Friday, June 22, 2007

CMO? CDO? There's a Difference?

by Tanta on 6/22/2007 08:10:00 AM

I predict that us UberNerds are going to spend a lot of time getting irritated in the coming weeks.

The OC Register reports on the Brookstreet mess:

In another fallout from Orange County's subprime mortgage industry collapse, Brookstreet Securities Corp., an Irvine broker dealer, shut its doors and laid off 100 local employees because it could not meet margin calls on complex securities backed by faltering mortgages, company spokeswoman Julie Mains said.

Mains said Brookstreet went from $16 million in capital Friday to being $3 million under water Wednesday because its clearing firm, National Financial Services, demanded payment for securities bought on margin.

The securities, known as collateralized mortgage obligations, lost value as Wall Street confidence in mortgage-backed securities collapsed. The most prominent collapse was this week's demise of two Bear Stearns & Co. hedge funds worth $20 billion that invested in collateralized mortgage obligations, which are mortgage-backed securities with varying maturity dates, risk and yields.

Mains said the value of Brookstreet's securities plunged to 18 cents on the dollar, forcing the company to dip into its capital to meet margin calls, which is when investors must increase deposits to meet minimum account requirements.

"It wasn't a problem with securities," she said. "It was a problem with the margins." . . .

The National Association of Securities Dealers ordered Brookstreet to liquidate its remaining accounts Wednesday, Mains said. Some customers lost the entire value of their investments while others "did indeed go negative," Mains said. She said clients should try to find another broker-dealer to take over their accounts.

Mains said clients should have known they were making risky investments, but consumer attorneys said CMOs should only be sold to pros.

Stuart Meissner, a New York attorney and former securities regulator, said he received calls from people whose Brookstreet accounts went from $250,000 to negative value. "They were supposedly guaranteed 10 percent returns," Meissner said.

Sam Edwards, a Houston attorney who has sued Brookstreet for investment malpractice, said he received calls from clients across the country complaining about losses in collateralized mortgage obligations bought on margin.

"These are very complicated, very high-risk securities and not appropriate for retail customers," Edwards said.

Dear OC Register: if we are going to make comparisons to Bear Stearn's hedge funds, and we are going to make statements to the effect that the securities in question are too complex for retail investors, it might possibly help matters if you would verify that we are really talking about Collateralized Mortgage Obligations as opposed to Collateralized Debt Obligations.

I suggest, reporters, that you call a specialist--Mark Adelson at Nomura appears willing to talk to the press, as does Janet Takavoli--and ask for a brief education in the difference between these two types of structured finance. If in fact Brookstreet was selling CDO tranches to retail investors, that's a big deal. If they were CMOs (also known as REMICs)? Well . . . the bond market is certainly going to change pretty radically if we declare that REMICs--as such--are too toxic for retail investors.