Rising defaults in subprime mortgages have sent shudders through the financial market that reach all the way to a tree-lined street in northeast St. Petersburg.
Claudia Vinson Johnson's savings were decimated as risky mortgage-backed securities in her account were devalued and her investments were sold to meet margin calls. The broker who put her into the high-risk investments: Steven Shrago, her neighbor across the street.
"One day you wake up thinking you have a little bit of financial security and by midafternoon, you have none," she said. To say the least, it's put a chill in a once neighborly relationship. Shrago, who didn't respond to attempts to contact him, keeps his blinds closed.
Johnson is one of dozens of clients of Brookstreet Securities Corp. who suffered huge losses in June on risky debt securities that were sold to them as safe investments. Brookstreet, which was based in Irvine, Calif., collapsed. The brokerage had 40 offices in Florida, including six in Pinellas County, one of which Shrago ran out of his home on Second Street N in St. Petersburg.
Only a few of those offices promoted the high-risk investments, but that was enough to bring down the company, said Coral Springs lawyer Scott Silver, who is representing Johnson and other Brookstreet investors.
The complex investments at issue are known as CMOs, which stands for collateralized mortgage obligations. Wall Street wizards create them from pools of mortgages that are sliced into different segments with varying degrees of risk. Brookstreet sold customers a particularly risky type known as inverse floaters that result in both interest and principal losses when market interest rates rise even slightly.
The investments show up on statements identified by the underlying mortgage security issued by government agencies such as Fannie Mae or by private companies with AAA ratings. It would take a sophisticated investor to recognize the risks.
Johnson, 63, said Shrago presented the investments as "government bonds at a discount. He said, 'It's like putting money in a CD. It's government backed.' If he had been honest with me, I'd never have been in this position."
Silver said Brookstone marketed the CMOs to retirees looking for income and safety. When they signed on as clients, they were put in margin accounts through which they borrowed money to buy even more CMOs, pumping up the risk. Silver said he has 90-year-old clients with margin debts in the hundreds of thousands of dollars.
Johnson said she invested about $450,000 with Shrago and, at first, the CMOs appeared to do well. According to her statements, her account was worth $598,753 at the end of March. That was her equity, the difference between the about $1.3-million value of her securities and the $733,866 she owed in margin debt.
Johnson said she was worried about carrying such a big debt and asked Shrago repeatedly to get her off margin and sell the CMOs. "He'd say, 'I'm working on it' and never did anything."
Between her May and June statements, the value of Johnson's account plummeted to $55,484 from $426,183. National Financial Services, the clearing broker that holds the accounts of Brookstreet customers, not only repriced them, but also sold off many of her securities at those lower prices to pay down her margin debt.
Since then, National Financial has sent Johnson notices asking her to add more money to her account. She said she doesn't know what her account is worth or even whether she has any equity left.
"There's no way to know until she gets her July statement," Silver said. "You can't go on Yahoo or Google and get a quote."
He said Johnson is better off than some Brookstreet customers because at least some of her money was in lower-risk investments. Some of his other clients have been wiped out and still owe National Financial thousands of dollars, he said.
How could they lose so much money so quickly?
Silver and Johnson blame National Financial, a unit of Fidelity Investments, for initially mispricing the CMOs, which allowed Brookstreet to sell them for more than they were really worth and increased the borrowing power of the accounts. The higher debts benefitted National Financial, which collects interest on the margin loans.
When fears of a mortgage meltdown roiled the financial markets, "it forced the clearing firms and other brokerage firms to recognize that they had improperly inflated the values of the bonds," Silver said. "June 25th was the moment of truth."
National Financial denies it did anything wrong.
"We're not responsible," said Adam Banker, a spokesman for Boston-based Fidelity. "National Financial has clear margin requirements in place and uses reputable firms to price securities held in brokerage accounts."
Silver and partner Darren Blum said they expect to file more than 50 arbitration claims against National Financial on behalf of Brookstreet clients.
Brookstreet and its customers and brokers weren't the only ones who made a bad bet on mortgage-related securities. Several hedge funds have collapsed as a result.
But for individual investors who thought they were following good advice from their brokers, the result is particularly painful.
"I'm not in good health so I can't go out and make that money again," said Johnson, who in the past has run a bookstore, a publishing company and a day spa. "I've always had low blood pressure before this and now it's sky high. I don't want to die over money."
Shrago, 47, and many other Brookstreet brokers have moved on and are now affiliated with Los Angeles-based Wedbush Morgan Securities.
Helen Huntley can be reached at email@example.com or (727) 893-8230. Go to her MoneyTalk blog (blogs.tampabay.com/money) to read more about investments and personal finance.