Brokers who sold auction rate securities to customers have begun a "counteroffensive" in response to investigations by New York State Attorney General Andrew Cuomo, according to CNBC. The brokers, stung by recent allegations that they misled customers about the liquidity of the securities and the possibility that charges will be filed against individual brokers, have begun pointing to the role of underwriters, according to a CNBC report.
The Regional Bond Dealers Association, a brokerage trade association, has written a letter to Cuomo's office. They hope to shift his focus onto firms who underwrote the securities, rather than the brokers who sold them on. Brokers are also pointing to the role of issuers, who many believe knowingly benefited from deception about risks in the market and who have been slow to redeem the securities.
The letter from the RBDA alleges that fraud occurred among the underwriters, the banks who brought the auction rate securities to market on behalf of the issuers. The brokers claim they were entitled to rely on the reassurances about liquidity from underwriters and acted in good faith.
Posted by guest , Aug 18, 2008 9:24AM
didn't sophisticated investors bid on these securities in an auction and effectively set the price (return on risk)? is cuomo up for re-election/appointment?
Posted by guest , Aug 18, 2008 9:35AM
brokers lied, P&Ls died.
Posted by guest , Aug 18, 2008 9:37AM
People are too stupid to assess risk and so they need protection from the welfare state.
Posted by guest , Aug 18, 2008 9:37AM
"didn't sophisticated investors bid on these securities in an auction and effectively set the price (return on risk)?"
Duh! NO! Why would you ask such a rhetorical question when you obviously don't have a clue about auction rate securities or what took place. If you care, do some reading. But if all you wanted to do was slam Cuomo, it works better if you don't do it with a comment that says "I'm an idiot, Cuomo sucks!"
Posted by guest , Aug 18, 2008 9:38AM
it was a question, that was my understanding, o #4 wise master of the universe and verified asshole would you like to explain why that's misguided?
Posted by guest , Aug 18, 2008 9:43AM
5 The devil is in the details, but let me attempt an answer. This only scratches the surface. Its a dutch auction market, which works only when there are a lot of buyers and sellers. The reality was that the brokers would routinely buy for their own inventory, thereby artificially establishing a market return (i.e. the rate at which the auction would clear), all the while telling their customers that the securities were liquid. Then one day they all decided to stop their buying for inventory and the auctions "failed", resulting in a return at the default rate specified for each issue. Which is not a bad rate, but investors were told that these were liquid instruments. And the failed auction means you cant get out of them.
Posted by John Carney , Aug 18, 2008 9:44AM
#1: Auction rate securities were sold to retail brokerage customers and corporate financial officers (who often aren't more sophisticated than the retail folks) as the equivalent of money market funds. That is, almost as good as cash.
#2: The welfare state actually operates to encourage people unsophisticated about risky financial products to invest in them because this enriches brokerages and provides cheap & easy financing to corporations and mutual funds. Investor confidence is stimulated as a subsidy to Wall Street.
Posted by guest , Aug 18, 2008 9:48AM
I'm an idiot. Cuomo sucks.
Posted by guest , Aug 18, 2008 9:52AM
From the wise master of the universe:
No, sophisticated investors did not bid on these securities in a auction and set the price. The rates were manipulated by the primary broker dealers by submitted bids bellow the high bids to "regulate" the rates in the interest of the overall market. And, if an auction was going to fail for want of enough bidders, they would buy the shares themselves creating the illusion of a robust market.
If you really want to know, there is a few months worth of reading out there about what has taken place. You will find that very UNsophisticated people were targeted and sold ARS to deal with the dumping of shares by institutional holders.
This is a huge fraud, only recently brought to light because major news organizations would not report it. Also likely to complicated for the average news viewer to understand. When is did get a comment or two on CNBC, etc., the anchor almost always made comments like "weren't these wealthy, sophisticated investors?" or "didn't they read the prospectus?" No, they were not wealthy, sophisticated investors for the most part. Most were older and many retirees or nearly so. And no prospectus was required. Look at the complaint exhibits, these were sold as cash equivalents, no the long-term securities they are.
Best I can do, and trying to be less of an asshole.
Posted by guest , Aug 18, 2008 9:58AM
9 #6 here: excellent answer. You're gonna have good karma today, I know it.
Posted by guest , Aug 18, 2008 10:01AM
Worse yet, on the SLARS, the brokers got the issuers to TEMPORARILY amend the penalty rates, then didn't tell anybody. This had the effect of returning principal (or OC money) to the current holders at the expense of the long-term security of the issue; they then sold these through broker networks and unloaded them on people who bid 14% (rightlfully) thinking that the penalty rates were high.
Posted by EconAnalyst , Aug 18, 2008 11:23AM
@11
Do you have a link for more information on the amending penalty rates angle?
Posted by guest , Aug 18, 2008 1:11PM
To the wise master of the universe:
Hey jackass. That was a nice explanation.
Not as great as #5 but still good.
2 thumbs up your ass.
Posted by guest , Aug 18, 2008 1:15PM
12: Only what I've been able to figure out. Look at 429825AQ and other NJ HESEAA bonds; UBS persuaded them to raise the penalty rate. This transferred more money to UBS (as they now owned a lot of them) at the expense of the trust -- it also made them much harder to refi.
Posted by guest , Aug 18, 2008 1:23PM
14 I get aroused whenever I see a CUSIP number
Posted by guest , Aug 18, 2008 2:49PM
#13,
Thanks. I tried my best as I was gritting my teeth. I assume you meant that #6 was a better explanation, #5 being a question directed to me. I agree, #6 was good. I was typing at the same time as #6 and had I known, would have saved myself the trouble.
Having graduated from an asshole to a jackass, I'll just assume we've both poked enough fun at each other and head off to get my thumbs unstuck.
We ARS victims really did get taken. You cannot know the lies we were told.
Posted by guest , Aug 18, 2008 3:25PM
@16- You reached for yield without any thought of the risk you took. I hope the ARS bankrupts you.
The only reason I can think of the shit coming out of your mouth is that you left a buttplug in your ass from Saturday night.
Posted by guest , Aug 18, 2008 3:38PM
17 Is that true? (The part about reaching for yield, etc.). I think its more a case of unintended consequences. Lets think back... Informed investors were thinking that there could be three outcomes, all acceptable: 1) Stay in and earn a market interest rate 2) Elect to get out and have the investment redeemed at par or 3) Encounter a failed auction, which, though not ideal, would result in an elevated penalty rate, which would compensatte for the lack of liquidity. And this would presumably not be the case for too long because the issuer, rather than paying that rate, would have an incentive to refinance.
The unintended consequences come about as a result of the credit crunch and resulting lack of liquidity which has prevented the refinancing and actually in some cases made the penalty rates look not so bad.
Posted by guest , Aug 18, 2008 4:13PM
The problem is that the penalty rates were not disclosed, nor were the formulas used to calculate them.
There were no prospectuses, and even if there were, there was no disclosure about the temporary overrides of the penalty rates; on the sellers' websites, there were no disclosures about what the assets were -- they were labeled Munis.
UBS temporarily jacked up the interest rate to loot the pool of assets -- I told my broker that I was happy to hold ARSes if the penalty rate was above the margin rate. So I should never have been put into crap with a penalty rate of 3% -- they were inconsistent with my investment goals.
Posted by guest , Aug 18, 2008 4:43PM
Forgive me 19, but I'm a little skeptical here. You told your broker that you were happy to hold ARSs if the penalty rate was above the margin rate. This presumably well in advance of any sign of trouble in the market. You get a double gold star for that - a sign of an extremely astute investor. What makes me skeptical is that I doubt that such an astute investor would in turn not ask for a prospectus. Go ahead, start a rain of s**t.