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July 9, 2008
SEC Study Finds Flawed Practices at
Credit-Rating Firms
The Securities and Exchange Commission issued a report yesterday
revealing how major credit-ratings firms, including Fitch, Moody's and
Standard & Poor's, flouted conflict-of-interest guidelines and
considered their own profits when rating securities, the New York
Times reported today. The SEC's report found that agencies
continued to issue ratings despite frequent complaints from managers
that they had neither the time nor manpower to measure the safety of
investments sufficiently. Faced with less time to perform the due
diligence expected of them, the report found that analysts began to cut
corners. The report was the result of a 10-month investigation into
practices at Fitch, Moody's and S.& P. The report also turned up
evidence that ratings firms had run afoul of basic guidelines intended
to avoid conflicts of interest.
href='http://www.nytimes.com/2008/07/09/business/09credit.html?_r=1&oref=slogin&ref=business&pagewanted=print'>Read
more.
Mortgage Lender's Financial Struggles
Continue
IndyMac Bancorp, one of the nation's largest independent mortgage
lenders, faced what amounted to a run on the bank as depositors rushed
to withdraw money, and its share price spiraled even lower, the New
York Times reported today. IndyMac's stock, which fetched $50 in
2006, at the height of the housing boom, plunged 38 percent to 44 cents.
In two years, more than $3 billion of shareholder value has been wiped
out. A once high-flying offshoot of Countrywide Financial, IndyMac
confronts an uncertain future. In a regulatory filing on Tuesday,
IndyMac, which is based in Pasadena, Calif., said that it had largely
stopped making loans and would shut its retail and wholesale lending
businesses. In all likelihood, IndyMac will undergo an orderly
bankruptcy or be sold, analysts said.
href='http://www.nytimes.com/2008/07/09/business/09lend.html?ref=business&pagewanted=print'>Read
more.
Commentary: Fed's New Mortgage Rules
Should Be Stricter
The Federal Reserve's new mortgage rules, to be issued next week, may
not go far enough to protect individual borrowers, according to an
editorial in today's New York Times. The new mortgage rules,
which are to be issued on Monday, are intended to help ensure that a
financial debacle of the same nature and scale as the current one
precipitated by questionable mortgage loans will not be repeated.
However, unless they are a significant improvement over the Fed's
previous proposals, they will not go far enough to protect individual
borrowers. In the past, the Fed has failed to champion rules that would
allow a lender to be sued for issuing a loan that a borrower has no
reasonable ability to repay. Without a real possibility of being called
to account for their actions, lenders are likelier to resume the
practice of making unaffordable loans to produce short-term profits for
their institutions.
href='http://www.nytimes.com/2008/07/09/opinion/09wed1.html?ref=opinion&pagewanted=print'>Read
more.
HUD Remarks Suggest White House Open
to Housing Deal
HUD Secretary Steve Preston today made a pitch for two items he said
should be included in a final housing-rescue package, but without the
threats of earlier White House veto actions on the measure,
CongressDaily reported yesterday. Preston said that he has been
in contact with both Senate Banking Chairman Christopher Dodd (D-Conn.)
and House Financial Services Chairman Barney Frank (D-Mass.) on HUD's
priorities as they attempt to complete a final bill before the August
recess. Preston is lobbying for a provision in the pending Senate bill
that would ban seller-assisted down payments under the Federal Housing
Administration's loan guarantee program. The program is still allowed
under a House-passed version. He noted that those loans have a
foreclosure rate three times greater than loans in which borrowers make
their own down payment, potentially threatening the solvency of the
program. Preston also wants the ability to price products based on a
borrower's credit risk. The House bill gives the FHA such ability; the
Senate measure does not. Frank has indicated that a compromise could be
reached over the seller-financed down payment provision, placing
additional safeguards into the program while still maintaining it.
In related news, Sen. John Ensign (R-Nev.) continued to hold up the
Senate's housing and foreclosure assistance bill yesterday, showing no
signs of backing down in his attempt to attach a package of tax credits
for wind, solar and other alternative energy sources,
CongressDaily reported today. Ensign's amendment, which he
sponsored with Sen. Maria Cantwell (D-Wash.) was approved on an 88-8
vote even without offsets when it was first attached to the housing bill
in April. Many Democrats considered that a “free vote” at
the time, knowing that the provision would be dropped from the final
housing bill because of the pay/go hurdle.
Retail Chain Faces Potential
Bankruptcy
Steve & Barry's, the clothing chain that tried to undercut
competitors by selling celebrity fashion and shoes for less than $10,
was preparing to file for bankruptcy protection late yesterday in the
latest blow to shopping malls battered by the economic downturn, the
New York Times reported today. The company's
management held discussions over the Fourth of July weekend with Sears
Holdings Corp. about a possible bailout or an acquisition of some of its
labels. Even as its business imploded, Steve & Barry's claimed
annual sales of about $1.1 billion and sales gains of 20 percent in
stores open one year or more. However, the company's strategy of
operating on razor-thin margins and of adding stores in distressed
locations with special payments from landlords became tenuous in recent
months as the economy weakened.
href='http://www.nytimes.com/2008/07/09/business/09shop.html?ref=business&pagewanted=print'>Read
more.
Alabama County Ousts Financial
Advisers
After months of efforts to renegotiate its troubled sewer debt,
Jefferson County, Ala., voted yesterday to replace its team of
financial advisers with a new group led by Regions Financial Corp.'s
Morgan Keegan & Co., which could also eventually include
Goldman Sachs Group Inc., the Wall Street Journal reported
today. Jefferson County has spent months trying to refinance billions of
dollars in sewer debt to avoid a possible bankruptcy filing after its
aggressive financing strategies and extensive use of interest-rate swaps
backfired during the credit crunch. If the county fails to renegotiate
the debt and files for bankruptcy, it would be the largest municipal
bankruptcy in U.S. history.
href='http://online.wsj.com/article_print/SB121557252600738387.html'>Read
more. (Registration required.)
Bombay Company's Disclosure Statement
Approved
Bankruptcy Judge D. Michael Lynn approved the The
Bombay Company Inc.'s disclosure statement and set a date for a
confirmation hearing on the home-furnishing retailer's liquidation plan,
Bankruptcy Law360 reported yesterday. Judge Lynn approved the
disclosure statement on Thursday for the first amended consolidated
joint plan of liquidation submitted by The Bombay Co., its bankrupt
subsidiaries and unsecured creditors' committee. Under the terms of the
proposed plan, priority and non-priority tax claims will be completely
paid out. Secured claimants will receive 100 percent of the net proceeds
from a sale of the company's remaining collateral or the return of that
collateral. A confirmation hearing is set for Aug. 20.
href='http://bankruptcy.law360.com/Secure/ViewArticle.aspx?id=61464'>Read
more. (Registration required.)
Judge Denies BoNY's $170 Million Claim
on Palco
Bankruptcy Judge Richard S. Schmidt denied a motion by
the Bank of New York (BoNY), acting as trustee for a group of
noteholders, for a $170 million administrative claim on the estate of
Pacific Lumber Co., but allowed the noteholders to get an extra $3.6
million under Pacific Lumber's chapter 11 plan, Bankruptcy
Law360 reported yesterday. Following a hearing yesterday, Judge
Schmidt increased the total compensation for the noteholders from $510
million to $513.6 million, according to an attorney for Mendocino
Redwood Co. and Marathon Structured Finance Fund LLP, the two creditors
that proposed the reorganization recently approved by the judge. The
original amount had been based largely on the court's valuation of
Pacific Lumber's timberlands, which served as collateral for the notes.
Last month, Bank of New York sought an additional administrative expense
claim on the grounds that its collateral lost value during Pacific
Lumber's automatic stay.
href='http://bankruptcy.law360.com/Secure/ViewArticle.aspx?id=61590'>Read
more. (Registration required.)
Auction-Rate Probe Grows over Clarity
from Brokers
Federal prosecutors, ramping up criminal probes stemming from the credit
crunch, are investigating whether two former Credit Suisse Group brokers
lied to investors about how they placed their money into short-term
securities, the Wall Street Journal reported today. At issue is
the $330 billion market for 'auction rate' securities, which allow
issuers such as municipalities and student loan companies, closed-end
mutual funds or financial institutions to borrow money for the long term
but at short-term, or lower, interest rates. The investigation, by the
Justice Department's U.S. Attorney's Office for New York's Eastern
District, represents the first known criminal matter stemming from the
crumbling auction-rate securities market and has punished thousands of
U.S. investors, who are now stuck paying high penalty rates, and it has
raised questions about whether Wall Street firms adequately disclosed
the risks in such auctions.
href='http://online.wsj.com/article/SB121556066791337507.html?mod=hpp_us_whats_news'>Read
more. (Registration required.)