Friday, February 10, 2012

Massachusetts Security Regulator Latest to Take Action on BoA CLOs

By Tim Husson, PhD and Olivia Wang, PhD

The Wall Street Journal today reported that Massachusetts is investigating Bank of America for their role in the LCM VII and Bryn Mawr II CLOs.  Secretary of the Commonwealth William Galvin is leading the investigation as to whether the two CLOs priced their underlying assets truthfully at the time of sales to investors.  The subpoenas have also been picked up by BloombergFox Business, and Reuters, amongst others.

SLCG initially reported the mispricing of these CLOs in a research paper earlier this year in connection with the recent FINRA award to Bobby Hayes, who purchased the juniormost tranche of the LCM VII deal.  From that paper:
We provide two examples [LCM VII and Bryn Mawr II] of such problematic CLO offerings in which Banc of America appear to have transferred at least $35 million of losses to investors in July 2007 and which ultimately led to approximately $150 million in losses in just these two CLOs. $35 million of those $150 million in losses occurred before Banc of America sold the securities to investors and only $115 million occurred after investors bought the CLO securities. 
We are excited that the issue of warehoused assets in these products has received attention from regulators and the media, which can play a large role in investor education and awareness.  As we outline in our paper,  we believe that problems with these two products are not unique to CLOs or to Bank of America, and highlight the enormous complexity and opacity of structured credit derivatives.

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