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Category Archives: Non profits

Lehman-Backed Main Street Natural Gas Bonds A Nightmare For Investors

As everyone knows by now, the meltdown on Wall Street has affected Main Street in unexpected, unusual and unprecedented ways. Consider the enchanting world of Walt Disney’s Magic Kingdom. As reported a year ago by USA Today, the natural gas that cooks the food in Disney’s Magic Kingdom – and elsewhere throughout America’s Main Street – was one of the things that Wall Street bought and sold to investors as safe, low-risk investments.

On Sept. 15, that natural gas deal – known as the Main Street Natural Gas bonds – went bust, plummeting in value after Lehman Brothers Holdings, which had guaranteed the bonds, filed for bankruptcy protection. Investors and consumers subsequently found themselves reeling from the fallout. Investors were out $700 million and places like Disney World experienced higher prices to cook the food for the visitors to its Magic Kingdom.

Main Street Natural Gas is a non-profit corporation of the Municipal Gas Authority of Georgia. In 2006, several Wall Street investment firms came up with the idea to get the Authority to lock in, for presumably decades, inexpensive supplies of natural gas. The idea was simple: Borrow money at low, tax-exempt interest rates and provide that money to the investment banks. Wall Street would then use that debt to make investments and, in turn, supply natural gas at low prices.

The investments made by Main Street included natural-gas derivatives – contracts that bet on the cost of natural gas in the future. In April, Main Street borrowed $700 million, giving it to Lehman Brothers. In return, Lehman promised to arrange delivery of nearly 200 billion cubic feet of natural gas over 30 years at a below-market price.

“That’s like a taxi driver borrowing $7,000 and giving it to a man who promises to supply gasoline for the next 30 years at 50 cents per gallon less than the market price,” said the USA Today article.

The savings associated with such a deal would be nothing to sneeze at – that is if the company holding all the money stayed in business. Lehman Brothers Holdings filed for bankruptcy on Sept. 15. At the time, less than 1% of the natural gas it promised to deliver actually made it.

As for the $700 million, it went the way of Lehman’s other assets: into a pool of money allocated to repay creditors. In other words, Main Street Natural Gas’ lenders must wait in line with countless other unsecured creditors. If they’re lucky, the lenders might get 30% of what they are owed. And the bonds they purchased to finance the natural-gas deal in the first place? They now sell for pennies on the dollar.

The brokerage firms that sold Main Street Natural Gas Bonds to investors never let on about the significant risks associated with the investments nor did they disclose critical information about the deteriorating fiscal health of Lehman Brothers and its toxic mortgage debt exposure.

If you own or owned Main Street Natural Gas Bonds guaranteed by Lehman Brothers Holdings, you may have a viable claim to recover any investment losses you suffered following Lehman’s bankruptcy. Please contact our firm to tell us your story.

Foundations, Universities, Nonprofits Face Dwindling Endowments From Failed Investments

A downturn in the economy, coupled with bad investments in auction rate securities and other risky financial instruments has left many foundations, universities and nonprofits with record low endowments. A March 2009 study from the Commonfund Institute showed that endowments at colleges, universities and independent schools saw their worst performance ever at the end of 2008, losing an average of 24.1%. Previously, endowments had their worst year in 1974, with an average loss of 11%.

The Commonfund survey included 235 institutions that lost $28 billion in asset value from July 1 to Dec. 31, bringing their endowments to $87 billion. About 51% of endowment assets were allocated to alternative investments, such as hedge funds and buyout funds as of Dec. 31, which is an increase from 46% six months earlier.

The collapse of the auction rate securities market in particular has created a firestorm of trouble for many foundations and nonprofit organizations. ARS buy back programs, which were announced last summer by some of Wall Street’s biggest investment firms and banks did not cover institutional investors, only retail investors and small businesses. 

As result, many foundations and nonprofits have been stuck with investment portfolios of hard to value and difficult to sell assets. Among these investments are mortgage related securities and collateralized debt obligations (CDOs), high risk products that are not trading on viable secondary markets.

For some entities, the plunging asset value of their endowments has forced them to close their doors. Others have reduced services or cut staff.

A March 20 article in the News and Observer offers another grim reality for universities, nonprofit organizations and foundations: The value of their endowments is being pulled so far down that they’re now worth less than the original donations. In other words, they’re under water. Adding to their financial woes are state laws that prevent nonprofits from tapping into their principal.

No one can say exactly how many foundations and nonprofits are struggling with under water endowments but, by all accounts, it is grave. Says Harvey Dale, director of the National Center on Philanthropy and the Law at New York University, in the News and Observer article: “Anecdotally, it is a serious problem. And if the current financial downturn continues, the problem will only get worse.”

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