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Oppenheimer Champion Income Fund: Bad Bets On Subprime, Credit-Default Swaps Spell Trouble

Wrong-way bets on subprime mortgage securities and risky credit-default swaps have created a financial nightmare for investors of the Oppenheimer Champion Income Fund (OCHCX). The fund has fallen by more than 80% in value, making it the worst-performing taxable high-yield bond fund of 2008. By comparison, similar bonds were down 30%.

It was in 2006 that OppenheimerFunds first began to alter its investing strategy for the Champion Income Fund. Stable investments gave way to riskier bets on “total-return swaps,” which essentially serve as agreements between parties to exchange cash flows in the future based on the performance of a set of underlying securities in the fund. In the case of Oppenheimer's Champion Income Fund, those securities were subprime mortgage-backed securities that failed to rebound after the housing market's collapse in 2007.

By September of 2008, the total-return swaps tied to the Champion Income Fund were down by $47 million.

In December, Angelo Manioudakis, the man whose gamble on toxic mortgage-backed securities and other risky structured finance deals ultimately backfired, abruptly resigned from his post as senior vice president of OppenheimerFunds and manager of the Champion Income Fund.

Credit-default swaps also have added to the Champion Income Fund's problems. Credit-default swaps are similar to insurance contracts, providing protection for investors against bond and loan defaults. In exchange for making possible payouts, sellers of credit-default swaps receive regular interest payments.

Sellers also can face a dangerous downside with credit-default swaps, however, particularly when it means providing insurance on already financially troubled companies. The Oppenheimer Champion Income Fund learned this lesson the hard way after having sold credit-default swaps on such firms as Lehman Brothers Holdings, American International Group (AIG) and General Motors Corp. In 2008, all three firms either went bankrupt or sought financial protection from the federal government.

In November 2008, OppenheimerFunds tried, to no avail, to prop up the Champion Income Fund with $150 million infusion of capital.

OppenheimerFunds is a unit of the Massachusetts Mutual Life Insurance Company. Oppenheimer Funds also owns Tremont Capital Management, the investment-management firm that placed hundreds of millions of dollars of investors' money into funds run by disgraced hedge fund manager Bernard Madoff. On Dec. 11, Madoff was arrested at his luxury Manhattan townhouse on charges of running a $50 billion Ponzi scheme.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

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