Following US Downgrade, S&P Reduces Credit Quality for 73 Funds Over Treasury Exposure

As a result of exposure to US Treasury and US government agency securities, Standard & Poor's has placed 73 fixed-income funds on credit watch with negative implications.

(August 9, 2011) — Standard & Poor’s Ratings Services has reduced its credit quality ratings for 73 funds that hold US debt.

The impacted funds include those managed by BlackRock Fund Advisors, State Street Global Advisors, Federated Investors, Franklin Advisers and Goldman Sachs Asset Management, as well as the City of Anaheim Treasurer Investment Pool, City of Los Angeles General Pool, Illinois Metropolitan Investment Fund, City of Houston General Investment Pool and the Florida Local Government Investment Trust.

S&P’s actions come after it downgraded the nation’s long-term rating for the first time, affirming the rating agency’s position that “there is a one-in-two chance that we would lower the ratings (on the funds) over the next 90 days by up to two notches.”

In a statement, the S&P noted that the portfolios of the funds include fixed-income funds, exchange-traded funds, hedge funds, as well as local government investment pools and unit investment trusts. According to S&P, it lowered the ratings on 73 of 206 funds managed in the US, Europe and Bermuda as a result of their “significant exposures,” greater than 50% to direct or indirect investments, in US Treasury and US government agency securities.

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Read the S&P’s full report on why it lowered the US’ long-term rating to ‘AA+’ based on political risks and rising debt.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

The $146.5 billion New York State Common Retirement Fund (CRF) has announced a proposed $168 million settlement of its securities fraud class-action lawsuit against National City Corporation over investment losses.

(August 9, 2011) — The $146.5 billion New York State Common Retirement Fund (CRF) has settled a security fraud class-action lawsuit for $168 million.

The suit — against National City Corporation — stems from investment losses, as CRF claims the firm misrepresented the quality of its mortgages and home equity loans, minimizing the severity of losses.

“This is a good result for the fund and the more than one million fund members who rely on these investments,” said State Comptroller Thomas DiNapoli, trustee of the fund and lead plaintiff in the class action.

A statement released by DiNapoli states that during the period in question, National City, which held more than $48 billion in residential real estate loans, was one of the largest financial holding companies in the United States. The complaint was filed in the United States District Court for the Northern District of Ohio in 2008.

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In January, DiNapoli’s office also announced the $4.25 million settlement of a securities fraud lawsuit against Merrill Lynch & Co. Based on court documents filed in July in US District Court in New York, the defendants attempted to hide the extent of the company’s involvement in risky subprime mortgage-backed securities, artificially inflating the value of the stock. The result: Major investor losses once the firm’s risky subprime exposure became apparent. The settlement additionally covers two former Merrill executives — company officials E. Stanley O’Neal and Jeffrey N. Edwards.

“The Fund was misled about the extent of Merrill Lynch’s participation in the subprime mortgage fiasco; that is unacceptable,” said DiNapoli in a statement. “I am responsible for protecting the secure retirement of more than one million system members, and I take that duty seriously. I am confident that this settlement makes up for a large part of the Fund’s losses. This sends a message that we will always fight to protect the best interests of our members.”

In 2010, CRF negotiated a $624 million settlement in a class-action securities fraud suit against Countrywide Financial Corporation in 2010.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742