Wednesday, September 7, 2011

Memphis Strikes Again

Does something in the water make local financial firms targets?

Posted By on Wed, Sep 7, 2011 at 11:42 AM

In 2009, an enforcement team of the Securities & Exchange Commission (SEC) raided the Memphis office of Stanford Financial Group and charged that Allen Stanford, now in jail, was running an $8 billion Ponzi scheme. So much for Stanford's sponsorship of the local PGA golf tournament and its "generous" gifts to charities.

In 2010, the SEC charged Memphis-based Morgan Keegan with fraudulently overstating the value of securities backed by subprime mortgages. The case was settled earlier this year for $200 million and a Morgan Keegan executive was banned from the industry for life.

Last week, it was First Horizon's turn to make the national business report in a bad way (see story page 10). The Federal Housing Finance Agency (FHFA), known to none-and-all as the agency charged with conserving taxpayer-backed mortgages, sued 17 financial institutions, claiming they sold $196 billion in overvalued mortgage securities to Fannie Mae and Freddie Mac. First Horizon, with $25 billion in assets, is the small fry in a group that includes Bank of America and Citigroup. Its share of the toxic mortgages is pegged at $883 million. The company says the charges are not true and will defend itself.

If you don't know what Fannie Mae or Freddie Mac are, join the club. This story is all about people tossing around financial jargon and investment products without really undertstanding what was going on.

The important thing is that Stanford is out of business, and Morgan Keegan and its parent company Regions Financial and First Horizon and their investors have lost about 80 percent of their stock market value in four years. The Memphis wealth index has taken a huge hit.

The game that led to the bursting of the housing bubble was Pass the Mortgage. Many of us took out mortgages years ago with a local bank or other lender and watched the loan move to some non-local mortgage aggregrator or "loan servicer." At some point the bundled good and bad mortgages, like sausage packed with beef, fat, and unmentionables, were sold to yield-hungry investors.

The good guys in this story are investigative reporters like Gretchen Morgenson at The New York Times and authors such as David Faber, whose book And Then The Roof Caved In: How Wall Street's Greed and Stupidity Brought Capitalism to Its Knees is cited in the FHFA lawsuits.

It describes the frenzy to create and sell "collateralized debt obligations" at financial firms such as Merrill Lynch. Morgan Keegan and First Horizon created such products.

"In its quest to increase its market share, Merrill Lynch faced fierce competition from an increasing number of market players," Faber wrote. "The push to securitize large volumes of mortgage loans contributed to the absence of controls needed to ensure that the loans conformed."

Federal regulators are already being accused of piling on. In fact, their actions came well after the housing bubble burst in 2007 and bank stocks crashed. Morgenson and Faber and others were writing about it in 2008 and 2009.

Also in 2008, some First Horizon employees sued the company claiming that it "breached its fiduciary duty by continuing to invest [retirement] plan assets in First Horizon stock when it was no longer prudent to do so." They allege that "material information about the company's financial problems had not been disclosed." The lawsuit is pending in federal court in Memphis.

In Memphis, good news about business often gets reported before it happens — Bass Pro Shops and Mayor A C Wharton's campaign claim of 10,000 new jobs. Bad news sometimes doesn't get reported at all. The Commercial Appeal reported the First Horizon story on Tuesday, four days late.

That's where lawyers like Dale Ledbetter come in. Ledbetter, who went to Messick High School with former county mayor Jim Rout and graduated from Rhodes College, represents disgruntled shareholders in Morgan Keegan funds. His nearly 200 clients include ordinary investors, famous athletes, pension funds, and nonprofits. Some of the claims have been settled and others have gone to arbitration.

The former Memphian has no mixed feelings about the travails of firms that are or were pillars of the community. He is organizing another investor meeting this week.

"My commitment is to Memphians whose lives have been altered forever by what this institution has done to them," he said. "These are stories of tears, anguish, of people who can't send their kids to college, of retirements destroyed. Somebody is supposed to be responsible for that. Charitable acts based on ill-gotten gains are not virtuous."

In his spare time, Ledbetter is a magician. Many Memphians wish that someone could conjure up their lost wealth.

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