Credit Risk in the Municipal Bond Marketplace
(Feb 2012)
Municipal bonds are debt securities issued by city, county or special-purpose government units (known as municipal authorities). This debt is typically issued to fund public works projects such as health care, construction projects or education. Because the interest from municipal bonds is usually exempt from federal income tax (one notable exception is Build America Bonds); the municipal bonds are especially attractive to high tax-bracket individuals. We will discuss some specifics of the...
Stock Market Correlation and Portfolio Diversification
(Feb 2012)
It has long been argued that diversification of stock portfolios across country borders is important to reduce investment risk. Although the 2007-2008 financial crisis wreaked havoc on both the developed and the developing world, diversification remains a central pillar of modern portfolio theory. The following figure from World Federation of Exchanges shows the value of several stock indexes starting from 1992(Full Disclosure: No data available for Tehran SE/TEPIX in 2008, 2009 and 2010)....
Déjà Vu: Non-Traded Business Development Companies
(Feb 2012)
Last week we posted an introduction to non-traded REITs that highlighted the many risks inherent to those investments. As it happens, another non-traded investment has been growing in popularity, but has an almost identical set of risk factors and has recently caught the attention of regulators: non-traded business development companies (BDCs).
The resemblance between non-traded REITs and non-traded BDCs is uncanny. Both are special business classes created by Congress in the mid 20th...
Did ARS Interest Payments Adequately Compensate Investors After the Failures?
(Feb 2012)
Auction Rate Securities (ARS) are floating interest rate debt issued primarily by municipalities, mutual funds, and special purpose trusts. ARS were marketed as short-term, cash-equivalent investments similar to commercial paper but any similarities with short-term investments were superficial and misleading. ARS are long-term debt traded in periodic auctions with prices fixed at par. The auction-determined interest rate was constrained by a maximum rate which could prevent the auctions from...
Should You Cash Out Your Home Equity to Find Your Missed Fortune? Careful! A Scam Might Be On the Way
(Feb 2012)
As a result of a lifetime of thrift, many homeowners find themselves in their 50s and 60s with considerable equity in their homes. Some investment advisors and insurance salesmen have been recommending that these homeowners refinance their mortgages to take the equity out of their homes - sometime called "equity harvesting" - to purchase high cost insurance contracts or investments. Whether insurance contracts or high cost investments are being pitched, the advisors and brokers get a big pay...
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...
More CDO-related Mischief: Former Credit Suisse Trader Charged with Falsifying Trading Books
(Feb 2012)
Last Tuesday we pointed out how Banc of America transferred at least $35 million of previous losses to unsuspecting investors in two of its CDO offerings. This story was further exposed by the New York Times' reporter Gretchen Morgenson in her report on February 4, 2012 titled "A Wipeout That Didn't Have to Happen".
Also in last week, the ex-global head of Credit Suisse Group AG's CDO business, Kareem Serageldin, was charged in Federal Court by the Manhattan District Attorney for overstating...
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...
Futures-Based (Commodities) ETFs
(Jan 2012)
Investors may think, when investing in Futures-Based Commodities exchange traded funds (ETFs), that they are gaining exposure to the underlying commodity. In this blog post, we discuss the ability of these ETFs to track the spot price of the underlying commodity.
In a previous blog post, we introduced the basics of Exchange Traded Funds (ETFs). In this post, we are going to discuss a specific kind of ETF: Commodities Futures Based ETFs.
There are a large number of Exchange Traded Funds...
