UBS's YES Was Not Same Iron Condor Product as at Credit Suisse
By: Craig McCann, Regina Meng, Edward O'Neal (Mar 2022)
Monthly returns from the Credit Suisse and UBS time periods - including for subperiods of similar characteristics UBS blames for the 2018 losses - show these two programs were very different and that UBS's program was much riskier and had much more directionality than the Credit Suisse program. We find market conditions in 2018 when YES lost 18.44% were much less dramatic than in 2008 when Credit Suisse lost only 2.42%
UBS's Yield Enhancement Strategy ("YES") Returns - and then the Losses - Were Caused by Equity Market Exposure
By: Craig McCann, Regina Meng, Edward O'Neal (Oct 2019)
UBS marketed YES as market-neutral based on a combination of four options is sometimes referred to as an "Iron Condor". UBS accounts subjected to YES treatment suffered losses of 12% to 14% in December 2018 when the S&P 500 dropped 9.2% because the overlay was more than 100%
In this paper the authors we explain the option basics necessary to understand the YES strategy and illustrate how UBS actually implemented the strategy with predictably disastrous results. They also present how UBS described the strategy in its marketing materials.
Puerto Rico Securities Arbitration Settlements and Awards Likely to Exceed $1.25 Billion (Updated May 15, 2019)
By: Craig McCann, Edward O'Neal, Chuan Qin and Mike Yan (Jun 2019)
SLCG releases its updated Puerto Rico Securities Arbitration Report showing over $600 million paid out so far in settlements and awards with a similar amount likely to be paid out in coming years as a result of brokerage firm customers losses in Puerto Rico.
Reporte de Arbitrajes de Valores en Puerto Rico: entre Acuerdos Transaccionales y Laudos Arbitrales seguramente se excederá de $1.25 billon (15 de may de 2019)
By: Craig McCann, Edward O'Neal, Chuan Qin and Mike Yan (Jun 2019)
SLCG publica su Informe de Arbitraje de Valores de Puerto Rico actualizado que muestra más de $600 millones pagados hasta el momento en acuerdos y adjudicaciones con una cantidad similar que probablemente se pagará en los próximos años como resultado de las pérdidas de clientes de la firma de corretaje en Puerto Rico.
Puerto Rico Securities Arbitration Settlements and Awards Sure to Exceed $1 Billion (Updated November 15, 2018)
By: Craig McCann, Edward O'Neal, Chuan Qin and Mike Yan (Feb 2017)
In 2013, a shrinking economy and the government's loss of continued access to capital markets necessary to make interest payments, refinance principal coming due and to fund an unsustainable government deficit caused Puerto Rico tax exempt bond prices to fall substantially.
Puerto Rico brokerage firms' customers held poorly diversified securities accounts, concentrated in Puerto Rico municipal bonds or closed end funds that held leveraged portfolios of Puerto Rico municipal bonds. Often these accounts were further leveraged using margin debt, lines of credit or proceeds from non-purpose loans recycled through third-party banks.
Large Sample Valuations of Tenancies-in-Common
By: Tim Husson, Craig McCann, Edward O'Neal, and Carmen Taveras (Oct 2013)
Published in the Journal of Real Estate Portfolio Management, Vol. 20, No 2, 2014.
In this paper, we value a large sample of tenant-in-common (TIC) investments based on cash flow projections found in 194 private placement memoranda. Our sample of TIC offering documents covers approximately 20% of the TIC industry from 2004 to 2009. Based on the sponsor's projections, we find that the TICs on average were worth 83.6 cents per $1 paid by TIC equity investors. However, we have found that sponsors' cash flow projections overstate likely returns to investors by assuming unrealistically high rental growth rates and unrealistically low vacancy and caps rates.
Adjusting only the sponsors' cap rates alone to rates reflecting market conditions lowers the average valuations by 9.5 cents to 74.1 cents per $1. Adjusting the sponsors' unrealistic rental growth rate and vacancy assumptions lowers the average value further. These low valuations are consistent with average upfront fees and reserves equal to 28% and 12% of equity. Our results suggest that private placement sponsors have considerable latitude in their projections, and that investors should view projected returns with skepticism.
Private Placement Real Estate Valuation
By: Tim Husson, Craig McCann, Edward O'Neal, and Carmen Taveras (Sep 2013)
Published in the Journal of Business Valuation and Economic Loss Analysis Volume 9, Issue 1, January 2014.
As a result of the Securities and Exchange Commission's relaxation of its prohibition against the marketing of private placements, investors will soon be exposed to a broad array of syndicated commercial real estate investments. Private placement commercial real estate investments are illiquid and so cannot be easily valued by reference to frequent transactions in the same asset in active markets.
We have reviewed over 200 syndicated commercial real estate private placement memorandums and find that virtually all include projected cash flows. This study explains how investors and their advisors can use these projections to develop estimates of investment value. We determine a lower bound for discount rates applicable to the cash flows derived from commercial real estate and apply the methodology to an actual commercial real estate private placement investment. Our findings suggest significant overvaluation by commercial real estate private placement investment sponsors even when using conservative estimates of discount rates.
Auction Rate Securities
By: Craig McCann and Edward O'Neal (Oct 2010)
Auction Rate Securities (ARS) were marketed by broker-dealers to investors, including individuals, corporations and charitable foundations as liquid, short-term, cash-equivalent investments similar to traditional commercial paper. ARS's liquidity and similarity to short-term investments were entirely dependent on the presence of sufficient orders to buy outstanding ARS at periodic auctions in which they were bought and sold subject to a contractual ceiling on the interest rate the issuer would have to pay. If the demand for an ARS was too low to clear the market, broker dealers sponsoring the auction could place bids just below the maximum interest rate to clear the auction. The lower the public demand for an issue, the larger the quantity broker dealers had to buy to avoid a failed auction.
Participating broker dealers had better information than public investors about the creditworthiness of the ARS issuers and were the only parties with information about the broker dealers' holdings and inclination to abandon their support of the auctions. This severe asymmetry of information made public investors in ARS vulnerable to the brokerage firms' strategic behavior. In this paper, we explain what auction rate securities were, how they evolved, how their auctions worked, and why their flaws caused them to become illiquid securities.
What TiVo and JP Morgan teach us about Reverse Convertibles
By: Geng Deng, Craig McCann, and Edward O'Neal (Jun 2010)
Reverse convertibles are short term, unsecured notes issued by brokerage firms including JP Morgan, Barclays, Citigroup, Morgan Stanley, Wachovia, Lehman Brothers, and RBC that pay less than the notes' face value at maturity if the price of the reference stock or the level of the reference stock index declines substantially during the term of the note. The SLCG study finds that brokerage firms overcharge for reverse convertibles so significantly that the expected return on these complex investments is actually negative and that reverse convertibles continue to be sold at inflated prices only because investors do not fully understand these products.
The SLCG study reports that despite substantial overpricing in the offerings and the significant losses on the reverse convertible notes in 2008 and 2009, there have been a substantial number of new issues of these dubious investments by JP Morgan, Barclays and many others brokerage firms in 2010. The study illustrates its main themes with JP Morgan's May 14, 2010 TiVo-linked reverse convertible.
What Does a Mutual Fund's Term Tell Investors?
By: Geng Deng, Craig McCann, and Edward O'Neal (Apr 2010)
Published in the Journal of Investing, Summer 2011, Vol. 20, No 2: pp. 50-57.
In a previous article, we highlighted a flaw in the average credit quality statistic frequently reported by bond mutual funds. That statistic understates the credit risk in bond portfolios if the portfolios contain bonds of disperse credit ratings. In this article we address a similar problem with bond mutual funds' reporting of the average term of their portfolios. The somewhat ambiguous nature of this statistic provides an opportunity for portfolio managers to significantly increase the funds' risks, credit risk in particular, by holding very long-term bonds while claiming to expose investors to only the risks of very short-term bonds.
Morningstar uses a fund-provided statistic - the average effective duration - to classify funds as ultra short, short, intermediate or long-term. Funds have figured out how to hold long-term bond portfolios yet be classified as ultra short-term and short-term bond funds. We show that extraordinary losses suffered by these funds in 2008 can be explained by the how much the bond funds' unadulterated weighted average maturity exceeded the maturities typically expected in short-term bond funds.
