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]