Regions Morgan Keegan: The Abuse of Structured Finance
Investors in six Regions Morgan Keegan (RMK) bond funds lost $2 billion in 2007. The RMK funds held concentrated holdings of low-priority tranches in structured finance deals backed by risky debt. We provide five examples of the asset-backed securities RMK invested in: IndyMac 2005-C, Kodiak CDO 2006-I, Webster CDO I, Preferred Term Securities XXIII, and Eirles Two Ltd 263.
RMK did not disclose the risks it was taking until after the losses had occurred. In fact, RMK misrepresented hundreds of millions of dollars of highly leveraged asset-backed securities as corporate bonds and preferred stocks thereby making the funds seem more diversified and less risky than they were. RMK and Morgan Keegan also materially misled investors by comparing these funds to indexes which only contained corporate bonds despite the fact the RMK fund held three times as much asset backed securities as they held coporate bonds.
Download the full working paper (.pdf)
The RMK funds held roughly 2/3rds of their portfolios as of March 31, 2007 in structured finance securities and only 22% or 23% in corporate bonds. RMK's structured finance holdings were roughly 90% in mezzanine and subordinated tranches and only 10% in senior tranches. The vast majority of tranches by market value are classified as 'senior' and so the RMK funds were overwhelming invested in the bottom of structured finance deals'capital structures. The attached Excel file contains SLCG's classification of securities in the RMK by senior versus mezzanine/subordinated.
Download SLCG's classification (.pdf)
Roughly 90% of the losses suffered by the RMK funds identifiable from their public filings during the last three quarters of 2007 when the funds collapsed were from the funds' holdings of structured finance securities. The attached slides summarize SLCG's classification of losses in the RMK funds in the last three quarters of 2007.
Download the RMK Losses Due to Structured Finance and Internally Priced Securities slide (.pdf)
Download the RMK Losses Due to Structured Finance and Internally Priced Securities backup (.pdf)