Market News First (www.mn1.com) reported the Brookstreet liquidation early Wednesday night and is ecstatic to see the rest of the media following suit on this potentially mammoth story.
First let’s find out who the players are and explore the different relationships involved in this debacle. Brookstreet Securities Corp. is an Irvine, California-based broker-dealer with National Financial Services as its clearing firm. National Financial’s parent company is Fidelity Investments Co.
Brookstreet closed its doors on Friday after heavy losses in the collateralized mortgage obligation (CMO) market, terminating at least 650 independent brokers, the firm’s president said in a release. Brookstreet President Stanley Brooks said the firm faced heavy markdowns over the last two weeks in its CMO investments held in margin accounts and was forced to close.
Brooks said the firm had a value of about $17 million at the end of May which has evaporated. He said he turned down several tentative offers to recapitalize the firm.
“I am flabbergasted,” said Brooks. “My life’s work is gone.”
Also, Brookstreet spokeswoman Julie Mains told the Orange County Register that Brookstreet went from $16 million in capital last Friday to being $3 million under water Wednesday because its clearing firm, National Financial Services, demanded payment for securities bought on margin.
Mains said the value of Brookstreet’s securities plunged to 18 cents on the dollar, forcing the company to dip into its capital to meet margin calls, which is when investors must increase deposits to meet minimum account requirements.
“It wasn’t a problem with securities,” she said. “It was a problem with the margins.”
Adam Banker, a spokesman Fidelity Investments, denied that his company’s margin calls forced Brookstreet’s collapse.
The National Association of Securities Dealers (NASD) ordered Brookstreet to liquidate its remaining accounts Wednesday, Mains said. Some customers lost the entire value of their investments while others “did indeed go negative,” Mains said. She said clients should try to find another broker-dealer to take over their accounts.
Brookstreet managed $571.6 million in 3,644 accounts, according to a Securities and Exchange Commission (SEC) report. The report said 75 percent were individual investors who did not qualify as “high net worth,” which means they had investable assets of less than $750,000.
Brookstreet has 15 days to recapitalize or, more likely, surrender its broker-dealer license, Mains said.
A CMO is a financial debt vehicle that was first created in June 1983 by investment banks Salomon Brothers and First Boston. Legally, a CMO is a special purpose entity that is wholly separate from the institution(s) that create it. The entity is the legal owner of a set of mortgages, called a pool. Investors in a CMO buy bonds issued by the entity, and receive payments according to a defined set of rules. The mortgages themselves are called the collateral, and the bonds are called tranches (also called classes), and the set of rules that dictates how money received from the collateral will be distributed is called the structure. The legal entity, collateral, and structure are collectively referred to as “the deal.”
An article from the Orange County Register contributed to this story.
