June 21, 2007 / 11:20 PM / 11 years ago

UPDATE 1-Brookstreet Securities hurt by CMOs, may shut down

NEW YORK/BOSTON , June 21 (Reuters) - Brokerage firm Brookstreet Securities Corp. said it may have to shut down in the wake of a severe liquidity crisis sparked by losses on collateralized mortgage obligations.

“Disaster, the firm may be forced to close ...,” the Irvine, California-based company told employees in an e-mail on Wednesday.

Reuters obtained a copy of it on Thursday.

“It would take a capital infusion of at least $5,000,000 to keep the company in compliance with no guarantee that additional markdowns may not be forthcoming,” the firm wrote in the seven paragraph-long email that details the disaster that the firms says occurred in one day.

Fidelity Investments’ National Financial unit, which acts as Brookstreet’s clearing firm, marked down the values of all of Brookstreet’s collateralized mortgage obligations, Brookstreet said. CMOs are securities of repackaged loans that are divided and sold to investors.

“Many of those accounts were on margin and have suffered horrendous markdowns and unrealized as well as realized losses,” the e-mail said.

Julie Mains, Brookstreet’s chief compliance officer, confirmed the e-mail’s contents.

Regulator NASD told the firm it could only sell securities and not make buy orders on behalf of clients.

On its Web site Brookstreet told potential customers: “We use a careful, conservative approach to business and to investing” and stressed investors are protected by the Securities Investor Protection Corporation and Boston-based Fidelity.

However, Brookstreet also warned: “Coverage does not protect against a decline in the market value of securities.”

Boasting personalized service and innovative technology, the 17-year old company called itself a full service brokerage firm that offers clients “virtually unlimited investment choices” to grow and protect their savings.

Now its crisis underscores the serious and potentially growing problems in the mortgage market.

This week two hedge funds managed by Bear Stearns fought to survive as bankers scrambled to try and forestall a potential fire sale of the funds’ mortgage securities. The funds’ final fate remained uncertain on Thursday evening.

Fidelity’s National Financial unit, which acts as Brookstreet’s clearing firm, said the company is now selling down its long positions and buying only to cover remaining short positions.

“We have been advised by Brookstreet that its securities business is limited to liquidating trades only,” Fidelity spokesman Adam Banker said.

Banker said funds and securities in Brookstreet customer accounts will continue to be held in custody at National Financial.

The future may be dire for Brookstreet employees.

“I will try to get enough money from our account at NFS to complete our upcoming payrolls,” the e-mail said, appealing to employees to stick it out a little longer.

“This has happened to us in one day, amazing.”

Additional reporting by Muralikumar Anantharaman

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