Get ready for the auction-rate securities settlement backlash.
The major dealers of the once-popular securities are lining up to make their individual investors whole, and pay fines to state regulators besides.
Now the question, at least among the more crusty bankers who like to grumble, is: ``Why?''
I have already heard from some of them. Their criticism of the settlements is a simple one: I bought this stuff for years, and it was described adequately to me, and last year when I heard the participation at the auctions was getting thin, I sold. People knew about the problems with this market. Why should dealers have to buy any of it back?
This is a viewpoint, albeit a minority one, and deserves at least some consideration. One thing it does is illustrate the huge gap in the level of knowledge between the people who work in the securities business -- you can see they do feel a degree of solidarity -- and everyone else.
If you think about it, this gap is responsible for problems as diverse as the bankruptcy of Orange County, California, back in 1994, to the mass property foreclosures in evidence in certain states today.
Camp Crusty
``Company news is the pornography of business journalism,'' a colleague said to me the other day. That's what we all call stocks coverage these days: ``Company news.''
So on the one hand, you have this group of people who crave company news in all its forms. These are your so-called sophisticated investors. How many of them are out there? Let's call it thousands, perhaps tens of thousands.
On the other hand, you have the people who are apparently obsessed with Blake Lively and Taylor Momsen of the ``Gossip Girl'' television show. This group is numbered, I don't know, in the millions.
And never the twain shall meet.
I have to admit, when I first heard about the auction market freezing up, I was in the hard-liner camp.
Of course, the first I heard about it was when states and municipalities started to pay high penalty interest rates because auctions failed. How terrible! The Port Authority of New York and New Jersey is paying 20 percent!
I waited to hear the moaning and wailing from government finance officers -- and didn't. It turns out, of course, that they knew exactly why they were paying penalty rates.
Why the Penalty?
For years, the auction market had done very well by this group -- they had borrowed long-term and paid short-term interest rates. They had saved millions of dollars for the taxpayers.
Great! They also understood that having dealers routinely provide support bids at auctions wasn't a given, even though only a handful of auctions had been allowed to fail in more than two decades. States and municipalities didn't balk. The larger question for them -- and for all taxpayers -- is why they agreed to the egregious penalty rates in the first place.
I also didn't have much sympathy for the investors in the stuff, at least not in the beginning.
Didn't they look at what they were buying? Didn't they pore over the prospectuses and the offering documents and all the rest of it before putting down their $25,000 and $50,000 and $250,000? Didn't they know they were relying on market convention rather than contractual obligation when it came to the auctions? Surely they knew all about the Securities and Exchange Commission's two- year investigation into the market in 2004?
Cash-Equivalents
And the answer is: No, no, no, and no.
That's why the big securities firms -- Citigroup Inc., UBS AG and Merrill Lynch & Co. among them -- are offering, a little belatedly, to provide investors with 100 cents on the dollar.
After the dealers stopped supporting the market they had built in February, investors couldn't get their hands on their money. They sent me e-mails by the score. Nobody ever told them about auctions. The brokers who sold them on auction-rate securities told them that they were every bit as safe as money- market funds, and were cash-equivalents.
These investors also got in touch with the SEC, their state attorneys general, anyone who would listen. Their stories are told in the complaints that have been filed against Merrill and UBS, again and again. They didn't know what they were buying, and their brokers, many of them, really didn't appreciate the risks of what they were selling, or even, in some cases, how it worked.
The dealers, it seems, agree that this stuff was being misrepresented by their own brokers.
So back off, grumblers.
The major dealers of the once-popular securities are lining up to make their individual investors whole, and pay fines to state regulators besides.
Now the question, at least among the more crusty bankers who like to grumble, is: ``Why?''
I have already heard from some of them. Their criticism of the settlements is a simple one: I bought this stuff for years, and it was described adequately to me, and last year when I heard the participation at the auctions was getting thin, I sold. People knew about the problems with this market. Why should dealers have to buy any of it back?
This is a viewpoint, albeit a minority one, and deserves at least some consideration. One thing it does is illustrate the huge gap in the level of knowledge between the people who work in the securities business -- you can see they do feel a degree of solidarity -- and everyone else.
If you think about it, this gap is responsible for problems as diverse as the bankruptcy of Orange County, California, back in 1994, to the mass property foreclosures in evidence in certain states today.
Camp Crusty
``Company news is the pornography of business journalism,'' a colleague said to me the other day. That's what we all call stocks coverage these days: ``Company news.''
So on the one hand, you have this group of people who crave company news in all its forms. These are your so-called sophisticated investors. How many of them are out there? Let's call it thousands, perhaps tens of thousands.
On the other hand, you have the people who are apparently obsessed with Blake Lively and Taylor Momsen of the ``Gossip Girl'' television show. This group is numbered, I don't know, in the millions.
And never the twain shall meet.
I have to admit, when I first heard about the auction market freezing up, I was in the hard-liner camp.
Of course, the first I heard about it was when states and municipalities started to pay high penalty interest rates because auctions failed. How terrible! The Port Authority of New York and New Jersey is paying 20 percent!
I waited to hear the moaning and wailing from government finance officers -- and didn't. It turns out, of course, that they knew exactly why they were paying penalty rates.
Why the Penalty?
For years, the auction market had done very well by this group -- they had borrowed long-term and paid short-term interest rates. They had saved millions of dollars for the taxpayers.
Great! They also understood that having dealers routinely provide support bids at auctions wasn't a given, even though only a handful of auctions had been allowed to fail in more than two decades. States and municipalities didn't balk. The larger question for them -- and for all taxpayers -- is why they agreed to the egregious penalty rates in the first place.
I also didn't have much sympathy for the investors in the stuff, at least not in the beginning.
Didn't they look at what they were buying? Didn't they pore over the prospectuses and the offering documents and all the rest of it before putting down their $25,000 and $50,000 and $250,000? Didn't they know they were relying on market convention rather than contractual obligation when it came to the auctions? Surely they knew all about the Securities and Exchange Commission's two- year investigation into the market in 2004?
Cash-Equivalents
And the answer is: No, no, no, and no.
That's why the big securities firms -- Citigroup Inc., UBS AG and Merrill Lynch & Co. among them -- are offering, a little belatedly, to provide investors with 100 cents on the dollar.
After the dealers stopped supporting the market they had built in February, investors couldn't get their hands on their money. They sent me e-mails by the score. Nobody ever told them about auctions. The brokers who sold them on auction-rate securities told them that they were every bit as safe as money- market funds, and were cash-equivalents.
These investors also got in touch with the SEC, their state attorneys general, anyone who would listen. Their stories are told in the complaints that have been filed against Merrill and UBS, again and again. They didn't know what they were buying, and their brokers, many of them, really didn't appreciate the risks of what they were selling, or even, in some cases, how it worked.
The dealers, it seems, agree that this stuff was being misrepresented by their own brokers.
So back off, grumblers.