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Category Archives: Market Trends

Municipal Bonds: What Investors Need to Know

Investors who are planning to invest in municipal bonds need to do their homework; if not, they may unknowingly give their first year’s worth of income to their broker. A June 7 article by the Wall Street Journal sheds a spotlight on the murky world of today’s municipal bond market – and what investors can and should do to minimize their risks and maximize their net returns.

As the article points out, “yields on the highest-quality, widely traded munis, triple-A-rated, 10-year “general obligation” bonds have risen by 0.45 percentage point since May 1.  And while U.S. Treasury yields also have risen recently, muni yields have truly skyrocketed.”

But before jumping on the municipal bond bandwagon, investors should proceed with caution,  industry experts say. Unlike what happens with stocks, you don’t pay a commission when buying a municipal bond. Rather, you pay a “markup,” which is the difference between a broker’s cost and the price an investor pays.

The markups themselves can be astronomical. And, unfortunately, most brokers don’t disclose their markup. Regulators and market analysts agree that many retail investors have no idea how much they’re getting charged on muni trades.

Securities Litigation and Consulting Group, a research firm in Fairfax, Va., recently analyzed nearly 14 million trades of long-term, fixed-rate munis over a period between 2005 and April 2013. (You can review the SLCG report here.)

The study found that on one out of 20 trades, people who bought $250,000 or less in municipal bonds paid a markup of at least 3.04%, or approximately a full year’s worth of interest income at today’s rates. By comparison, you will pay less than $10 in commission to buy a stock at most online brokers, or 0.004% on a $250,000 purchase; a typical mutual fund charges management fees of about 1% a year.

SLCG founder Craig McCann estimates that investors paid at least $10 billion in what he considers excessive markups since 2005. That is at least twice the normal cost to trade a given bond.

“That’s more than a billion dollars a year needlessly transferred from investors to dealers’ pockets,” McCann said in the Wall Street Journal story.

SEC’s Gallagher Remains Steadfast to Muni ‘Armageddon’ Comment

Daniel M. Gallagher, a member of the Securities and Exchange Commission (SEC), is not backing down from recent comments regarding what he called “Armageddon risks” in the municipal bond market.

“I made the comment in the context of credit risk plus interest rate risk being two major factors that maybe investors don’t fully understand,” Gallagher said in an April 23 article by Investment News. “The population of investors in this space means we have to double down on investor education.”

Gallagher made the Armageddon reference last week at a round-table discussion sponsored by the SEC on fixed-income markets. Specifically, Gallagher stated that combining rising rates with the recent California muni bankruptcies could translate into potential “Armageddon.”

What concerns Gallagher, as well as others, is the trend of credit quality in the municipal bond arena, combined with an environment in which rates can only go up and thus drive down the value of existing bonds.

Use Commonsense (And Caution) When It Comes to ‘Guaranteed’ Investment Opportunities

R. Allen Stanford’s conviction for running a $7 billion Ponzi scheme is yet another reminder that investors need to keep their guard up when presented with investment opportunities that sound too good to be true.

Stanford was accused of defrauding some 30,000 investors from 113 countries over the course of 20 years with bogus certificates of deposit sold by his bank inAntigua. According to prosecutors, investors thought their funds were being invested into safe and conservative assets when in actuality their money was used to fund risky businesses, as well as Stanford’s lavish lifestyle.

Financial frauds like Stanford’s are far from a rarity. Fraud complaints to the Federal Trade Commission (FTC) have quadrupled during the past decade and are up 35% in the past three years alone, according to The Rise of Financial Fraud, from the Center for Retirement Research atBoston College. It’s likely, however, that financial fraud is much more pervasive in that it often goes unreported to authorities.

The elderly are particularly vulnerable to financial fraud. Many individuals who become victims suffer from dementia or are desperate to find ways to recoup the financial losses they suffered during the 2008 market downturn.

The Boston College report includes a list of red flags regarding potential financial fraud schemes, including investments that sound too good to be true, financial products that supposedly guarantee high rates of return but little risk, and proposals that include the “free-lunch” seminar.

A Feb. 29 article by CBS Money Watch reminds investors that when presented with a financial opportunity or proposal to be aware of the rates of return that are available with different types of investments. As of March 2, the Board of Governors of the Federal Reserve System shows these rates of return as the following:

– 0.52% for six-month CDs;
– Under 1% for Treasuries with durations of five years or less;
– Returns of 1.97% for 10-year Treasuries and 2.74% for 20-year Treasuries;
– 3.82% and 5.08% returns for corporate bonds, depending on the bond’s duration and quality; and
– Returns of 3.72% for state and local municipal bonds.

What About Elm Street?

Over the past several months, both with the election and the credit crisis, much has been written and spoken about Wall Street vs. Main Street. But what has been largely overlooked is how the current financial crisis is affecting the individual, small investors on Elm Street.


Everyday it seems the headlines highlight the poor economic conditions in this country and the previous day’s new record Wall Street losses.  We read ample coverage of what the Treasury and Fed are doing (or going to do) to fix the problems. We read what policies President-elect Obama is likely to enact. We read about the Big Three and more financial institutions than you can name facing bankruptcy.  But there has been a noticeable lack of coverage on the pain being felt by the millions of individual investors suffering through these unprecedented times.


The financial services industry has spent tremendous amounts of money over the last two decades convincing all Americans that they need to invest in the markets.  The expansion of investing through 401(k)s and IRAs has paralleled these marketing efforts.  Today, unlike during the Crash of 1987, investors are not only the rich and sophisticated.  Investors are grandmothers, college students, single mothers and blue collar workers.  It is these individuals who truly suffer when the market losses 50 percent of its value in a year.


Too many of these small investors do not fully understand the markets and are confused by what is going on currently.  In response, most place all their trust (and their life savings) with the “professionals” they hire to assist and guide them. Unfortunately, all too often, these investors are not given suitable advice, are sold products they do not comprehend and are in many instances simply overlooked. They are told to “hold tight” even as they tell their advisors they cannot take any more losses. These small, individual investors are not likely to question or challenge the people deemed to be the experts. 


In times like these, it is imperative that all investors pay attention to their investments and make sure that their needs, objectives and desires are being met.  Failure to do so will result in losses that many simply cannot withstand. When losses do occur, investors need to seel legal counsel to determine whether an action exists to seek to recover those losses. 


Auction-Rate Securities: Can Investors Recover?

In response to the collapse of the auction-rate securities market, many investors are left questioning what to do next about their illiquid holdings. Investors should realize that there is not one correct solution that all auction-rate securities investors should follow. Whether investors decide to sell their securities or wait for the market to improve, here are some key points that investors should take into account when making their decision: 

Trends in the Market 

Some of the top brokerage firms agree that the auction-rate securities market has little hope of recovering, but some investors have had their securities refinanced. According to a June 6th Bloomberg article, municipal issuers either made plans to refinance or refinanced about $76.1 billion of auction-rate securities. In addition to municipal auction-rate securities, some investors have also been redeemed for their auction-rate preferred stocks. Although additional refinancings are expected to occur, investors should be aware that not all stock issuers are willing to refinance auction rate securities. Some issuers have decided to not refinance while others have only refinanced portions of their investors’ losses.  

Student loan auction-rate securities, which constitute $85 billion of the market, are among the most illiquid and unlikely to be refinanced. According to a July 10th Bloomberg report, less than 4% of student loan auction-rate securities have been refinanced so far. This is because issuers are not charged high penalty interest rates when auctions fail, leaving them little incentive to refinance. Auction-rate securities issued by CDOs, or Collateralized Debt Obligations, are also highly illiquid.   

Weighing Options 

When investors face the decision of what to do next with their auction-rate securities, factors such as liquidity and future expectations should be taken into consideration. For example, investors who do not want to risk their securities in the market any longer and need liquidity in the near future may choose to sell rather than wait. Or, investors who do not need liquidity any time soon and their issuer is being charged penalty interest rates should consider waiting rather than selling. Investors should learn what their issuers’ future plans are for refinancing. In addition, other resale markets are available where investors can dispose of their illiquid auction-rate securities. There is no guarantee, however, that this market will be successful in the future. So far, only one private market has had successful dispositions of illiquid auction-rate securities: Restricted Securities Trading Network (to learn more, visit  

Finally, investors should decide whether or not they are going to take legal action against their issuer to recover their losses. If so, then it is in the best interest of investors to take action as soon as possible rather than waiting to file a claim so they do not risk reducing the amount of damages they can recover.   

To Sell or Not to Sell? 

Investors could see many advantages to selling their auction-rate securities. First and foremost, investors receive liquid cash from selling and avoid the stress of worrying about future harm to their investments that could occur in the unpredictable market. Also, investors are able to better pursue legal action because they have made an effort to reduce their damages upon discovery of their investment losses.  

Investors can benefit from waiting because they could potentially be refinanced from their issuer. If an investor is refinanced, he or she no longer has to worry about lawsuits or illiquidity. Also, selling one’s auction-rate securities immediately will usually not earn an investor the face value of their investments. Waiting to sell avoids this discount problem. 

Evergreen Investments CEO to Retire

Evergreen Investments, the mutual fund operation and money-management unit of Wachovia Corp., will soon get a fresh start. The company announced Tuesday that Chief Executive Dennis Ferro will retire at the end of this year, just five years after assuming the position. Peter Cieszko, Evergreen employee since mid-2006 and current head of global distribution, will be his successor.  

In August, Evergreen Investments also plans to fill the abandoned chief investment officer position with David Germany, a former investment manager for Morgan Stanley. Ferro was the interim fill in after former CIO Chris Conkey unexpectedly left last year.  

Wachovia seems to be following in the footsteps of Evergreen with “top-level” struggles. The bank’s CEO G. Kennedy Thompson was ousted last month due to substantial losses and write-downs. These leadership changes come in the midst of struggles for Evergreen.

In the past year their funds’ mortgage- and asset-backed investments have been overwhelmingly troublesome.  Wachovia was forced to step up and buy such securities from Evergreen’s money-market funds to prevent them from breaking the buck – – when their net asset value per share falls below the $1 money market standard. The bank also reported a loss of over $40 million on the asset-backed securities purchased from Evergreen’s money funds.  

Last month, Evergreen was forced to liquidate one of its bond funds, Evergreen Ultra Short Opportunities Fund, because it lost half of its value in a mere six months due to subprime mortgage investments.

Evergreen’s closed-end funds, like many others, have suffered from the auction-rate preferred securities they issued. The investors of these securities were unable to withdraw their money when the market froze up in February.  

Mr. Cieszko claims the main reason for the mutual-fund investor evacuation is that, in recent years, Wachovia’s wealth-management unit started using non-Evergreen funds. Some Evergreen funds were even removed from of the Wachovia wealth-management operation since they were not “top of class”. According to a July 8, 2008 Wall Street Journal article by Shefali Anand, Evergreen’s mutual funds have had net outflows of nearly $10 billion since beginning of 2008. It now has $41.5 billion in fund assets and manages $258 billion overall.

Citigroup is Expected to Writedown Another $8.9 Billion

Citigroup Inc., the bank with the largest reported losses due to the mortgage market collapse, is expected to take an additional $8.9 billion in net writedowns for the second quarter. Citigroup is already staggering from the $42.9 billion defeat in credit related losses. 

Goldman Sachs Group Inc. has lowered its ratings for U.S. brokerages from “attractive” to “neutral”, because the deterioration rate of the industry appears to be far worse than they originally believed. Goldman also slashed Citibank’s six-month price target to $16 and put the bank on its “conviction sell” list, after it closed at $18.85 in trading last week. Citibank has dropped about 16% this year. 

Goldman sees more struggles in the near future for Citigroup. Cathy Chan reported in a recent Bloomberg article that Goldman expects the bank to face risk of further writedowns, higher consumer provisions and the potential need for additional capital raisings, dividend cuts or asset sales. Goldman is not alone in these forecasts for Citigroup. UBS AG and Merrill Lynch & Co. also predicted more writedowns. Merrill Lynch analyst Guy Moszkowski believes the bank will report another $8 billion of writedowns this year.  

Citibank CEO Vikram Pandit announced an additional 13,000 job cuts this year. He also expects “substantial” additional writedowns and more losses on consumer loans. Goldman believes Citigroup may writedown $7.1 billion of collaterized debt obligations and associated hedges, as well as $1.2 billion for other asset classes. They also said the bank may need to post a $600 million loss to reflect the market-to-market value of its own structured note liabilities.  

It is unlikely that Citigroup will be able to keep its current 7% dividend yield, and they need to make more capital. It’s estimated they could generate $3.5 million in capital a year by cutting payouts in half.

Another CEO Falls: Thompson Forced Out at Wachovia

Chief executive officer of Wachovia Corp., Kennedy Thompson, has stepped down (at the board’s request) after being blamed for losses costing the lender more than half of its market value this year. Thompson’s departure comes less than a month after his title was officially removed, making him the latest CEO to be ousted during the housing market chaos. Chairman Lanty Smith temporarily replaces him as CEO and Ben Jenkins is the interim chief operating officer.

Thompson’s title was removed after the annual meeting in April where shareholders, upset with the company’s first quarterly loss in seven years, requested his termination. Wachovia’s stock fell four percent and their shares dropped over 40 percent this year.

Even before his removal, Thompson’s standing with Wachovia was feeble. He recently admitted Wachovia’s $24 billion acquisition of Golden West Financial Corp. in 2006, in hopes to expand business during the housing boom, was “ill-timed”. The increased mortgage defaults and write downs due to subprime home loans caused the fallout.

Thompson slipped up again early this May. According to David Mildenberg and Hugh Son in their article Monday, the bank reported a first-quarter loss of $708 million, 80 percent more than Wachovia previously reported, due to the write-downs for bank-owned insurance policies. As a result, the bank had to cut its dividend by 41 percent and raised around $8 billion in new capital.

Wachovia formed a four-person search committee headed by Smith to find a permanent replacement for Thompson. Many wonder if his removal means more problems for Wachovia. The company has suffered a serious of setbacks, including their recent losses and investigations.

Washington Mutual Inc. seems to be on a similar path. They reported yesterday CEO Kerry Killinger was also stripped from his CEO title. The recent changes in many companies are occurring due to the credit losses from the current housing crisis and $386 billion in asset write downs.

SEC Proposes New Rating System

The Securities and Exchange Commission plans to change the way credit rating agencies evaluate the risk of complex financial instruments. Recently, rating companies have been accused of embellishing the appropriate ratings for mortgage-related securities, especially after the decline in the housing market. 

Triple-A is currently the highest rating, meaning there is little chance the bond will fail, and if it does, little money will be lost. The new highest rating would be defined as Triple-A, S or V, representing structured or volatility.  The goal of the new rating scale is to insure inexperienced investors understand the risk of the structured product.              

But will a new rating scale be as effective as supporters hope? Many groups remain skeptical. According to Kara Scannell and Aaron Lucchetti in their Wall Street Journal article, SEC Pushes for New Risk Scorecard, critics believe the scale is not the problem, but the quality of ratings. Other lobbyists find the idea “counterproductive and will serve to further undermine, rather than restore, liquidity”.              

Credit-rating companies are taking the crisis into their own hands and developing new procedures. According to Standard & Poor’s Rating Services, the firm plans to improve on their current system instead of adapting a completely new scale. The SEC plans to vote on the entire proposal, which includes other changes as well, on June 11.  The proposal will then be sent to the public for comment before final approval.

Financial Advisors Angry Over Failed Auctions Too

The auction-rate securities market has now been frozen for over three months and it is not just the thousands of investors now holding these illiquid investments that are livid.  Many of the financial advisors who sold these products also feel duped.

The latest issue of Registered Rep. magazine highlights the anger of financial professionals.  These advisors are stepping forward claiming that they were told by their employers that these auction-rate securities were safe, money market-like investments.  Advisors were assured that the $330 billion auction-rate securities market was too big (and too important as a source of liquidity for investors) to fail.  We now know otherwise.

Many advisors interviewed in the piece noted that their firms’ never discussed risks of these products.  In fact, one former Merrill Lynch broker said that Merrill specifically trained advisors that auction-rate products were in fact cash equivalents.  Other brokers were told the same thing by the Wall Street firms.

So as the number of lawsuits and arbitrations increase, advisors are taking action to protect themselves.  Many are compiling information that they were provided by their firms to highlight Wall Street’s position as to these products.  But were the advisors really without knowledge of the risks?  There were warning signs after all.

In early 2005, all the major accounting firms were advising corporate clients to classify auction-rate securities as “investments” and not “cash equivalents” as they had done previously.  In addition, the SEC settled a case against 15 Wall Street brokerage firms in 2006 for violations relating to the attempts to save various auctions from failure.  These events were known, or should have been known, to the firms as well as the advisors.

Investors are mad and they should be.  They were sold a product carrying known risks as a safe, conservative risk-free investment.  Wall Street should not be let off the hook simply because historically the products performed without showing their inherent risks.  As Wall Street is quick to point out, past performance does not guarantee future results.       

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