From Subprime to a CMO hedge fund now :)

Here's an email Brookstreet sent to its employees Wednesday:

"To Our Valued Brookstreet Members,
Disaster, the firm may be forced to close...

Today,the pricing system used by National Financial has reduced values in allCollateralized Mortgage Obligations. Many of those accounts were onmargin and have suffered horrendous markdowns and unrealized as well asrealized losses.

National Financial and the regulators expectBrookstreet to pay for realized liquidated losses and take a capitalcharge for unrealized mark to market losses.

This firm has donea valiant if not Herculean job of managing the liquidations and capitalcharges to the firm's net worth and net capital. We had reduced themargin balance significantly; we had liquidated and reduced exposure by80%.

That still left a $70,000,000 margin balance against around85,000,000 of value. Unfortunately the pricing service used by NFrevalued many CMO positions downward last night. We went from apositive net capital of 2.4 million, down from 11 million at the end ofMay, a negative net capital of 2.1 million. It would take a capitalinfusion of at least $5,000,000 to keep the company in compliance withno guarantee that additional markdowns will not be forth coming.

Icannot in good conscience request that anyone put money in the firm, Ithink $10,000,000 would be a minimum without consideration of thehorrific customer complaints to follow.

I have told many of youthat you are always in danger of not being paid on your last check whenworking for any broker dealer, which is why I have always paid twiceper week and maintained huge net cash positions, generally in the realmof 15,000,000 on average. I will try to get enough money from ouraccount at NFS to complete our upcoming payrolls.

Since I havebeen writing this letter I have received three hurried inquiries aboutre capitalizing the company. I will negotiate an arrangement thatguarantees that everyone gets paid, to the best of my abilities. Pleasestay at Brookstreet at least until Friday so I may do my best for eachof you.

Unfortunately we are on "SELL ONLY."

I believeI will be able to reconstitute another opportunity for everyone thatwill result is a minimum of change and disruption. There will bedisruption.
Please give a day or so for us to come up with the beststrategy. This has happened to us in one day, amazing. All of ourfamily net worth is in the firm, please give me time to present a newplan."

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