Wall Street Law Blog

Bear Stearns Planned to Dance Like Former Citi CEO Chuck Prince.

The plan? Milk as much profit as possible for as long as possible from the mortgage securitization business.

The Method? Keep finding borrowers for home mortgages as long as there were suckers willing to buy ABS CDOs. 

 

 

 

A sucker born every minute...

 

INTRODUCTION

On May 25, 2005, Wall Street trade paper "Asset Securitization Report"  published an article called CDO machine? Managers, mortgage companies, happy to keep fuel coming.  

 The article, written by reporter Allison Pyburn, describes a very interesting (and disturbing) panel discussion at the 2005 Bear Stearns Global Credit Conference. The panel talked about CDOs and the mortgage market.

Panelists were, at the time, all senior executives from Bear's mortgage securitization and trading businesses.  According to the article, they included: (a) Scott Eichel from the Bear Stearns Collateralized Mortgage-Backed Securities group; (b) Tim Kolterman from the Bear Stearns Credit derivatives group (c) Jeff Zavaterro from Bear's CDO group. 

Please note that no one from Wall Street Law Blog was at the 2005 conference.  Nor have we managed to obtain a transcript of this particular panel discussion.  

Based solely on our reading of the article, we believe that panelists were surprisingly candid about Wall Street's plans to squeeze profits from the CDO machine, regardless of consequences, until demand from investors evaporated.

Indeed, per our reading, the Bear mortgage guys were saying stuff that sounded a lot like Citi's former CEO Chuck Prince.  Speaking about the risks of the CDO market, Prince infamously said his company would keep dancing until the music stopped.  

 

Keeping the The CDO Machine Humming

In 2005, Scott Eichel was a senior managing director at Bear Stearns and one of Bear's top mortgage traders.  Ms. Pyburn reported these comments from Eichel in her article:

There is a machine going...

There is a lot of brain power [working] to keep this going...

 

Pushing the Envelope

 

 Ms. Pyburn's article attributes the following quotes to Tim Koltermann, then a managing director/principal in the Bear Stearns credit derivatives group: 

Until there are credit issues, we're going to continue to push the envelope... 

There is so much demand for real estate CDOs, I don't think we'd pull back [production] at all...

 

And then, according to the article, there was this comment from panelist Jeff Zavattero, then a senior managing director in Bear's CDO group:

 

As long as there are investors willing to purchase the product, the market will continue to grow more and more levered...   And demand right now is very high.

 

Like Chuck

 

Wall Street Law Blog's interpretation?

Sounds an awful lot like Bear Stearns CDO experts were, in essence, saying the same thing as Chuck Prince:  The music is still playing and we are still dancing.

 

WE INVITE ANY READER WITH FIRST-HAND KNOWLEDGE OF THE PANEL DISCUSSION TO COMMENT ABOUT OUR INTERPRETATION - IF WE ARE RIGHT, LET US KNOW.  IF WE ARE WRONG, SET US STRAIGHT.

By Brett Sherman, The Sherman Law Firm

Should investors opt-out of securities fraud class action settlements?

By Brett Sherman

 

The road less taken:  

Opt-outs and securities fraud litigation... Why some individual investors may be better off going it alone in securities fraud litigation or arbitration.

We originally wrote this piece in May 2008.  While we have edited and updated the text, please note the following:

NERA has published more recent data that is NOT included in our post. However, NERA's updated statistics do not change our conclusions. Readers may review the most recent statistics by visiting the NERA website.


-Introduction-

Based on research and experience, The Sherman Law Firm has concluded that any individual investor who-

(a) has suffered substantial stock losses, and

(b) is a class member in a securities fraud class action,

may ultimately recover a significantly higher percentage of the investor's stock losses by choosing to opt out of large class of anonymous plaintiffs. Thus, opting out of a class action and proceeding with individual claims in court or arbitration should receive careful consideration.

-Background-

Class Actions

A class action is a special breed of lawsuit in which a group of plaintiffs that share substantially similar legal claims against one or more defendants band together in a single lawsuit.

Class actions are known as "representative actions," because one or more plaintiffs are actually named in the class action complaint. Along with their attorneys, these named plaintiffs pursue the case as representatives for the entire class.  Class members who are not named do not actively participate in the lawsuit.

Most class action claims settle. The end result, however, is that - after attorney fees and expenses are deducted from the settlement amount - there often is not much money distributed to individual class members.

In a 2006 post, Lawsuitssearch.com wrote:

"Often being part of a class action lawsuit is not financially advantageous to an individual. Even though the defendant named in the case may be required to pay out a large sum of money, one individual who is part of the class action will only receive a small portion of that sum."

A study published by NERA Economic Consulting (NERA) supported the statement of Lawsuitsearch.com. NERA's report included the following, rather shocking, statistic:

The average settlement recovery in securities fraud class actions was only 2.2% of total investor stock losses.


-What does it mean to "Opt out"?-

Our own experiences at The Sherman Law Firm and Wall Street Law Blog provide anecdotal evidence that many (if not most)investors who suffer stock losses do not even know that they are entitled to opt out of class action litigation.

A shareholder who chooses to opt out of a class action generally hires his or her own lawyer and proceeds against the company in an individual litigation.  Assuming the case has merit, any recovery is likely to be substantially more than two percent of investor losses.

Conclusion-

This post is intended to compare the relative merits of class action litigation versus opt out litigation in securities fraud cases.

Based on our research and experience, we believe that shareholders with substantial losses have a dramatically better chance to recover a higher percentage of losses in individual opt out cases rather than as participants in class actions.

Disclaimer (we know, we know... But we are lawyers) -

Every case is different. This post does not take into account unique circumstances such as quality of counsel or facts which may be unique to any individual. This post is information, not legal advice. Class members should consult with an attorney to make an informed decision about whether to pursue claims as part of a class action or through individual litigation.

THE SHERMAN LAW FIRM represents individuals and entities in securities litigation, and readers should consider this post as an advertisement for attorney services.

The Sherman Law Firm, CLICK HERE to visit our website

Corruption or what? CDOs, Treasuries and Credit Ratings...

CDOs and Treasury Bonds - Risk, Return, and Credit Ratings? We aren't economists, but something sure seems wrong.

PLEASE - set us straight if we are off base here...   

OK, if two fixed income investments have the same risk profile, they should offer the same return (or something very close to it).  Right?

If so, then are we right to assume that two classes of fixed income investments stamped with the same credit rating should have very similar risk characteristics?  If one investment offers higher returns with no added risk, common sense (and, we presume, the science of economics) dictates that rational investors will choose the higher yielding investment product.  

So far, so good?  If so, then what in the world were the Credit Rating Agencies doing during the housing bubble?   

A huge volume of mortgage-backed securities (MBS) and related investments like collateralized debt obligations (CDO's) received AAA credit-ratings and offered investors yields that, for several years, were superior to AAA U.S. bonds.  To managers of massive pension funds, sovereign wealth funds, and other investors, a AAA credit-rating means there is virtually zero risk of default (we looked that one up). Therefore, the only logical conclusion is that Moody's, S&P, and Fitch told investors that certain mortgage securities were pretty much impregnable, just like obligations of the United States government.  

It seems kind of clear to us that no fund manager would purchase super safe U.S. government bonds when investments in high-rated tranches of MBS and CDO's carried higher yields with no added risk? Predictably, demand for mortgage-related securities skyrocketed.

In nearly every case, investors relied on credit ratings.  Institutions believed the CDOs were safe.  AAA means AAA, and because financial engineers at places like Bear Stearns and Lehman brothers were able to slice and dice the cash flow from all kinds of mortgages in ways that were too complex for practically anyone to truly understand, even sophisticated investors were unable to do any independent risk assessment.  

Again, it is our understanding that the basic risk-reward principle dictates that two or more AAA-rated fixed income investments issued in the same interest rate environment should produce virtually identical returns.  Is there some basic fact or principle that Wall Street Law blog is missing?  And yet...

Vast quantities of AAA-rated mortgage-backed securities and CDOs consistently promised and, until the credit bubble started to leak, actually delivered significantly higher yields than AAA-rated U.S. Treasury bonds (which are, of course, guaranteed by the full faith and credit of the United States Government). 

All of this leads us to one of two conclusions -

EITHER-  

The science of economics and/or the business of credit ratings are farsical-

-OR- 

Wall Streeters like Merrill Lynch, Lehman Brothers and Bear Stearns colluded with the major credit rating agencies to obtain bogus investment grade ratings (at least for AAA tranches) in order to maximize the universe of potential investors for CDOs.  

If we have this stuff way wrong (and maybe we do), we'd sure like to hear what really happened and where our amateur analysis went awry.      

The Sherman Law Firm