Did you buy InterNotes for CIT, Bank of America, Lehman Brothers, GMAC, Prudential or another corporate issuer?
- Did you think you were buying something just like a regular corporate bond?
- Have you now suffered major losses with your InterNotes?
- Have you tried to sell your InterNote, but found you can't?
- Did you try to exercise the "Survivor's Option," but the issuer refused to redeem your note?
The StockMarketLoss.Com group of the law firm
Hermann, Cahn & Schneider is investigating
claims made concerning InterNotes.
Call us today to discuss your experience.
We might be able to help you recover your losses.
Smart investors know they're supposed to diversify their holdings. Smart investors know that, generally speaking, bonds do better when stocks do worse.
So, as the stock market declines, there's a natural push by brokers to put their clients in fixed-income investments, like bonds.
But, at the same time in late 2007, capital markets started to dry up for the companies that needed to raise funds. Banks stopped lending and institutional investors weren't inclined to lend money to troubled companies. Existing high-quality corporate bonds were in scarce supply, and new ones weren't being issued.
So what happened? An outfit known as Incapital LLC came up with the genius idea of putting the troubled borrowers together with retail customers. Incapital created a product known as "InterNotes," which were supposedly bond offerings for the common person. Individual retail investors would have access to bonds offered by major companies, like CIT, GMAC, Bank of America and Lehman Brothers, in $1,000 increments. The investor would pay face value for the securities, and receive a stream of income until the securities matured and they would recover the face value. As an added incentive to purchase the products, many of the securities offered what was called a "Survivor's Option," whereby the surviving family or spouse could force the issuer to buy the securities back at face value in the event the beneficial owner died. A surviving spouse could then enjoy the liquidity if they needed it.
What could go wrong?
Plenty.
Companies like CIT and Lehman have filed for bankruptcy protection, leaving little to no value for the investors holding InterNotes.
Investors trying to utilize the "Survivor's Option" found out that the issuer could refuse to redeem the securities.
Had your broker done their homework and undestood what they were selling you, they would have realized that InterNotes were being sold because the institutional investors refused to lend more money. All the signs were there for a savvy broker to recognize that these products were neither safe nor secure. Indeed, the only reason they existed at all was that the institutional investors were staying as far away from these sorts of things as they could.
For example, the yield on these products was typically much higher than similarly situated bonds issued by these same companies, held by institutional investors. Why? Because the lack of liquidity for these InterNotes ramped up the risk in an appreciable way. For example, the risk premium for a CIT InterNote was 26% greater than a regular CIT bond due a month later. That means there's more risk for the person holding the InterNotes.
The risk inherent in the products was also revealed in the credit default swap market. The pricing of the credit default swaps for many of the InterNote issuers suggested that there was a growing likelihood that these companies, like CIT and Lehman Brothers, would never make good on their debts.
Rather than focus on the many risks inherent in these InterNotes, brokers tended to push the "Survivor's Option." Investors were told that, once one of the owners of the InterNotes died, the family or surviving spouse could require the issuer to buy the product back at face value - providing immediate liquidity to the family. What was commonly left out from these sales pitches, however, was the fact that many of the InterNotes allowed the issuer to limit the number of "death puts" used in any given year. For example, the CIT InterNotes allowed CIT to limit the total amount paid to investors under the "death put" feature to the greater of $2 Million or 2% of the principal amount of outstanding notes for a given calendar year. So, if a particular investor was counting on the liquidity provided by the "death put," he or she could well find out that the feature wouldn't work since more than $2 Million had been paid out to other similarly-situated investors. Once again, the liquidity of the product was limited or sometimes simply illusory.
So who wins in this situation?
The issuer does - it is able to raise capital where it couldn't otherwise.
The broker does - he or she gets paid a nice commission.
The ratings agency did - it was paid a nice fee for saying these products were investment-grade.
Who loses?
The investor invariably does.
- It may be difficult, or impossible, for you to sell your InterNotes if you wanted or needed to do so in the future?
- You were subject to the credit risk for the issuer?
- The "Survivor's Option" wouldn't work if too many people tried to use it in a particular year?
- The ratings agencies were paid for their services, and the ratings typically lagged a company's performance?
- If interest rates fell, the issuer could retire your note, leaving you to buy another product that offered a lower interest rate?
We're currently interviewing potential clients interested in trying to recover the losses they suffered by investing in InterNotes. Please call or email us today for more information.
