Volume of SEC Litigation Releases over Time
(Oct 2013)
Here at SLCG, we have spent a lot of time compiling and summarizing the SEC's Litigation Releases each Friday. You can find all of those weekly summaries on our blog -- 91 and counting! -- but we noticed that last week had a lot more Litigation Releases than usual. We also noticed the same thing at the end of last September. We wondered if there was a pattern here.
Being nerds, we wrote a program to count all of the SEC's Litigation Releases over the past 15 years. We aggregated them monthly...
Trouble in Paradise: UBS Puerto Rico Bond Fund Investors Hit Hard
(Oct 2013)
Despite a 2012 settlement agreement with the SEC, UBS Puerto Rico continues to face new allegations regarding its sales practices of tax-advantaged closed-end funds. While UBS Puerto Rico did not admit wrongdoing when it settled with the SEC, an SEC statement on the matter said "UBS Puerto Rico denied its closed-end fund customers [...] accurate price and liquidity information, and a trading desk that did not advantage UBS's trades over those of its customers." At the time of the SEC...
Risk Retention in Collateralized Loan Obligations
(Sep 2013)
Last week we covered the SEC's proposed risk retention rules for securitized assets such as collateralized debt obligations (CDOs) and mortgage backed securities (MBS). One of the reasons why these types of structured deals are so complex is because they are divided into many different securities, called 'tranches,' with different levels of risk. We explained tranching in our post, What is a CDO, Anyway?
The new proposed rules require sponsors of securitizations to keep at least 5% of each...
Cat Bonds and Contamination Risk
(Aug 2013)
Many pension funds have struggled to achieve sufficient return on their investments in the current low interest rate environment. Some have begun investing in insurance-linked securities, particularly catastrophe ('cat') bonds. You can find our primer on insurance-linked securities on our blog post, "The Basics of Insurance Linked Securities"; essentially, insurance companies issue cat bonds to transfer the risk of catastrophic losses to investors, meaning cat bond investors suffer losses in...
Structured CD with an Exotic Embedded Option
(Aug 2013)
In the past few months, we have constructed a database of thousands of structured certificates of deposit (CDs). We have analyzed and evaluated hundreds of these CDs and have compiled these results into a recently completed study . Our results indicate that structured CDs are usually issued at significant discounts to face-value (comparable to structured products), offer little if any market exposure and are often less valuable than contemporaneously issued fixed rate CDs.
We've recently come...
Municipal Bonds Trading in ETFs
(Aug 2013)
About a month ago, we spent a full week highlighting research conducted at our firm that shows the degree to which investors are harmed by excessive markups in municipal bond trading. In the paper, our colleagues argue that low-cost improvements in disclosure requirements could largely eliminate these transfers of wealth from taxpayers and investors to the brokerage industry.
After the research was completed, we began thinking about other ways investors gain exposure to municipal bonds. For...
Misrepresentation of Asset Quality in RMBS
(Jul 2013)
Investors in Residential Mortgage Backed Securities (RMBS) have suffered tremendous losses since 2007. Many junior and mezzanine investors were wiped out by the asset pools' delinquency rates coupled with the subordination embedded in these structured securities. Since then, there has been a proliferation of litigation alleging that the underwriters and originators of RMBS misrepresented the risks of these products. An interesting new paper by Professors Piskorski and Witkin of Columbia...
Similar Structured Product Premia in US and Europe
(Jul 2013)
One point we've made again and again in our research is that structured products -- debt securities with market-contingent payoffs -- tend to be priced at a premium to face value. We have documented premia in reverse convertibles, autocallables, absolute return barrier notes, principal-protected notes, dual directionals, and over 17,000 individual products freely available in our searchable structured product database.
Recently, the SEC has required structured product issuers to disclose an...
Structured Investments Linked to Proprietary Indices
(Jun 2013)
Structured products are often linked to well known indices like the S&P 500 or the Dow Jones Industrial Average, but recently it has become more and more common for banks to issue structured investments linked to proprietary indices that they create themselves. The use of proprietary indices (also known as 'self-indexing') has begun to arouse suspicion from various sources and so we thought we'd take a step back and talk about the issue for a moment.
Structured products linked to well-known...
Reverse Convertibles and Event Risk
(Jun 2013)
Reverse convertibles are short-term debt securities issued by banks whose return of principal at maturity is contingent upon the returns of the linked stock. Although these notes typically pay relatively high coupons, they expose investors to losses on the underlying asset, especially if those losses are beyond the trigger level. Academic research shows that these coupons are not adequately compensating the investor for the market risk that they are bearing by investing in the notes. For...
