Trusts Suddenly Terminate; Investors Could Lose Millions

[NNN0LHI]

http://ap.tbo.com/ap/breaking/MGB7HJ1GLUD.html

NEW YORK (AP) - A sudden and unusual liquidation of a handful of bond trusts sold by Lehman Brothers Inc. and Morgan Stanley may cost some investors millions.
Trusts worth $430 million, backed by the debt from subsidiaries of General Electric Co. and Verizon Corp., were terminated this month after the subsidiaries stopped filing their own financial reports with the Securities and Exchange Commission.

Brokerage firms are telling some investors in a Lehman Brothers trust to expect up to a 16 percent loss, only months after their initial investment. By contrast, investors in one Citigroup Inc. trust will lose nothing, because the bank is making up their loss.

"It's a little bit of a fiasco," said Andrew Montalbano, a trader with Advest Inc. who sold shares of the trusts to investors.

more

[aquart]

1. Huh?

Yeah, this market don't need no steenking reform!

[w4rma]

2. Somebody is going to get alot of money.

Somebody else is going to lose alot of money.

[Rebellious Republican]

3. What does this mean for those of us who are not CPA's or MBA's

Really I do not understand the significance, other than a bunch of people are going to lose money. Are they rich fat cats that are losing or just more of your average Joe types that has been getting ripped off Enron style?

[AP]

6. Here's what it means: corporations sell bonds in packages too large for...

...small investors to buy. So large banks buy blocks of bonds and create a trust which small investors can buy into. However, the prospectus for the trust said the trust would have to be disolved if thesubsidiary issuing the bonds stopped filing SEC reports and, instead, the parent company files SEC reports for the subsidiary (this is because SEC rules only allow these trusts to sell bonds in a company which directly reports to the public). That's what happened. The trust has dissolved. The shares in the trust have become worthless because they can't be sold. However, the investment company still holds the bonds (they just can't sell them). Lehman brothers has all these 7% bonds and they can either keep them, or, more likely, they have a contract that requires the issuers to buy them back. And if they don't, I'm sure, in order to preserve good relationships, the issuer will buy them back. Verizon doesn't want Lehman brothers to hate them.

Bascially, this is an example of the SUPER-wealthy making money off the backs of the mildly wealthy (doctors and lawyers and people who work for a living). It's an example of wealth getting transferred up the wealth pyramid.

[Rebellious Republican]

7. Thanks AP, guess they can't squeeze anymore money out of us

little guys. So they are moving up the food chain!

[AP]

9. Yeah. Wherever the money is, someone more powerful and more politically

connected will steal it.

This isn't capitalism. It's theft.

[AP]

10. Another phenomen: pushing risk down the pyramid. Insuring guaranteed

wealth for people at the top.

Verizon gets to keep the money from selling the bonds. Lehman can keep the bonds and get their 7% interest, and they get to keep their brokerage fees.

It's the smallest and least powerful investor in the chain who had to incur ALL the risk of loss, and who incurred the loss as well.

[mulethree]

18. so where does the 18% go?

If they sell the bonds near market value at auction, or if Verizon re-buys them at value, then why are the share-holders of the trust loosing 18%?

Did they underfund the trust? say selling $103mm worth of shares backed by $85mm worth of bonds?

Or did the value of the bonds drop for some reason?

It creeps me out that a company can issue securities and then stop SEC reporting without first redeeming the securities. But then the ideas of wholly owned subsidiaries and holding companies also creep me out.

[AP]

20. The market value changed when the SEC rules meant they could no longer

sell them to the public.

The problem isn't that they stopped reporting at all. It's that the subsidiaries finances are now reported as part of the parent company's disclosure.

The point of the rule makes sense. If you're selling bonds to the public for a subsidiary company, the public is entitled to see that company's fiances in as uncomplicated a format as possible.

The rule prevents the parent company from burying the truth of the subsidiary's finances in their own reports.

[mulethree]

25. I agree the rule makes sense

But the market value should be based on the underlying bonds plus a little bit based on changes in interest rates - relative yield and - if applicable - changes in the bond rating of the underlying bonds.

If the $25 price represents $25 worth of bond principle. And unless the bond-issuer's rating tanked big time. Then it's still backed by $25 worth of bond principle which should be worth $24 - $26 once the bonds are liquidated (sold to some institutional investor). The bonds are still a promise to get $103mm from Verizon in the future and 7% interest payments until then and some company that needs $103mm near the maturity date should be willing to pay $100-106mm or so depending on how 7% interest compares to current prevailing interest rates and on the remaining term. ?

I wonder what happens to the debt rating on this subsidiary? How are Moody's, S&P and such supposed to do a rating on a subsidiary they have essentially no financial data on? Verizon reports the regulatory conditions for each of its subsidiaries but the financials for all the subsidiaries are all jumbled.

If you owned in a REMIC or mortgage pool passthru that got liquidated near end-of-life you wouldn't loose anywhere near 18%. I don't understand why this should be different except for the reason for liquidating.

Heh, Lehman is doing an investor conference for Verizon Wireless tomorrow. Verizon may claim they had no knowledge of this but lets see if they don't lean on Lehman to make things right so as to correct the impression that an investment in Verizon debt can loose out big time.

[AP]

27. If there's no regulated market, the transaction costs are way too high

for the average investory to buy and sell the bonds.

What are you going to do? Put an add in the paper? Hit up your friends down at the club?

The SEC exists so that you don't have to do a ton of due dilligence and consult attorneys every time you buy or sell a stock or bond.

The fact that the SEC forbids offers to the public of these trusts destroyed the value of the holdings, regardless of whatever the underlying value is. And note, Lehman has the ability to do the due dilligence and the connections that allow them to realize value without having to make public offers, so they're protected. It's the average investors who are fucked. Unless they can find a rich friend to buy the bond (presuming Lehman allows members to sell them without Lehman's involvement) the only way to get rid of your interest is if Lehman buys it back.

Also, it might be the case that the trust holding the bonds isn't selling the title to the bonds, but are only selling the beneficial interest in the bonds, so the trust investors don't actually own the bonds. This is probably the case, since it's called a trust.

[Toots]

8. Curious about your ribbon

Is it for number of CAs or amount of time in the air?

[DemoTex]

22. Looks like an Air Medal ribbon

My Army Air Medals were awarded based on number of missions and hours.

12.5 CA missions (combat assaults)
25 DCS missions (direct combat support)
And, I believe, OCS missions (other combat support) were awarded on the basis of hours flown. I had so few OCS (a trip or two to Saigon, a ferry flight or two, and that kind of thing) that I cannot remember. Most of my 250+ missions were CA (over Laos at night), and yielded 19 Air Medals.

[Rebellious Republican]

29. I had this conversation with someone on another thread, its not

an Air Medal, its an artists rendition of a Navy Expeditionary Medal. I found it at a commercial sight, it was more true to the colors than the JPEG I found at the chinfo sight, they use poor quality photo's on their site. I did not realize how close it looked like an air medal ribbon until someone else pointed it out. Here are the differences, notice the blue spacing between the yellow bars.


Artists rendition of Navy Expeditionary Medal


Chinfo GIF of Air Medal (Ribbon)


Chinfo GIF of Navy Expeditionary Medal (Ribbon)

I received for it being in Beirut in "83"
Hope that clears it up for you. RR

[54anickel]

4. "A little bit of a fiasco" HA! Ya think? Unfrigginbelievable! I'm sure

this is just the start of things to come. And their defense is to claim ignorance of the SEC rules. Isn't that just peachy! These are the "Professionals" we are entrusting our hard earned buck-a-roos to. These "Professionals" are supposed to be keeping up on the rules, regulations and risk assessments for us.
Great! I feel better after reading this, don't you? :grr:

[screembloodymurder]

17. Just a "little bit of a fiasco"

unless it's your money. Then it's a BFD.

[AP]

5. A transfer in money from Iowa doctors and Nebraska lawyers to the pockets

of GE and Verizon board members and Lehman Brother bond brokers.

[mike1963]

11. Is this legal? If a bank just shut down and decided to "keep" all deposit

deposits, wouldn't that amount to essentially the same thing?

sheesh

[AP]

14. The problem is that you can't trade them. The SEC made the

marketplace disappear through their rules.

They have a value still, but that value almost entirel disappears because you can't sell them without having huge transactional costs. Or at least for the doctors and lawyers they have huge transactional costs.

Lehman brother protected themselves from that risk, but didn't protect the people to whom they sold interets in the funds.

It looks like Citigroup assumed some of the risk contractually, but Lehman Brothers shifted it all to the purchasers.

[indepat]

12. "How convenient" and "now isn't that special?" Wonder who the bandits

are?

[shanti]

13. i'm concerned about the timing

remember the short sales before 9/11? everything they do should be taken with a grain of salt.

[AP]

15. Stuff like this goes on every day of the week, every week of the year.

[aquart]

16. Disingenuous of Verizon.

I'm not buying the ignorance crap AT ALL.

Filing has become more costly because of requirements under the 2002 Sarbanes-Oxley Act, and many companies are reducing expenses with consolidated filings. Some Verizon subsidiaries stopped filing in February 2003.

Under SEC rules governing the trusts, the underlying securities must come from a company that files directly with the SEC. When Verizon New York stopped filing, it triggered the termination of months-old $230 million Lehman Brothers trusts.

Folks, other Verizon subsidiaries stopped filing over a year ago without triggering a crash. But NY Verizon still issued debt a few months ago and let it crash? EXCUSE ME??????????????

No, I'm not buying ignorance for a flat second. I just wanna know how the scam works.

[AP]

21. It's not really Verizon's fault. They should be able to make decisions

about how to report without having to worry about the terms of Lehman's agreements with the people the bonds are then sold to.

The rule makes the trusts illegal. It doesn't make illegal the sale from Verizon to Lehman or to any other bond owner (where ownership is of the bonds and not a trust holding the bonds).

The problem here is that Lehman Bros ripped off their customers.

[coda]

23. I don't know AP

I won't argue with you on Lehman Bros, but to say you decide to issue SEC filings from the parent to save money?. Months later? Did they think the Sarbanes-Oxley Act was going to go away?


I seriously doubt the veracity of this statement.

"Verizon wasn't involved in the trusts at all," he said. "We weren't aware trusts would have to be liquidated if we suspended reporting in New York. This is a question for Lehman."

[AP]

26. Once the bonds are sold be Verizon, they have nothing to gain from

Lehman's actions.

Only Lehman had a contract that screwed over the investors.

Basically, this was a problem of information -- Lehman had it, and the trust investors didn't have it.

I'd be surprised if Verizon didn't know the consequences of their actions, but, unless they had some back-end deal that constitutes fraud, you really can't blame them.

Once again, whether there's a rule about the filings or not, Verizon is going to behave the exact same way. They're going to sell bonds in blocks too big for small investors to buy.

[Mountainman]

19. Reminds me of the junk bond days.

People were told of the risk I think. Buyer beware the repubs always say.

[Deja Q]

24. So much for the improving economy... or do the Saudis own the trusts?

:tinfoilhat:

$430 mil is NOTHING compared to the $1 trillion total that the Saudis own.

"backed by the debt". We're a nation of debt. Government, corporation, individual people.

We're boned.

[dusty64]

28. More evidence of the

REAL rethug "recovery".