Sub Prime Securities Investment Law Blog

The recent purchasing patterns in Florida’s pension funds serve to identify a sleazy side of the subprime debacle. In the February 2008 Bloomberg Markets David Evans has discussed some horrid behavior in a pension fund that was once an example for the rest of the nation. “On Sept. 30, 2005, 25 percent of the pool was invested in U.S. Treasuries and debt issued by U.S. agencies, the safest and most liquid debt sold… Florida was more aggressive than most states. In October, the Florida pool had the highest return of any public fund in the U.S., earning 5.63 percent.” However, in 2007, something changed and Florida’s fund managers began buying risky, subprime holdings.

Coleman Stipanovich supervised an investment fund for Florida’s school district until he resigned on December 4, 2007 and after school districts in Florida began panicking and pulling money out of his fund. Apparently, in July and August 2007, Stipanovich bought $842 million of mortgage-backed debt with taxpayer money. The securities defaulted within four months.

David Evans uncovered a consistent scheme of purchasing subprime laden debts. “As the subprime crisis unfolded around the world, Stipanovich and [pool manager] Lombardi increased their holdings of high-risk debt. They steadily reduced holdings of government securities in favor of higher-yielding—and riskier—commercial paper. In February 2007, London-based HSBC Holdings Plc, Europe’s largest bank by market value, reported it had losses of $1.8 billion more than expected on its U.S. subprime lending. In the same month, Lombardi bought the $400 million in Countrywide CDs.”

Florida’s funds suffered not only due to a consistent plan of purchasing high risk subprime securities but also from the predatory self-dealing of its managers.

http://www.bloomberg.com/news/marketsmag/mm_0208_story2.html

Posted by Kirk Reasonover | Permalink | Email This Post

Posted In: Effect on Securities Markets , Institutional Investors

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Once again the subprime mortgage crisis is taking its toll on the average working American. Bloomberg Markets has recently described investments in Structured Investment Vehicles (SIVs) and Collateralized Debt Obligations (CDOs) by public funds across the United States. Both SIVs and CDOs invest heavily and opaquely in subprime mortgages, and fund managers are enticed by the potential returns and undisclosed risks.

SIVs are perhaps the most sinister investment vehicles. “SIVs finance themselves by selling asset-backed commercial paper, or short-term loans backed by collateral such as mortgages. When the subprime debt market blew up in August, investors stopped buying SIV commercial paper. As a result, in September and October, SIVs didn’t have the cash to pay debt holders of more than $8 billion of their paper.” These programs do not file with the SEC and do not publicly disclose financial statements. As a result, they can hide any and all risk associated with their investments.

State pension plans bought up SIVs and CDOs riddled with subprime debt and are now facing tremendous losses not only from market declines but from major default rates. As Bloomberg Markets David Evans says: “Until municipal fund managers learn to steer clear of traps like CDOs and SIVs, taxpayers’ money will be at risk—and it’s not likely anyone will tell them.” Taxpayers certainly aren’t the winners in the subprime mess.

http://www.bloomberg.com/news/marketsmag/mm_0108_story3.html

Posted by Kirk Reasonover | Permalink | Email This Post

Posted In: Effect on Securities Markets , Institutional Investors

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The financial industries have come up with a colorful, appropriate name for the equity tranches of CDOs - the toxic tranch. Also sometimes called, ‘first loss’ portions, these tranches promise the highest return and are the first to default. The subprime crisis hit the equity tranches first and hardest, and, incongruously, pension funds across the nations lost millions of dollars.

David Evans of Bloomberg wrote in July 2007 about the increase in equity tranch purchases by pension funds. “Seven percent of all the equity tranches sold in the U.S. in the past decade were purchased by pension funds, endowments and religious organizations…. Public pension funds have bought more than $500 million in CDO equity tranches in the past five years.” These equity tranches are riddled the very subprime debt that plummeted throughout the second half of 2007.

Evans spoke with Chriss Street, the treasurer of Orange County, California, who “says the big risks taken by public pension fund managers to juice up their investment performance with CDO equity tranches could result in big losses. Those tranches are filled with risky debt, which is sometimes in the form of subprime mortgages… ‘Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans,’ [Street] says.”

All of the players involved in peddling toxic securities are responsible for the losses due to pension participants and individual investors. Financial Institutions have advertised the high returns, and pension fund managers have accepted the bait, sometimes unwittingly exposing their clients to risky subprime debt.

Read the story:
http://www.bloomberg.com/news/marketsmag/pension.html

Posted by Kirk Reasonover | Permalink | Email This Post

Posted In: Effect on Securities Markets , Institutional Investors

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