Investors Feeling The Pain: Mortgage Related Derivatives and Financial Instruments
Sharon L. Secor
November 18, 2007
According to recent news reports, the sub-prime lending crisis and the mortgage meltdown are starting to inflict real fiscal pain on investors that have money tied up in mortgage related derivatives and financial instruments. Many experts suspect that this may be just the tip of the iceberg, as the increase in loan defaults and property foreclosures doesn't seem as though it is going to slow down anytime soon.
On Friday, November 9, 2007,the Associated Press reported that Wachovia Corp. admitted to a loss of slightly over $1 billion in the value of the collateralized debt obligations contained in their portfolio. According to the company website, Wachovia is the “fourth largest bank holding company in the United States based on assets” and “third largest U.S. full-service brokerage firm based on client assets.” This company offers full financial services in 21 states and acts as a full-service retail brokerage nationally, as well as handling investment banking products, mortgage lending and automobile financing.
Bloomberg.com published a story that made mention of the serious losses, ranging in the billions, of companies such as Citigroup and Merrill Lynch. According to the November 5, 2007, report, during a three year span, “$1 trillion of subprime mortgages were packaged and sold to investors.” With the larges names in the investment industries experiencing incredible losses right now, it is unlikely that there will be a lot of improvement soon. That is because there is roughly $500 billion worth of adjustable rate mortgages coming due for interest resets in 2008, and $300 billion more that will be reset in the following year.
Furthermore, that trillion plus dollars worth of repackaged sub-prime mortgages has landed in the hands of investors great and small throughout the world. With fear rightfully permeating the market, banks and financial institutions have seen stocks drop significantly, as confidence fades. Thus, in addition to borrowers suffering in the current mortgage and housing situation, so too are investors and stock holders. However, some share holders are not going to take their losses laying down.
On November7, 2007, the Wall Street Journal reported that a federal lawsuit was filed against Citigroup Inc. and some of its former and current top executives. Shareholders allege that “Citigroup executives recklessly purchased sub-prime loans to be used for future collateralized debt obligations and then made allegedly improper statements regarding the financial services company's exposure to the sub-prime market meltdown. It also alleges some defendants sold their own shares in the company while in possession of "material nonpublic information" about its exposure, securing more than $36 million in proceeds.”
Business Week, on November 5, 2007, reported that Merrill Lynch confirmed that they are facing a class action lawsuit. This comes after the company experienced the largest single quarter loss in its entire history of 93 years. Citigroup is also facing a class action lawsuit, one on behalf of employees and former employees and the losses that have been incurred by those who invested in 401K plans through the company. Much of the loss of value of these plans has been attributed to sub-prime mortgage debt exposure, as well as to a variety of risky off-balance sheet transactions.
The current economic climate makes it essential for investors to make an accurate assessment of their financial condition and look for ways to reduce risk. The fact of the matter is that the investor of today is often an average person of average income trying to place their money where it will grow enough to ease the burden of paying for college or to serve as part of a retirement plan. As financial institutions and investment plans may not always be as transparent as they should be about the degree to which the mortgage meltdown can affect returns on investments, it is important for the investor to do research. This is especially important for the smaller investor who may feel somewhat intimidated by financial investment and place full trust in investment professionals to make all decisions. Learning more can help that investor to avoid loss by asking the right questions at the right time.
On Friday, November 9, 2007,the Associated Press reported that Wachovia Corp. admitted to a loss of slightly over $1 billion in the value of the collateralized debt obligations contained in their portfolio. According to the company website, Wachovia is the “fourth largest bank holding company in the United States based on assets” and “third largest U.S. full-service brokerage firm based on client assets.” This company offers full financial services in 21 states and acts as a full-service retail brokerage nationally, as well as handling investment banking products, mortgage lending and automobile financing.
Bloomberg.com published a story that made mention of the serious losses, ranging in the billions, of companies such as Citigroup and Merrill Lynch. According to the November 5, 2007, report, during a three year span, “$1 trillion of subprime mortgages were packaged and sold to investors.” With the larges names in the investment industries experiencing incredible losses right now, it is unlikely that there will be a lot of improvement soon. That is because there is roughly $500 billion worth of adjustable rate mortgages coming due for interest resets in 2008, and $300 billion more that will be reset in the following year.
Furthermore, that trillion plus dollars worth of repackaged sub-prime mortgages has landed in the hands of investors great and small throughout the world. With fear rightfully permeating the market, banks and financial institutions have seen stocks drop significantly, as confidence fades. Thus, in addition to borrowers suffering in the current mortgage and housing situation, so too are investors and stock holders. However, some share holders are not going to take their losses laying down.
On November7, 2007, the Wall Street Journal reported that a federal lawsuit was filed against Citigroup Inc. and some of its former and current top executives. Shareholders allege that “Citigroup executives recklessly purchased sub-prime loans to be used for future collateralized debt obligations and then made allegedly improper statements regarding the financial services company's exposure to the sub-prime market meltdown. It also alleges some defendants sold their own shares in the company while in possession of "material nonpublic information" about its exposure, securing more than $36 million in proceeds.”
Business Week, on November 5, 2007, reported that Merrill Lynch confirmed that they are facing a class action lawsuit. This comes after the company experienced the largest single quarter loss in its entire history of 93 years. Citigroup is also facing a class action lawsuit, one on behalf of employees and former employees and the losses that have been incurred by those who invested in 401K plans through the company. Much of the loss of value of these plans has been attributed to sub-prime mortgage debt exposure, as well as to a variety of risky off-balance sheet transactions.
The current economic climate makes it essential for investors to make an accurate assessment of their financial condition and look for ways to reduce risk. The fact of the matter is that the investor of today is often an average person of average income trying to place their money where it will grow enough to ease the burden of paying for college or to serve as part of a retirement plan. As financial institutions and investment plans may not always be as transparent as they should be about the degree to which the mortgage meltdown can affect returns on investments, it is important for the investor to do research. This is especially important for the smaller investor who may feel somewhat intimidated by financial investment and place full trust in investment professionals to make all decisions. Learning more can help that investor to avoid loss by asking the right questions at the right time.
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