|
|
|
|
|
DEUTSCH & LIPNER Tobacco Settlement Bonds Losses; Cases Being Filed
Many investors suffered losses in 2008 because they owned Tobacco
Settlement Bonds (“TSBs”). These bonds, which are tax exempt,
were sometimes marketed by brokers as “municipal bonds”. They lost up to
50% of their value as a result of Wall Street’s self-induced credit
crisis.
Other than their "tax-exempt" status, TSBs have absolutely nothing in
common with traditional municipal bonds.
Billions in TSBs were created and sold between 2001 and 2006. After
entering into long-term settlement pay-outs as a result of the
well-publicized tobacco litigation, many states did not want to wait for
their money from the tobacco companies. Enter - Wall Street’s sharpies.
Eager to create products and charge investment banking fees, Wall Street
offered the states a way to get the money up-front - through
their favorite device, “securitization”.
With the help of investment bankers at companies like Bear Stearns, the
states set up agencies to sell tax-exempt TSBs to the public. These
bonds, which to the uninitiated look like municipal bonds, are not
backed by any state's general credit or its by any state's general fund
- these bonds are backed only by the stream of income that is supposed
to come from the tobacco companies over the next 40-odd years.
In creating this new breed of security, the risk of default or
diminished payments was shifted from the states onto the backs of
bond-buyers. That risk is magnified by the long duration of the bonds
(in some cases 45 years), by the complex terms of some of these
instruments, and by the fact that the terms of the Master Settlement
Agreement between some states and the tobacco companies provide for
diminished payments over time if U.S. cigarette sales decline.
The market for these new-fangled bonds suffered horribly in 2008. With
credit ratings hovering just-above junk-bond status, and with U.S.
tobacco sales way down (and excise taxes on tobacco sales rising), the
value of TSBs dropped precipitously in the Fall of 2008. Instead of
behaving like municipal bonds, TSBs acted like bad corporates. With
their short track-records, very long maturities and uncertainty about
the future income streams, some values dropped as much as 50%. Mutual
funds that were heavily concentrated in TSBs, such as the Oppenheimer
Rochester Funds, also were hit hard.
Deutsch & Lipner has begun filing cases on behalf of aggrieved investors
in TSBs and the funds that owned them. Anyone who bought these
securities based on advice or representations that these bonds were in
any way equivalent to owning municipal bonds should consider doing so as
well. A cost-free consultation with our expert attorneys is available by
telephone. |
