Morgan Keegan /RMK Funds

Morgan Keegan’s hometown newspaper, the Memphis Commercial-Appeal, recently published an article detailing the factors behind the collapse of Morgan Keegan’s RMK family of bond mutual funds.  Among the factors pointed out by the article are: Lack of regulatory oversight Lack of supervision by Morgan Keegan over Jim Kelsoe, the funds’ manager Kelsoe’s “bets” in the inferior tranches of Collateralized Debt Obligations and Collateralized Mortgage Obligations; bets which lost heavily during the subprime mortgage collapse. As noted by the article, most RMK investors had no idea they were investing in products which made such risky bets in structured finance, particularly subprime mortgages.  This was even acknowledged by Gary Stringer, investment director of Morgan Keegan’s Wealth Management division, who stated in a May 2007 e-mail:  “Mr. & Mrs. Jones don’t expect that kind of risk from their bond fund. . . . I’d bet that most of the people who hold that fund have no idea what’s it’s actually invested in. I’m just as [...]

Birmingham-based Regions Financial Corp said that it may consider selling Morgan Keegan.  Analysts suggest that the investment unit of Regions may sell for as much as $1.5 billion.  Currently, Regions owed the Treasury Department approximately $3.5 billion in funds recieved from the TARP Program.  The announcement regarding the potential sale came soon after regulators announced that Morgan Keegan agreed to pay $210 million in penalties for the marketing and sale of the RMK Funds.  The state and federal regulators concluded that Morgan Keegan misled investors about the risks of the funds and that they also misrepresented and omitted material facts about the funds.  Morgan Keegan neither admitted or denied the regulatory findings. […]

On April 7, 2010, the securities regulators of four states, the United States Securities and Exchange Commission, and FINRA brought charges against Morgan Keegan, Morgan Asset Management, Mr. James Kelsoe and key Morgan Keegan employees alleging that they participated in a massive fraud in connection with the purchase, sale, marketing, pricing and public filings of all of the RMK funds. All of these complaints allege violations of the anti-fraud provisions of state and federal laws or FINRA’s rules and all of them point to the basic similarity of all of the RMK funds.  As described at ¶ 16 of the State complaint: All six (6) Funds were largely invested in the lower, implicitly leveraged and most risky “tranches,” or slices, of structured debt instruments…The Funds were comprised of many of the same holdings… The Funds were highly correlated, meaning they behaved like each other under similar market conditions.  The combination of risky lower tranche holdings, mirrored holdings among the Funds, and [...]

The WSJ reports that Regions Financial Corp.  will set aside four times as much money to cover expected loan losses in the fourth quarter as it did in the third, citing further weakening in its portfolio of loans made to home builders. The Birmingham, Ala.-based bank said its loan loss provision would rise to about $360 million in the fourth quarter from $90 million in the earlier period. The announcement is the latest sign that costs from the struggling housing market are mounting at the country’s regional banks. Regions has made about $7.5 billion in loans to residential builders, representing about 8% of its total loan portfolio. To slow defaults, the bank said it has assigned a team of executives to help distressed builders work out their debts. Still, it thinks the sector will struggle “well into 2008” and expects bad debts to mount through the year. For full story click here. […]