sometimes get chastised when they downgrade a company’s credit.

Mortgage delinquencies spreading: AIG

Residential mortgage delinquencies and defaults are becoming more common among borrowers in the category just above subprime, American International Group (NYSE: AIG) said on Thursday.

In a presentation on its subprime exposure, AIG, the world’s largest insurer and one of the biggest mortgage lenders, said total delinquencies in its $25.9 billion real estate portfolio were 2.5 percent. It said 10.8 percent of its subprime mortgages were 60 days overdue, compared with 4.6 percent in the category with credit scores just above subprime, indicating that the threat to the mortgage market may be spreading.

Morgan Keegan’s Kelsoe Falls From Top Ranking on Subprime Rout

Jim Kelsoe, a top-ranked junk-bond fund manager since 2000, dropped to last place this year because of losses tied to mortgages for people with poor credit.

Kelsoe’s $1.1 billion Regions Morgan Keegan Select High Income Fund fell 4.2 percent from the beginning of 2007 as defaults on subprime home loans reached a five-year high. The mutual fund had 15 percent of assets in the subprime market and at least the same amount in other mortgage debt in May.

The High Income fund got a boost from the holdings for seven years and now “it’s very easy to be critical” of the investment decision, Kelsoe said in an interview from his office at Morgan Asset Management Inc. in Memphis, Tennessee. The fund had as much as 25 percent of assets in subprime-related securities in 2005.

Kelsoe’s fund ranks last of 93 high-yield rivals and it’s the eighth-worst performer this year of more than 550 U.S.-based bond funds tracked by Bloomberg. Losses accelerated in June after the collapse of two hedge funds run by Bear Stearns Cos. partly because of bad bets on bonds linked to subprime mortgages.

The $1 billion Regions Morgan Keegan Select Intermediate Bond Fund, which Kelsoe manages, also is the worst in its class, down 2.1 percent this year including reinvested dividends.

“A lot of mutual funds didn’t own much of this stuff,” said Lawrence Jones, an industry analyst at Chicago-based research firm Morningstar Inc., referring to the subprime market. The Morgan Keegan fund “is the one real big exception.”

The 44-year-old Kelsoe said that, like fund managers drawn in by Internet stocks at the start of the decade, an “intoxication” with high-yield subprime investments kept him from pulling out completely. Subprime mortgage bonds rated BBB, or investment grade, yielded 2.05 percentage points more than benchmarks in February, compared with 1.53 percentage points for BB-rated, or junk, corporate bonds, according to JPMorgan Chase & Co. in New York.

Morningstar cut its rating on Kelsoe’s High Income fund this month to three stars from four stars, citing above-average risk and underperformance. The highest grade is five. The fund has a one-year Sharpe ratio of minus 0.9, compared with 1.86 for its peers. A higher ratio means better risk-adjusted returns.

The average high-yield fund has gained 2.9 percent this year, according to Morningstar. The top-performing $4.1 billion Pioneer High Yield Fund, run by Andrew Feltus at Boston-based Pioneer Investment Management Inc., has gained 9 percent.

Kelsoe, who has worked at Morgan Keegan for the past 16 years, favors bonds backed by assets such as aircraft leases, and mortgage loans, as well as collateralized debt obligations, or CDOs, instead of corporate bonds, which made up only 21 percent of the fund in March. The $9.5 billion Vanguard High- Yield Corporate Fund, by contrast, has 92 percent of its assets in corporate bonds last month.

The strategy helped Kelsoe avoid getting pummeled by companies dragged down by concerns about accounting scandals at energy trader Enron Corp. in 2001 and phone company WorldCom Inc. the next year. A large part of his outperformance in recent years came from purchases of beaten-down aircraft-lease bonds after the Sept. 11, 2001, terrorist attacks, Morningstar’s Jones said.

Kelsoe, who graduated from the University of Alabama in Tuscaloosa, started managing the High Income fund in 1999. Morgan Asset Management is a unit of Birmingham, Alabama-based Regions Financial Corp.

Kelsoe’s fund rose 17 percent in 2000, 18 percent the next year and 11 percent in 2002, outperforming 99 percent of its competitors. Since the start of the decade, the fund climbed at an average annual rate of 12 percent, compared with 2.2 percent for the Standard & Poor’s 500 Index of U.S. stocks.

The fund is declining this year amid surging delinquencies on mortgages that may cause bond investors to lose about $100 billion in principal, according to estimates from analysts at New York-based Citigroup Inc.

Kelsoe had $4 million at the end of last year in a security backed by second mortgages that Goldman Sachs Group Inc. created in January 2006. The bond was downgraded twice this year by Moody’s Investors Service to the lowest rating.

Another holding was an unrated piece of a CDO overseen by Deerfield Capital Management LLC that was sold a year ago by Royal Bank of Scotland Group Plc. The $4.8 million security, which a semi-annual report listed with a 15 percent coupon, is mostly backed by subprime and “mid-prime” mortgage securities.

Bear Stearns Tells Fund Investors “No Value Left”

Bear Stearns Cos. told investors in its two failed hedge funds that they’ll get little if any money back after “unprecedented declines” in the value of the securities used to bet on subprime mortgages.

“This is a watershed,” said Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pennsylvania. “A leading player, which has honed a reputation as a sage investor in mortgage securities, has faltered. It begs the question of how other market participants have fared.”

Estimates show there is “effectively no value left” in the High-Grade Structured Credit Strategies Enhanced Leverage Fund and “very little value left” in the High-Grade Structured Credit Strategies Fund, Bear Stearns said in a two-page letter. The second fund still has “sufficient assets” to cover the $1.4 billion it owes Bear Stearns, which as a creditor gets paid back first, according to the letter, obtained yesterday by Bloomberg News from a person involved in the matter.

Bear Stearns, the fifth-largest U.S. securities firm, provided the second fund with $1.6 billion of emergency financing last month in the biggest hedge fund bailout since the collapse of Long-Term Capital Management LP in 1998. The losses its clients now face underscore the severity of the shakeout in the market for collateralized debt obligations, or CDOs, investment vehicles that repackage bonds, loans, derivatives and other CDOs into new securities.

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