Interesting post on Land America stuff

[bcassill]

A connection between the Richmond Fed and Land America fraud?

http://www.jrdeputyaccountant.com/20...ok-client.html

[ThePythonicCow]

Re: Interesting post on Land America stuff

A connection between the Richmond Fed and Land America fraud?

http://www.jrdeputyaccountant.com/20...ok-client.html

Dang. That's a nasty story. Thanks, bcassill. The storm grows a shade darker.

[newnewthing]

Re: Interesting post on Land America stuff

Nothing really odd there. A lot of people bought ARS for the tad bit extra interest. And they were liquid. Until they weren't. Was the prospectus not clear about the risks should the auction fail (reach the interest cap) and become non public junk bonds?

In most cases the interest didn't rise abruptly to its limit. What did people expect when it kept climbing at each auction or did they just think Oh Boy, they are paying more interest?

It doesn't take a rocket scientist to figure it out.

As for the BK, the lawyers are always high up on the chain as they are required in seeing proper liquidation. It's also pretty much required that the company tries to keep doing business as usual right up to the bk - which is properly kept as secret as possible until filed.

Yeah, it seems unfair but doing bk any other way introduces other potential unfairnesses. Always check into any entity you entrust funds to and assess your risk.

[ZimbabweBen]

Re: Interesting post on Land America stuff

You'd be right under normal circumstances but LandAm 1031 exchangers were not entered into any sort of agreement for these illiquid securities. That was not part of the deal.

So in essence what you have here is the fiduciary frittering away the funds that they were not supposed to touch anyway. THAT is the crime, the questionable marketing tactics of those pushing the ARSs aside.

At least that is my understanding of the situation.

[newnewthing]

Re: Interesting post on Land America stuff

You'd be right under normal circumstances but LandAm 1031 exchangers were not entered into any sort of agreement for these illiquid securities. That was not part of the deal.

So in essence what you have here is the fiduciary frittering away the funds that they were not supposed to touch anyway. THAT is the crime, the questionable marketing tactics of those pushing the ARSs aside.

At least that is my understanding of the situation.

The ARS were an odd duck. They were sold as maintaining principal and the frequent auctions made them liquid. Until they didn't and weren't.

Criminal though? Perhaps.

[ZimbabweBen]

Re: Interesting post on Land America stuff

So the question here becomes who exactly is the criminal?

[kartius919]

Re: Interesting post on Land America stuff

ARS were sold as "cash equivalents" and many kept them on the balance sheets as such until a recent FASB change. The short periodic reset allowed owners to dump their securities anytime which gave a false sense of liquidity so long as the auctions were fully subscribed. If there were not enough buyers for the ARS, the big banks would step in and purchase the securities to prevent any failed auctions. Of course this small detail was never mentioned, nor i doubt the purchasers ever understood what the hell ARS were. Probalby just the marketing hype of cash equivalents earning interest. Many people, including large "sophisticated" institutions believed the big banks when they said that ARS was as good as cash.

Also note the multiple hats worn by the big banks. They were advisors to both lender and creditor, underwriters, market makers, my mommy, etc.

[newnewthing]

Re: Interesting post on Land America stuff

ARS were sold as "cash equivalents" and many kept them on the balance sheets as such until a recent FASB change. The short periodic reset allowed owners to dump their securities anytime which gave a false sense of liquidity so long as the auctions were fully subscribed. If there were not enough buyers for the ARS, the big banks would step in and purchase the securities to prevent any failed auctions. Of course this small detail was never mentioned, nor i doubt the purchasers ever understood what the hell ARS were. Probalby just the marketing hype of cash equivalents earning interest. Many people, including large "sophisticated" institutions believed the big banks when they said that ARS was as good as cash.

Also note the multiple hats worn by the big banks. They were advisors to both lender and creditor, underwriters, market makers, my mommy, etc.

The widespread use of ARS as "cash equivalents' was part of the problem. When the initial ARS failures occured there was a rush to the exits by companies that simply couldn't afford the balance sheet shift from "cash equivalents" to long term assets. Even companies that had prior auctions producing interest rates well below the cap quickly had failed auctions. So it took some nimbleness for corporate financial depts. to monitor the auction trends, grok the risk, and exit early.

When people discovered how to control and initiiate fire they enjoyed its delights, keeping warm in a cold winter and cooking up tasty critters. At some point they discovered the downside of uncontrolled fire. Now it's our turn. We have reaped the benefits of FIRE and are just getting a glimmer of the downside.

[kartius919]

Re: Interesting post on Land America stuff

I'm not sure what you mean by "couldn't afford the balance sheet shift to long term assets" The values dropped like a rock after they became illiquid and companies who owned these assets had to take a write down on their books. ARS failed and failed all at once because the banks declared they will no longer support the auctions. That was the big fraud. They were not liquid if not for tinkering by the big banks, but peddled as such by the big banks. The owners were stuck with assets advertised as highly liquid until the NY attorney general forced the banks to buy them back or face prosecution for fraud.
"companies that had prior auctions producing interest rates well below the cap had failed auctions." Don't know what that means.

[newnewthing]

Re: Interesting post on Land America stuff

I'm not sure what you mean by "couldn't afford the balance sheet shift to long term assets" The values dropped like a rock after they became illiquid and companies who owned these assets had to take a write down on their books. ARS failed and failed all at once because the banks declared they will no longer support the auctions. That was the big fraud. They were not liquid if not for tinkering by the big banks, but peddled as such by the big banks. The owners were stuck with assets advertised as highly liquid until the NY attorney general forced the banks to buy them back or face prosecution for fraud.
"companies that had prior auctions producing interest rates well below the cap had failed auctions." Don't know what that means.

No, Lots of companies did not write down their ARS after they failed auction but were not in default (paid the capped dividends). It depended on the quality of the issuer and the company's judgement. However, they could no longer be carried under current assets on the balance sheet.

"companies that had prior auctions producing interest rates well below the cap had failed auctions."

It means that the failure of ARS auctions was fairly rapid. As companies saw the risk they decided to take the money and run from their supposedly "liquid" ARS. Too many sellers v buyers results in a failed auction even if the auction produced much lower interest rates just 2 weeks before.