An Introduction to Non-Traded REITs
(Feb 2012)
Both FINRA and the SEC have started warning investors about non-traded real estate investment trusts (REITs), which are growing in popularity but expose investors to very serious risks. We at SLCG have had a variety of cases involving non-traded REITs and would like to describe our experience analyzing these investments and what they mean for regulators and retail investors.
In the most general sense, REITs are simply companies that hold almost entirely real estate assets. These companies can...
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...
ETFs' Asset Value is Increasing, Trading Volume Remains Stable
(Feb 2012)
Financial Times reports that the daily trading volume in the 50 most traded US ETFs in this January and last December was at its historical lows, dropping to the level of the end of 2007. This is surprising since over the past decade the total asset value of ETFs have increased from its 2002 level of $102 billion to just over $1 trillion in 2011 according to the Investment Company Institute. Below we plot the ETF total asset value over the last decade.
Intuitively, one would expect as asset...
Reserve your Clever ETF Ticker Before it's Too Late
(Feb 2012)
The Wall Street Journal reported yesterday that descriptive and catchy tickers for Exchange Traded Funds (ETFs) are getting harder and harder to come by these days. From the article:
But finding a catchy symbol can be tough these days. Many have already been taken: 1,350 symbols are in use on the NYSE Arca alone, the biggest U.S. market for exchange-traded products. That's up 108% over the past five years, says Ms. Morrison. In addition, fund firms have reserved 2,446 symbols for future...
Dealbreaker on the Hayes award and LCM VII CLO
(Feb 2012)
Matt Levine at Dealbreaker posted last night on our work regarding the Hayes award and the LCM VII CLO. He interpreted some of the facts of the case differently, but we think he did touch upon the key issue: the proper disclosure of the decline in the market price of collateral on the closing date. We wanted to directly address a couple points he raised.
To be clear, at least by the closing date the CLO did track the daily mark-to-market value of the loans in the LCM VII portfolio using...
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...
Schwab Sues FINRA RE: Class Action and Consolidated Claims
(Feb 2012)
There has been some buzz on the blogosphere concerning the ongoing dispute between Schwab and FINRA concerning the issue of class action waivers attached to securities products.
FINRA recently alleged that Charles Schwab & Co. violated FINRA rules by including class action waivers in their customer agreements. From their press release:
FINRA's complaint charges that in October 2011, Schwab amended its customer account agreement to include a provision requiring customers to waive their rights...
SLCG Research: Reverse Convertibles and Stochastic Volatility
(Feb 2012)
We've talked a lot about structured products -- and reverse convertibles in particular -- on this blog. In this blog post we discuss reverse convertibles in more detail and present some results found in a new research paper my colleagues and I have just completed.
Reverse convertible notes -- or simply "reverse convertibles" -- are structured products whose payoff at maturity is dependent upon the return of an underlying asset or security during the tenor of the note. If the underlying asset...
Did BoA's 2007 CLOs Defraud Investors?
(Jan 2012)
We have posted a new paper today showing that on July 2007 Banc of America appears to have transferred at least $35 million of previous losses to unsuspecting investors in two of its CLO offerings - LCM VII and Bryn Mawr II. Investors ultimately lost nearly $150 million in October 2008 when these two CLOs backed by leveraged loans were liquidated.
Leveraged loans issued to below investment grade corporations were frequently extended by a syndicate of lenders intending to re-sell...
