AIG May Sue Goldman

American International Group is considering taking action against Goldman Sachs and other Wall Street banks over soured mortgage assets. The insurance giant is examining its mortgage debt pools and securities for any indication that the structures were fraudulently created or sold.

While the insurer has been scouring its books for some time, scrutiny has intensified now that the Securities and Exchange Commission put Goldman Sachs in its crosshairs with a civil fraud lawsuit for allegedly withholding information about collateralized debt obligation ABACUS 2007-AC1. The SEC asserts that Goldman didn't tell investors that the Paulson hedge fund, which wanted to bet against the deal, had a hand in selecting mortgage assets that would determine how the CDO performed. The firm denies any wrongdoing.

In a separate matter, two Democratic Congressmen have reportedly urged the SEC to force Goldman to return funds it received from AIG if it turns out that the insurer's default protection was fraudulently sold.

AIG previously insured seven Goldman-arranged ABACUS CDOs that originally totaled $6 billion, and AIG representatives are poring over the deals for any disclosure issues similar to what the SEC raised.

AIG and Goldman agreed last year to unwind most of these contracts, which led AIG to realize a loss of about $2 billion. AIG still insures approximately $1.3 billion in ABACUS deals.

Meanwhile, the SEC's actions against Goldman have sent credit default swap spreads spiraling wider for the entire banking sector, according to Fitch Solutions. Goldman CDS widened 41%, and liquidity also spiked by five regional percentiles due to uncertainty over the firm's credit condition.

Schwab Settles YieldPlus Lawsuit for $200 Million

Charles Schwab has settled the federal class-action lawsuit agsinst its YieldPlus Fund for $200 million, far less than the $800 million plaintiffs had sought. The settlement, announced Tuesday, is subject to a definitive agreement and final approval of the court. Other related regulatory matters, including a Securities and Exchange Commission investigation, and a case in a California court remain open.

Schwab set aside $172 million in the first quarter to pay for the settlement.

The class-action suits were filed between March and May 2008, after a regulatory investigation into the investment policy, disclosures and marketing of the Schwab YieldPlus Fund, an ultra-short bond fund invested in corporate bonds, asset-backed securities and mortgage-backed securities. After the credit crisis, investors in the fund experienced steep declines. Schwab reached the settlement without admitting liability, and said it "allows the company to avoid the distraction and uncertainty of a trial, and the possibility of protracted appeals."

Clinton Admits Error on Deregulating Derivatives in 2000 Commodity Futures Act

Former President Bill Clinton now says he had an inadvertent role in the credit crisis and the SEC's civil fraud case against Goldman Sachs by signing the Commodity Futures Modernization Act in 2000, exempting the $58 trillion credit default swap industry from meaningful regulation.

In fact, it was a huge mistake, Clinton said in an interview with Bloomberg News. But he blames former Treasury Secretary Robert Rubin and his successor Lawrence Summers for advising him on financial deregulation.

"Their argument was that derivatives didn't need transparency because they were 'expensive and sophisticated,' and only a handful of people buy them, and they don't need any extra protection," Clinton said.

"The flaw in that argument was that, first of all, sometimes people with a lot of money make stupid decisions and make [them] without transparency," Clinton continued, noting that while derivatives make up 1% of financial products, the overwhelming amount of money invested in them effectively threatened to destroy the world economy.

CDO in Goldman Case Cut To 'D' by S&P in May 2009

The collateralized debt obligation at the center of the fraud case against Goldman Sachs, known as ABACUS 2007-AC1, was cut to "D" from "CCC-" by Standard and Poor's in May 2009.

That "D" grade may have been the most recent rating action taken on this specific transaction, which had two classes of debt, or tranches. The ABACUS deal had a Class A1 and a Class A2.

Goldman used ABACUS as the name of a shelf for a series of CDOs, all of which were tied to residential mortgage-backed securities. In 2007, Goldman was the sixth-ranked underwriter of CDOs worldwide, according to Thomson Reuters.

S&P's report said the downgrade of the transaction's Class A-1 "follows a number of recent write-downs of underlying entities that caused the class A-1 notes to incur a partial principal loss."

By October 2007, 83% of the residential mortgage-backed debt in the portfolio had been downgraded, and 17% was on negative watch, according to the SEC. By January 2008, 99% of the portfolio had been downgraded.

Fitch Ratings, meanwhile, said through a spokesman it did not rate that specific deal, and a Moody's spokesman said it had initially rated the two classes of the ABACUS deal AAA. Moody's cut these classes to Baa2 and Baa3 in November 2007, and in April 2008 they were rated Ca, a rating notch above default.

Money Funds Hemorrhage Record $324.4B in 1Q10

Investors pulled $324.4 billion from money market mutual funds in the first quarter, the largest quarterly outflow ever tracked by Morningstar. Approximately $148.2 billion left the funds in March.

Open-ended mutual funds had inflows of $47.5 billion in March, for a total of $125.2 billion for the quarter.

Inflows to exchange-traded funds soared by $19.7 billion in March, for a quarterly net of $7.7 billion. There were 18 new ETFs launched in March.

International stock funds pulled in $19.7 billion for the quarter, the strongest quarterly inflow since the fourth quarter of 2007.

However, bond mutual funds continued to lead stock funds with $35.6 billion in inflows in March.

XBRL iPad, iPhone App

XBRL US is working on applications for Apple's iPhone and newly released iPad. The goal is to demonstrate the power of XBRL in a simple and accessible way, said XBRL US President and Chief Executive Mark Bolgiano. "Our goal is to facilitate the use of XBRL through multiple channels," added Campbell Pryde, chief standards officer, "and to make it possible for people to see the benefits of XBRL firsthand-by easy, convenient and familiar means."

In June, XBRL will "crowd-source" the design and features of the applications using the platform it has used to develop US GAAP, mutual fund risk-return and credit ratings taxonomies for the Securities and Exchange Commission.

Crisis Inquiry Commission Subpoenas Moody's

The federal Financial Crisis Inquiry Commission has subpoenaed Moody's Corp. for allegedly failing to provide requested information.

Last May, Congress enacted the Fraud Enforcement and Recovery Act, which created the FCIC and charged it with figuring out what caused the financial crisis.

The 10-member, bi-partisan commission is examining 22 facets of the crisis, including financial institutions' reliance on rating agencies and the use of ratings in regulation and securitizations. FCIC has the power to hold hearings and subpoena witnesses.

75% of 401(k)s Include Target-Dates: Vanguard

Use of target-date funds in 401(k)s is up significantly thanks to their status as qualified default investment alternatives under the Pension Protection Act of 2006 and the growth of automatic enrollment, according to a new Vanguard study. Since their inception in 2004, target-date funds now account for just under $60 billion of Vanguard's total $1.2 trillion in assets under management. Net cash flows have grown steadily year over year, from $2.3 billion in 2004 to a peak of $14 billion in 2007, dipping to $13 billion in 2008 and $12.9 billion in 2009. Inflows for the first quarter of 2010 are already at $5 billion, however, indicating target-date finds upward trajectory is back on track.

People aren't just buying them because they're the default choice, said Vanguard spokeswoman Linda Wolohan. "People are actively choosing these funds," she said. "A lot of people say target-date funds are growing because they're the default, which is true, but a lot of people are buying them on their own."

Vanguard's 2009 Target-Date Fund Adoption Report said that 75% of the defined-contribution plans it administers offer a target-date fund option, and 42% of plan participants invest in them. Of this group, half bought the funds of their own volition, Wolohan said.

The firm analyzed the holdings of 3.2 million participants in 2,200 defined-contribution plans administered by Vanguard.

BlackRock Bond Funds Aimed at New Opportunities

BlackRock has introduced two new fixed income funds designed to take advantage of opportunities in the unpredictable market environment post-financial crisis.

The BlackRock Multi-Sector Bond Fund is a diversified fixed income fund focusing on taxable securities that offer higher income than other core strategies. The BlackRock Strategic Income Opportunities Fund will invest in various securities across the fixed income universe.

"The recent credit crisis has made the fixed income market more unpredictable and difficult to navigate, but attractive market opportunities remain highly accessible to discerning investors," said Curtis Arledge, chief investment officer of fundamental fixed income at BlackRock.

Referring to what BlackRock terms "spread sectors," that is, bonds trading with a yield spread over Treasuries, the CIO added: "Rates won't rise in a straight line across all sectors, so managers who can take advantage of disparities among different assets will have an edge over managers confined to specific sectors or asset classes. Though demand for spread sectors has grown, many of the underlying securities in these sectors remain undervalued."

Investors also need to veer away from traditional benchmarks, given the "preponderance of government-related debt" in the fixed income market today, Arledge said.

Japan to Champion World's Green Technology: SPARX

Japan is the most energy-efficient country in the world, using nearly half the energy consumption per GDP of the United States and nearly one-eighth less than India and China, said Shuhei Abe, portfolio manager of the Hennessey Select SPARX Japan Fund, said at a presentation in New York last Monday.

As the world turns to energy alternatives to oil, "entire social infrastructures will have to change, and arbitrage of our technology over the next five to 10 years will turn Japan into the gateway to Asia," Abe said.

Energy technologies Japan excels at include photovoltaic solar panels, hybrid/electric vehicles, wind power, highly efficient water heaters and batteries, Abe said. In addition, Prime Minister Yukio Hatoyama, who as president of the Democratic Party of Japan defeated the long-governing Liberal Democratic Party in last year's election, has proposed spending $1.9 trillion over the next decade to reduce carbon dioxide gas emissions 25% from 1990 levels.

"This spending would create huge demand for Japanese companies that are focused on energy-saving technologies," Abe said.

Furthermore, businesses and government in Japan, weary of the past two decades of recessions and stagnant growth, are adopting more competitive models, including joint ventures with Chinese companies, hiring outside CEOs who are not Japanese nationals, downsizing and restructuring.

"In the 'New Japan,' slow-growth companies will become high-growth, delivering profits of 10% to 50%," Abe said. "Japanese companies are taking more aggressive strategies for growth. They are telling me they are starting to make major decisions; otherwise, they will be dead with the country. They think this is it. They cannot wait any longer."

Along these lines, the Hatoyama cabinet acknowledges the nation's debt, 460% of GDP, warrants a "reallocation of the wealth and how they can spend government money. Corporate tax is unevenly higher than the rest of the world, and the 5% consumption tax is unevenly lower. That is one of the reasons no one sells Japanese government bonds," Abe said.

Asset managemers looking to enter the Japanese market might find now particularly auspicious for joint ventures, Abe added.

(c) Copyright 2010 Money Management Executive and SourceMedia Inc. All rights reserved.

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