It looks like the Wall Street Journal's James Stewart got caught up in the auction-rated securities trap. And he is not happy about it.
Last year, when some money-market funds turned out to hold some mortgage-backed securities and faced a liquidity crisis, their sponsors stepped in and redeemed the shares at face value. This seemed the only decent course, not to mention a good investment in customer loyalty.
But when I asked a broker at Merrill Lynch if it would do the same for owners of these money-market equivalents, the answer was "no" -- not after the multibillion-dollar write-offs Merrill has taken on illiquid assets. Merrill Lynch and the other big banks that sold these shares have stopped making a market in them, which is a major reason the auctions have failed.
Merrill Lynch, when asked for comment, told me: "We are offering our clients loans which can give them liquidity." It wasn't yet clear whether these would be interest-free loans, which they certainly should be, in my opinion.
He ends the column by calling for the SEC to investigate. "At least two states are investigating, and I would expect them to be joined by the Securities and Exchange Commission," he writes. Since we know SEC enforcement lawyers get their tips from newspapers, you can bet someone has opened a file on this. And with Merrill Lynch playing a central role in Stewart's story, they are probably on the top of the SEC's list.
Risks of a 'Safe' Investment Are Found Out the Hard Way [Wall Street Journal]
Posted by guest , Feb 28, 2008 10:39AM
John are you saying that the SEC does *not* chase down investigations just because they are news? I would differ from you on this. The SEC has a long record or headline-mongering. That is why it likes to make a big stink about forcing settlements paid by companies that are the targets of its investigations, even if it is meaningless sum to the company in question.
I have often wondered what the SEC has to gain from being seen to be an effective body as opposed to actually BEING effective. I mean is the SEC really launching many political careers? But then I get lazy, chalk it up to institutionalized bureaucracy, and move on.
Posted by guest , Feb 28, 2008 10:40AM
and yes Merrill Lynch actually probably should be at the top of the SEC's list.
Posted by Anal_yst , Feb 28, 2008 10:47AM
Citi prolly shouldn't be too far behind...
Posted by diablo , Feb 28, 2008 10:49AM
On the other hand, when is the SEC going to start investigating Gasparino?
Posted by guest , Feb 28, 2008 10:57AM
@diablo that might be more a matter for the FDA
Posted by John Carney , Feb 28, 2008 11:09AM
I know I'm often sarcastic and so it's reasonable to read my statement about the SEC following headlines as sarcasm. But I meant it with all sincerity.
The SEC's enforcement division certainly does follow headlines. I've asked many SEC enforcement attorney's where they get their leads, and all of them have told me they look through the papers.
Posted by guest , Feb 28, 2008 11:18AM
Yeah okay, that's what happened, thanks for clearing up
Posted by guest , Feb 28, 2008 1:17PM
Well maybe the SEC will chase todays headline from Big Bens testimony on Capitol Hill. An inquisitive Chuck Schumer (D-NY, go figure) asks Ben "What of the SIVs SPEs and CDOs?" To which a nervous and bumbling Ben answers with 100% certainty, " I dunno." Also he commented on Dodds dumb questions relating to the Dollar, Decoupling, and the price of oil, and what impact it would have if it was valued in Euros, to which a benign Ben had to express the fundamentals of world currencies and how they relate to supply and demand and bla bla bla bla bla. Well I thought about that one and would like to raise the question, What if we just used the same damn currency all over the world, I mean the planet is becoming smaller everyday due to emerging markets and the far reach of globalization raping every last resource in the world to further increase profits. Pehaps it would spur some type of unity and collective responsibility among mankind to work cooperatively on somthing so easy as trade. Im very unimpressed with the questions asked today of our fed chairman, I know if I was there drilling Ben, he would have cried and wet his pants. I'm a 26 year old MALE nurse and I think I might just head for the woods.
Posted by golden girl , Feb 28, 2008 1:57PM
At GS they are ever-so-kindly allowing clients with PARS to margin against the positions. Unless ... they are clients who are invested in "Central PARS" (ie, they have handed over discretion in their cash management to the PARS trading desk, as opposed to having purchased PARS on a one-off basis here and there when attractive paper came up).
Something about "too operationally difficult" or some such.
So, the people who gave over the most trust to the firm are not only illiquid, they can't even get margin on their PARS mandate.
Posted by anyname , Feb 28, 2008 4:42PM
All I know is that I made requests of SEC at least twice about things that looked unfair and unlawful and I am still waiting. Both filed early 2007.
Posted by guest , Feb 28, 2008 11:03PM
This PARS scandal is the worse case of misrepresentation by Wall Street in many years, given its size and scope.
I say that because there was very little cause to think this market would simply cease to function overnight.
These instruments were clearly marketed as AAA with weekly liquidity. Someone mentioned that the word 'auction' should have raised a red flag. That's absurd, or your Treasury Bills and Bonds are also suspect for the same reason. The auction was there to establish a clearing interest rate, not as a pot luck "are there any buyers out there??" event.
At least that was the party line given to 99% of all investors. Who would have accepted the paltry 1/2 or even 1% over money markets if there was a high risk of being stuck for an indefinite time?
No one, that's why the shysters didn't reveal the weak underbelly.
If they can't get money market funds involved to clean up the supply of this paper, I call for a mandatory, court enforced, deleveraging of Closed End Funds, over a period of time.
They have no right to hold those funds or force sale at a discount when the product was misrepresented and mismarketed to unsuspecting investors.