Massachusetts Security Regulator Latest to Take Action on BoA CLOs
(Feb 2012)
The Wall Street Journal today reported that Massachusetts is investigating Bank of America for their role in the LCM VII and Bryn Mawr II CLOs. Secretary of the Commonwealth William Galvin is leading the investigation as to whether the two CLOs priced their underlying assets truthfully at the time of sales to investors. The subpoenas have also been picked up byBloomberg, Fox Business, and Reuters, amongst others.
SLCG initially reported the mispricing of these CLOs in a research paper earlier...
Could Credit Rating Agencies be Held Accountable This Time?
(Feb 2012)
A recent wall street journal article reports that U.S. lawmakers plan to introduce a bill that would require top credit-rating firms to review their credit ratings on a quarterly basis, hoping that more frequent reviews would increase the accuracy of their ratings and help identify potential problems.
According to Wall Street Journal, the bill would "amend the Securities Exchange Act of 1934 to require the chief executive officer of each [credit-rating firm] to attest, quarterly, to the...
A Wipeout That Didn't Have to Happen
(Feb 2012)
This weekend the New York Times' Gretchen Morgenson wrote an article about the recent FINRA award against Banc of America Securities for their LCM VII CLO. We have blogged about this case before, and have put together a research paper describing the underlying issue of warehousing assets in structured credit derivatives. We are very grateful to the New York Times and Gretchen Morgenson for giving this story the attention it deserves.
The fundamental problem with structured credit and many...
In the News: UBS & Morgan Stanley Subpoenaed over Reverse Convertibles
(Jul 2011)
UBS, Morgan Stanley Subpoenaed Over Reverse Convertibles
Bloomberg news reported today that the state of Georgia had sent subpoenas requesting for data and other information from UBS AG, Morgan Stanley and Ameriprise Financial Inc.. The state is investigating whether these brokerage firms violated the securities laws of Georgia in their sale of reverse convertibles to investors of Georgia.
Sales of reverse convertibles have grown, and investors who are being sold these structured...
In the News: Structured Notes
(Oct 2010)
Bloomberg issued a news release today reporting that the amount of sales and issuances of structured products had reached a record in 2010. The demand for higher yields and caution in investing in stock were factors which contributed to the growth in structured products. According to Bloomberg, a popular structured product was the step-up callable note, which is a callable note that increases ('steps up') its fixed rate over time.
This calls for active analysis of the merits of...
In the News: SEC Reviewing Sales of Structured Products
(Sep 2010)
Bloomberg issued a news release today announcing that sales practices of banks and broker-dealers for structured products are being investigated by the Securities and Exchange Commission (SEC) for product overcharging and disclosure of conflicts of interest.
This is not a surprising new release: it is consistent with our findings in our paper on reverse convertibles, 'What TiVo and JP Morgan teach us about Reverse Convertibles.' In this paper, we find that brokerage firms consistently...
In the News: Structured Notes
(Aug 2010)
Structured Notes Are Wall Street's `Next Bubble,' Whalen Says
Bloomberg issued a news release today discussing the topic of a structured products bubble in Wall Street. According Christopher Whalen, managing director of Institutional Risk Analytics, the sale of structured products allows the selling firms to make bets on interest rates. Furthermore, they are illiquid products for which firms are not obligated to make markets and hence provide liquidity when these products might need them...
Reverse Convertibles tied to TiVo Stock
(May 2010)
J. P. Morgan's 64% Note Tied to TiVo Stock Shows Risks of Reverse Convertibles
Bloomberg issued a news release reporting on the reverse convertible, a structured product, on TiVo.
A reverse convertible note is a type of structured product that is linked to an equity security or an index. It is a short-term note that pays a relatively high coupon rate compared to traditional notes. The returns of the note at maturity depends on whether the equity, called 'reference asset', falls below a...
Registered Rep.: A Tempest Over Structured Products
(Feb 2007)
A Tempest Over Structured Products
Registered Rep. issued a news release today reporting on the state of the structured products market. The sale of structured products has grown by an estimate of 33% from 2005 to 2006. Yet the general features of structured products seem to make these products unattractive: complex, expensive, and illiquid. Financial advisors might favor structured products for it enables portfolio diversification and for its ability to tailor to the specific needs of...
Forbes: Guaranteed to Go Up
(Nov 2006)
Guaranteed to Go Up
Forbes published an article examining structured products sold to retail investors around the world. It describes how a structured product works, the payoffs and risks, using an example of the principal protected note. It then explains how the principal protected note is equivalent to and can be replicated by a combination of traditional securities and derivatives.
A principal protected note returns at least the face value of the note at maturity. If the reference...
