Thursday, January 15, 2009

SLCG Research: Abuse of Structured Finance

SLCG released today ‘Regions Morgan Keegan: The Abuse of Structured Finance’.

Six Regions Morgan Keegan (RMK) bond funds lost $2 billion in 2007. In the paper, we argue that the loss was not due to ‘flight to quality’ or ‘mortgage meltdown’ but to RMK’s portfolio concentration in subordinated tranches of asset-backed securities.

We also find that RMK misrepresented to investors and the Securities and Exchange Commission (SEC) in several ways. Firstly, RMK did not disclose to the SEC the risks associated with subordinated tranches of asset-backed securities. Secondly, RMK misrepresented to the SEC by representing asset-back securities as corporate bonds and preferred stocks. Thirdly, RMK misled investors by using the Lehman Brothers Ba Index as a benchmark of comparison when such an Index is an inappropriate benchmark as it does not contain asset-backed securities.

Investors are encouraged to fully understand the risks associated with subordinated tranches of asset-backed securities, and to beware of false comparisons that are used to mislead investors into thinking that certain securities are less risky than they really are. SLCG is dedicated to the education of the investing public. Other papers can be found at our dedicated website.