|
|
|
This
is the older third-half of this web site.
For
the latest current matierial, click
here.
July
30
Arbitration
Tilting More Against Investors
Commentary
by Jane Bryant Quinn
July
30 (Bloomberg) -- Let's say you had $50,000 in auction-
rate securities that your broker said were as safe as
money-market funds. The market collapsed and you sold
at an 80 percent haircut. At your arbitration hearing,
one of the three panel members works at a firm that
also sold auction rates deceptively. How fair will the
hearing be? Will the industry let this conflict of interest
stand?
The
flood of auction-rate claims against brokerage firms
points up, again, how badly the deck is stacked against
you in securities-industry arbitration. For claims exceeding
$50,000, your three-member panel of judges must include
an industry representative, plus two "public''
members who also can have industry ties.
The
industry rep is there to explain the industry's point
of view to the other panelists -- effectively, a Wall
Street mouthpiece, sympathetic to the very products
and practices you're complaining about. As an "expert,''
his or her opinion carries extra weight.
For
years, the lawyers representing customers have pressed
to get rid of this fifth-columnist on arbitration panels.
The industry always stonewalled.
Then,
in 2007, a bill called the Arbitration Fairness Act
appeared in Congress, containing a clause requiring
all three panelists to be from the public. Coincidentally
-- I'm sure -- the Financial Industry Regulatory Authority
(Finra), which runs securities arbitrations, decided
to hedge its position.
Last
week, Finra announced a two-year pilot project, allowing
as many as 420 cases to be heard by an all-public panel.
Customers' lawyers welcomed the pilot, tepidly, as a
baby step in the direction of fairness.
Then,
fairness got the boot.
Last
May, the Public Investors Arbitration Bar Association
wrote to Finra about the problem of conflicted panelists
on the auction-rate cases. PIABA President Laurence
Schultz, of Driggers, Schultz & Herbst in Troy,
Michigan, asked that potential panelists be excluded
from the hearings if they worked for firms that originated
or sold auction-rate securities. After private talks,
PIABA expected a yes.
Finra
said no, in a letter that Linda Fienberg, president
of Finra Dispute Resolution, sent to Schultz last week.
Arbitrators will simply be required to make additional
disclosures if, after Jan. 1, 2005, they worked for
firms that sold auction-rate securities, sold them themselves
or supervised anyone who did.
It
will then be up to the lawyers (or to the customers,
if they're representing themselves) to decide whether
to take those arbitrators as panelists. "The steam
is coming out of my ears,'' says Philip Aidikoff of
Aidikoff, Uhl & Bakhtiari in Beverly Hills, California.
To
understand the steam -- and why Finra is still being
pressed to change its mind -- you need to know how arbitration
panels are chosen. The parties to the dispute get three
lists of eight names, chosen randomly by computer from
the arbitrator pool. There's one list of industry panelists
and two for the two public members. Each side strikes
as many as four names on each list, for any reason at
all, then ranks the rest in order of preference. Finra
names the panel, choosing the arbitrators most acceptable
to both sides.
By
keeping the people involved with auction-rate securities
in the panelist pool, Finra forces customers' lawyers
to use up their challenges to get rid of them. If four
challenges aren't enough, they're stuck.
They
will also use up challenges that might have been needed
for other reasons, such as bouncing an arbitrator whose
awards consistently skew in favor of the industry. Arbitrators
can also be challenged for cause -- meaning direct and
definite bias or interest in the outcome -- though that's
hard to show.
What
makes this especially unfair is that arbitration issues
have changed, says Brian Smiley of Smiley Bishop &
Porter LLP in Atlanta. "The cases used to be about
isolated broker misconduct,'' he says. "Now we're
seeing institutional misconduct -- the perversion of
Wall Street research during the tech bubble, selling
fraudulent and unsuitable variable annuities, abuses
in the securitization of subprime products and, lately,
auction-rate securities.'' All the big firms are involved.
Say
that you have an auction-rate case against UBS AG and
get stuck with a Merrill Lynch & Co. branch manager
as your required industry panelist. How can that Merrill
manager bring in a large award, or indeed any award?
His own firm is up against the same charges. He might
worry that if he finds for you, it could cost him his
promotion or even his job.
Whatever
the reason, the win rate for consumers has been spiraling
down. They won 53 percent of their arbitrated cases
in 2001 but only 36 percent in 2007, according to the
Securities Arbitration Commentator in Maplewood, New
Jersey, which tracks awards. (So far this year, they're
running at 47 percent, says SAC Managing Editor Richard
Ryder.)
Even
with wins, you don't get much money back. In a study
of arbitration covering 1995 through 2004, attorneys
Daniel Solin and Edward O'Neal, of the Securities Litigation
& Consulting Group in Fairfax, Virginia, combined
win rates with awards to create an "expected recovery
rate.'' It peaked in 1998, at 38 cents on the dollar,
falling to 22 cents in 2004.
More
cases settle than go to arbitration, but those low recovery
rates "knock down the settlement offers you get,''
says attorney Theodore Eppenstein of New York.
When
trying to remove Wall Street's thumb on the scale during
arbitration, "you're up against some of the best
funded lobbying in the country,'' Aidikoff says. "Where
are the people who speak for individual investors?''
Where, indeed.
(Jane
Bryant Quinn, a leading personal finance writer and
author of "Smart and Simple Financial Strategies
for Busy People,'' is a Bloomberg News columnist. She
is a director of Bloomberg LP, parent of Bloomberg News.
The opinions expressed are her own.)
To
contact the writer of this column: Jane Bryant Quinn
in New York at jbquinn@bloomberg.net
August
1 , 2008
NY
AG to sue Citigroup units over auction-rate securities
by Chad Bray of
DOW JONES NEWSWIRES
NEW
YORK (Dow Jones)--New York State Attorney General Andrew
Cuomo said Friday he intends to "imminently"
take legal action against two Citigroup Inc.
units over their marketing and sales of auction-rate
securities.
In a letter Friday, Cuomo's office indicated it intended
to sue Citigroup Global Markets Inc. and Smith Barney
under the state's Martin Act for fraudulent marketing
of the securities and for destruction of documents under
subpoena.
Cuomo's office said a five-month probe found that Citigroup
"repeatedly and persistently" made material
misrepresentations and omissions in its underwriting,
distribution and sale of auction rate securities.
"Citigroup represented that auction-rate securities
were safe, liquid, and cash-equivalent securities,"
wrote David A. Markowitz, chief of Cuomo's Investor
Protection Unit. "These representations were false,
and had a severe detrimental impact on tens of thousands
of Citigroup customers."
Citigroup would become the third major Wall Street firm
to face legal action over its sales of auction-rate
securities in recent weeks.
Last week, Cuomo sued two UBS AG units
for allegedly misrepresenting to clients the risks of
auction-rate securities before the $330-billion auction-rate
market seized up earlier this year.
Massachusetts regulators filed charges against UBS in
June. On Thursday, they filed a civil-fraud complaint
against Merrill Lynch & Co. for
allegedly misrepresenting the nature of the securities
to investors and for co-opting its "supposedly
independent" research analysts to help them reduce
its own inventory of the securities.
A Citigroup spokesman didn't immediately return a phone
call seeking comment Friday.
Auction-rate securities are long-term bonds that have
a short-term debt component, in which interest rates
are reset in auctions on a periodic basis, including
daily, weekly or monthly sales. The bonds typically
are issued with 30-year maturities, but the maturities
can range from five years to perpetuity.
In February, several auctions failed, driving up the
interest rates for such issuers as municipalities, student-loan
providers and museums. The collapse of the auction market
also left investors locked into those investments.
In its letter, Cuomo's office said the Citigroup units
destroyed recordings of telephone conversations concerning
the marketing, sale and distribution of those securities,
which Cuomo had sought in an April 14 subpoena.
The letter said Citigroup failed to notify the attorney
general's office about the destruction of the tapes,
even though it learned in mid-June that recordings from
its auction-rate desk had been destroyed.
The attorney general's office said in the letter that
it didn't learn of the destruction of the recordings
until June 30 and it "significantly and materially"
interfered with its probe.
"Citigroup has informed the Attorney General's
Office that it is likely unable to recover the lost
information on the destroyed tapes," Markowitz
wrote.
"Verbatim records of the most important witness
statements during the most relevant period were therefore
destroyed after the issuance and service of the subpoena."
Cuomo's
office did leave the door open for a settlement with
Citigroup, saying in the letter the company must buy
back retail investors' securities at par; reimburse
retail investors for damages they have incurred; undertake
immediately to make institutional investors and corporations
whole; and pay a significant penalty for its alleged
misconduct during the investigation.
The New York attorney general's office has now subpoenaed
30 entities and 100 individuals, seeking information
about the sales of auction-rate securities.
Among those subpoenaed are Merrill Lynch & Co. By
Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com
August
1, 2008
Merrill
'Co-Opted' Analysts Backed Auction-Rate Debt to the
End
By
David Scheer
Aug.
1 (Bloomberg) -- Four days before Merrill Lynch &
Co. stopped supporting the auction-rate securities market
and left thousands of individual investors stuck with
securities they couldn't sell, the firm's analysts recommended
clients buy.
"Reports
of the imminent demise of the auction market seem to
be greatly exaggerated, again,'' analyst Kevin Conery
wrote in a Feb. 8 research note. "We continue to
be impressed by the auction market's resiliency.''
The
remarks show Merrill's researchers were "co-opted''
during a seven-month drive by the New York-based firm's
sales force to prevent a meltdown in the $330 billion
market, Massachusetts Secretary of State William Galvin
alleged yesterday in an administrative complaint filed
in Boston. As the sales desk pushed analysts to publish
upbeat notes, managers used gallows humor to complain
about a "collapsing'' market and the end of $2,000
dinners.
"Come
on down and visit us in the vomitorium!!'' the auction-rate
desk's managing director, Frances Constable, wrote to
a co-worker in August, as demand began to dry up. "Market
is collapsing,'' another executive cited in Galvin's
complaint said in a November 2007 personal e-mail. "No
more $2K dinners at CRU,'' a Manhattan restaurant where
the wine list includes dozens of bottles for more than
$1,000.
Galvin,
57, wants the third-largest U.S. securities firm to
"make good'' on sales of now-frozen holdings, compensate
investors who disposed of their bonds or shares at a
loss and pay an unspecified fine. He has already filed
a related claim against Zurich-based UBS AG, and is
probing Bank of America Corp.
'Significant
Danger'
"Research
analysts routinely soft-pedaled significant negative
events affecting liquidity in the auction markets,''
he said in the complaint. At the same time, managers
knew "the auction markets were not functioning
properly and were in fact in significant danger of collapsing,''
he said.
Conery,
47, received a "six-figure'' bonus for 2007 after
his year-end review credited him for "proactive
and timely interchange'' with the sales desk and clients,
according to the complaint. "Ultimately, his work
contributed to better liquidity and lower inventory
levels in the marketplace,'' the reviewer said.
Merrill
denied that its analysts acted improperly in recommending
auction-rate securities, also known as ARS.
The
analysts mentioned in Galvin's complaint "are men
of integrity and intellectual honesty. They called the
ARS market as they saw it, not the way anyone else did,''
Merrill spokesman Mark Herr said. "Nothing the
sales desk could do or couldn't do affected how much
these analysts earned or their standing in our research
department.''
Pulling
Support
Auction-rate
securities are long-term bonds or preferred shares with
interest rates adjusted typically every seven, 28 or
35 days through a dealer-run bidding process, providing
them with the characteristics of money-market investments.
Firms historically supported the auctions, without contractual
obligation, when demand waned.
Merrill
is the second bank to face a complaint by Galvin after
brokers stopped supporting the auctions in mid-February
as losses from securities tied to subprime mortgages
mounted. Massachusetts last month filed a complaint
against UBS, Switzerland's biggest bank.
UBS
said it will contest the allegations. The bank agreed
July 30 to pay $1 million to settle a separate complaint
filed by Massachusetts Attorney General Martha Coakley
over the marketing of auction-rate securities to 20
towns and public agencies in the state. UBS also agreed
to pay $38.5 million to the municipalities.
Insurer
Losses
February's
meltdown began in July 2007, when MBIA Inc. and Ambac
Financial Group Inc., the two largest insurers of auction-
rate debt, reported lower profits because of losses
on securities backed by subprime mortgages. Losses at
the insurers prompted auctions for $1.8 billion of their
own securities to fail, according to Fitch Ratings.
That
month, Constable, 51, objected to an analyst's report,
which noted auction-rate bonds lack a so-called "hard
put,'' like some other variable-rate securities, which
obligate the issuer to arrange a purchaser for any unwanted
securities when rates reset.
The
reference was misleading, she said, because the report
focused on municipal bonds and those instruments weren't
yet failing. When the analyst, Martin Mauro, refused
to retract the note, Constable sent an e-mail to colleagues
within the firm.
"I
HAD NOT SEEN THIS PIECE UNTIL JUST NOW AND IT MAY SINGLE
HANDEDLY UNDERMINE THE AUCTION MARKET,'' she wrote in
capital letters, according to Galvin's claim.
'Misplaced'
Concerns
The
research department withdrew the report a day later,
Galvin said. While a revised version still included
information on the hard put, it also recommended auction-rate
securities, saying concerns were "misplaced'' and
they may offer good value.
"The
same facts contained in the first report were all retained
in a longer, fuller and clearer version,'' Herr said.
Constable,
Conery and Mauro, all located in New York, have no comment,
he said, declining to make them available. They aren't
named as defendants in Galvin's complaint.
Constable's
objections had a lasting effect, according to Galvin.
When an analyst drafted a report on the securities the
following January, he asked his colleague for advice
before publication.
"I
want to make sure that research cannot be accused of
causing a run on the auction desk,'' the analyst, who
wasn't named, wrote in an e-mail.
To
contact the reporter on this story: David Scheer in
New York at dscheer@bloomberg.net.
Last Updated: August 1, 2008 00:01 EDT
Updated:
Thursday July 31, 2008 17:36 EDT
Merrill
Defrauded Auction-Rate Investors, State Says (Update5)
By
David Scheer and Jeremy R. Cooke
July
31 (Bloomberg) -- Merrill Lynch & Co. was accused
by Massachusetts Secretary of State William Galvin of
misleading investors about the stability of the auction-rate
market at the same time the investment bank was marketing
the securities.
New
York-based Merrill "co-opted'' its research department
to help place the securities with customers, Galvin
said in a statement from Boston today. The state's administrative
claim asks the third-largest U.S. securities firm to
"make good'' on sales of now-frozen holdings, compensate
investors who disposed of their bonds or shares at a
loss and pay an unspecified fine.
"This
company was aggressively selling'' the securities "and
its auction desk was censoring the research analysts
to make sure they downplayed'' risks in the market,
Galvin said in the statement. "They knew the auction
markets were in trouble, but the investors were the
last to know.''
Merrill
is the second bank sued by Galvin after Wall Street
brokers abandoned their routine role as buyers of last
resort for auction-rate securities in mid-February,
allowing the $330 billion market to collapse. Massachusetts
last month filed a complaint against UBS AG, Switzerland's
biggest bank. A related investigation of Bank of America
Corp. is "still going on,'' said Brian McNiff,
Galvin's spokesman.
Auction-rate
securities are long-term bonds or perpetual shares with
interest rates adjusted typically every seven, 28 or
35 days through a dealer-run bidding process, providing
them with the characteristics of money-market instruments.
Firms historically supported the markets, without contractual
obligation, when demand dried up.
Market
Size
Municipal
auction-rate bonds totaled about $166 billion at the
time of the market's collapse in February; student-loan-backed
debt and closed-end mutual funds' preferred shares comprised
most of the rest.
Officials
in at least 12 U.S. states are investigating auction-rate
sales practices after receiving complaints from investors
unable to access their cash. New York Attorney General
Andrew Cuomo last week sued UBS, alleging the bank's
promotion of auction-rate securities as safe investments
was fraudulent.
One
of two former Credit Suisse Group AG brokers suspected
in a federal probe related to auction-rate securities
may have fled to his native Bulgaria, the Wall Street
Journal reported.
"In
September 2007, two former employees resigned after
we detected their prohibited activity and promptly suspended
them,'' said Regula Arrigoni, a Credit Suisse spokeswoman.
``Credit Suisse immediately informed our regulators
and we continue to assist the authorities.''
Congressional
Hearing
U.S.
House Financial Services Committee Chairman Barney Frank
said today his congressional panel will hold a hearing
in September to find out what went wrong in the collapse
of the auction-rate securities market.
Merrill
decided to stop supporting bids on auction-rate bonds
with its own money five days after one of its analysts
told financial advisers the bonds represented "a
good, conservative, reasonable investment,'' according
to Galvin's release.
"Our
research reflected the honest belief that'' auction-
rate securities "offered higher returns in exchange
for less liquidity and noted that market changes had
begun to occur,'' said Mark Herr, a spokesman for Merrill.
"We are disappointed that Massachusetts filed this
action.''
The
amount of auctions that failed to draw enough bidders
during two decades of the auction-rate market was "small,''
Herr said. "In 2007, there were no failed auctions
of securities sold to retail clients and, in fact, none
to these clients until late January 2008.''
Failed
auctions, where issuers' interest costs reset to a penalty
rate as high as 20 percent or pegged to a money-market
formula, have since become more common than successful
ones.
Profitable
Segment
Merrill,
which trails Goldman Sachs Group Inc. and Morgan Stanley
in market value, made about $90 million in profit during
2006 and 2007 from its auction-rate program, Galvin
said.
One
executive cited in Galvin's complaint said in a November
2007 personal e-mail: "Market is collapsing. No
more $2K dinners at CRU,'' a Manhattan restaurant where
the wine list includes dozens of bottles for more than
$1,000.
"Time
after time, when confronted with conflicts of interest,
Merrill Lynch was consistent in that it placed its own
interests ahead of its investor clients,'' according
to the secretary of state's complaint.
Biased
Research
During
the dot-com boom that peaked in 2000, Merrill was among
firms accused of publishing tainted research to promote
Internet companies. Through Henry Blodget and other
technology analysts, Merrill issued reports urging investors
to buy shares of companies such as 24/7 Real Media Inc.
and Interliant Inc. The value of 24/7 shares fell from
a peak of $323.13 in January 2000 to 45 cents by September
2001; Interliant peaked at $54.44 per share in February
2000 and reached 13 cents by May 2002.
Regulators,
including the U.S. Securities and Exchange Commission
and then-New York Attorney General Eliot Spitzer, accused
the investment banks of using the biased research to
lure investment-banking clients. Merrill, Citigroup
Inc. and eight other securities firms agreed to pay
$1.4 billion to settle the matter in 2002.
According
to the complaint Galvin released today, Merrill's sales
and trading department pressed the firm's analysts to
endorse auction-rate securities and took them to task
over their reports and conference calls. Year-end employment
reviews for some analysts evaluated how much support
they gave to ``business partners'' on the firm's auction-rate
desk, he said.
Research
Report
In
one incident, Frances Constable, the desk's managing
director, objected to an analyst's report in August
2007 that noted auction-rate bonds don't have a so-called
``hard put,'' like variable-rate demand notes, which
obligate the issuer to arrange for buying any unwanted
securities when rates reset.
The
reference was misleading, she argued, because the report
focused on municipal bonds and auctions for those instruments
weren't yet failing. Researchers rewrote the piece,
Galvin argued.
"In
fact, there were no material changes in the reports,
and the same facts contained in the first report were
all retained in a longer, fuller and clearer version,''
Herr said. "These two analysts are men of integrity
and intellectual honesty. They called the ARS market
as they saw it, not the way anyone else did.''
That
same month, Constable sent messages to an analyst during
a conference call with financial advisers. After a participant
asked a question, she urged the analyst to ``shut this
guy down,'' adding: ``He is focusing attention away
from your positive message.''
The
objections had an effect, Galvin said. In January, one
researcher asked if someone could review his work before
publication to ensure it wouldn't upset the auction
desk.
Constable
wasn't named as a defendant in the complaint. A call
to her office was referred to Merrill's spokesman, Herr,
who said Constable had no comment.
To
contact the reporters on this story: David Scheer in
New York at dscheer@bloomberg.net, or Jeremy R. Cooke
in New York at jcooke8@bloomberg.net.
Mass
charges Merrill Lynch with fraud in auction Rate Securities
Dealings
To
read the offical complaint and see the exhibits, go
to the Securities
Division, of William Francis Galvin, Secretary
of the Commonwealth
If
you can't read the PDFs posted on Mass site, go to Adobe
and pick up the latest version of Adobe
Reader.
Here
is today's official press release from Galvin:
Secretary
of the Commonwealth William F. Galvin today charged
Merrill Lynch, Pierce, Fenner & Smith, Inc. with
fraud in pushing the retail sale of auction rate securities
to investors while misstating the stability of the auction
market itself.
The administrative complaint also charged Merrill Lynch
with co-opting its supposedly independent research department
to help sell auction rate securities.
The complaint seeks to order Merrill Lynch to make good
on the sales of ARS that are now frozen and make restitution
to those who had to sell at less than par.
The order would also censure the firm and impose an
administrative fine.
"This company was aggressively selling ARS to investors
and its auction desk was censoring the research analysts
to make sure they downplayed ARS market risks in research
reports up to the day Merrill pulled the plug on its
auctions," Secretary Galvin said. "They knew
the auction markets were in trouble, but the investors
were the last to know."
Today's complaint is the second action brought by the
Securities Division in the wake of the collapse of the
auctions earlier this year. Last month, a similar complaint
was brought against UBS.
At Merrill Lynch, the managing director in charge of
the auction desk got a research report in the Merrill
Lynch Fixed Income Digest retracted and rewritten. She
said the offending report "may single handedly
undermine the auction market."
The
complaint charges that "Merrill Lynch also permitted
Sales and Trading managers, including auction desk personnel,
to communicate to members of the Research Department
(in violation of company policies and procedures) sensitive
confidential information concerning inventory levels,
marketing initiatives, and enhanced sales incentives
offered to financial advisers.
Year-end employment reviews of certain Research Analysts
also took into account the level of support that analyst
provided to his 'business partners' at the Auction Desk."
Despite these efforts, Merrill Lynch, as the complaint
states, "had known for a period of several months
that auction markets were not functioning properly and
were, in fact, in significant danger of collapsing."
On November 19, 2007, one executive in a personal e-mail
stated, "Market is collapsing. No more $2k dinners
at CRU," referring to a Manhattan restaurant.
On February 7, 2008, Merrill Lynch Research Analyst
Kevin Conery told financial advisers, "But is it
(the auction business) an area we think represents a
good, conservative, reasonable investment? Yes, it is."
Five days later, Merrill Lynch decided to stop supporting
the auction rate securities program and most of their
auctions failed the next day.
The complaint further charged that the very process
of the auctions was "fundamentally flawed"
with Merrill Lynch submitting support bids to prop up
the market. "Broker-dealer support created a false
impression that there were deep pools of liquidity in
the auction market," the complaint said.
Merrill Lynch made about $90 million in profit from
this program in 2006 and 2007, but their dual role in
representing bond issuers and investors buying ARS "created
significant and inherent conflicts of interest which
could not be reconciled," the complaint said. "Time
after time, when confronted with conflicts of interest,
Merrill Lynch was consistent in that it placed its own
interests ahead of its investor clients."
Saturday
July 26
UBS
Suspends Top Executive
By LIZ RAPPAPORT of the Wall Street Journal
Swiss
bank UBS AG suspended David Shulman, the firm's head
of fixed income in the U.S. and global head of municipal
securities, according to people familiar with the matter.
The
suspension comes as state and federal investigations
have heated up into sales and marketing practices related
to auction-rate securities by UBS and other Wall Street
firms. Mr. Shulman ran the auction-rate securities business
at UBS.
The
office of New York state Attorney General Andrew Cuomo
on Thursday followed Massachusetts state securities
officials by filing a civil-fraud lawsuit against UBS
regarding its sales of auction-rate securities. Neither
has charged any individual, though Massachusetts named
Mr. Shulman as a figure who helped to direct UBS's efforts.
A
UBS spokeswoman confirmed the firm placed an employee
on administrative leave last week. The suspension occurred
in mid-July.
Mr.
Shulman is cooperating fully with UBS as it works through
these matters, said Jonathan Gasthalter, a spokesman
for Mr. Shulman.
Both
New York and Massachusetts suits allege that UBS and
its executives knew the auction-rate securities market
was collapsing last year and early this year, and didn't
disclose the problems to investors. Instead, the suits
allege, the firm marketed the securities to institutional
and retail investors through its sales forces to clean
their own inventories of the investments.
According
to the Massachusetts case, Mr. Shulman helped to direct
those sales. The case names several other UBS employees
and made public reams of their emails.
A
spokeswoman said UBS is frustrated by the cases because
the firm is working to help its clients holding auction-rate
securities. She said the firm doesn't believe any of
its employees acted illegally, but some might have used
poor judgment. She also said UBS will defend itself
against any charges.
After
encouraging UBS-affiliated financial advisers to increase
their efforts to sell auction-rate securities to retail
investors starting in August, the Massachusetts complaint
said, Mr. Shulman also sold much of his personal
holdings in the instruments.
Write
to Liz Rappaport at liz.rappaport@wsj.com
July
25 Front page news.
Auction-Rate
Crackdown Widens.
UBS Faces New Charges in New York, as Scrutiny of Wall
Street's Role Intensifies
By
LIZ RAPPAPORT of the Wall Street Journal
The
state of New York on Thursday joined a widening array
of prosecutors and customers accusing Wall Street firms
of wrongdoing in efforts to hold together the $330 billion
auction-rate securities market before it collapsed in
February.
State
Attorney General Andrew Cuomo filed civil fraud charges
against UBS AG, accusing the firm of a "multibillion-dollar
consumer and securities fraud," and demanding that
the firm pay back its profits from the business, make
investors whole and pay damages.
A
spokeswoman for UBS said, "We will vigorously defend
ourselves against this complaint."
The
New York attorney's case echoes a similar case brought
against UBS by Massachusetts officials and many private
cases and arbitration claims filed against UBS and other
prominent firms in recent months.
The
firms are accused of pushing risky securities on retail
and corporate customers with misleading sales tactics,
even as the market for those securities was falling
apart. When the collapse came, many customers faced
losses or were stuck with securities they couldn't sell.
Wall
Street firms themselves have suffered immense losses
and faced litigation resulting from their activities
in other kinds of troubled financial instruments --
most notably mortgage-backed securities. Their auction-rate
problem could prove a smaller financial scar than the
hundreds of billions lost in mortgage-backed securities,
but a big loss to Wall Street's reputation.
The
victims in the auction-rate cases range from individual
investors to big corporations. Some 250 public companies
held these instruments, as did tens of thousands of
individuals. The companies -- ranging from 3M Co. to
Texas Instruments Inc. -- have on average written down
the value of these holdings by 12% in the past few months,
according to Pluris Valuation Advisors LLC, a company
that helps corporations value illiquid securities. Applied
across the whole $330 billion market -- which since
February has gotten substantially smaller -- that would
amount to roughly $40 billion of losses.
Auction-rate
securities -- issued by municipalities, student-loan
companies, charitable organizations and others -- are
long-term securities that Wall Street engineered to
have short-term features. Their interest rates reset
at weekly or monthly auctions run by Wall Street firms.
The firms promised individual investors and corporate
clients that the frequent auctions made these securities
as safe and liquid as cash because they would always
be easy to sell quickly.
At
the root of these cases is a common allegation: As problems
mounted in these auctions and their own inventories
of these securities became bloated, Wall Street firms
worked aggressively to push the instruments out of their
doors and into the hands of clients, playing down the
severity of the problems rippling through the market.
The
action, Mr. Cuomo and others charge, helped to contain
their own losses but left their customers with beaten
down, illiquid investments.
The
New York complaint also alleges that several high-ranking
UBS executives, whom the New York attorney didn't name,
sold roughly $21 million of their own auction-rate securities
holdings amid the turmoil. Some 50,000 UBS customers
were left holding $37 billion worth of the struggling
investments, the complaint says.
Karina
Byrne, a UBS spokeswoman, said, "UBS does not believe
that there was illegal conduct by any employee."
After an internal investigation into personal sales
of auction-rate securities, "we have found cases
of poor judgment by certain individuals and are evaluating
appropriate disciplinary measures for these individuals,"
she said.
"It
is frustrating that the New York Attorney General has
filed this complaint while we have been fully engaged
in good-faith negotiations with his office to bring
liquidity to our clients holding auction-rate securities,"
she added.
UBS
is at the center of many of these allegations, but it
isn't alone. Investigators from 10 states showed up
at the offices of Wachovia Corp.'s St. Louis brokerage
offices last week to get documents and conduct interviews
in a dramatic escalation of their probe into its auction-rate
activities. Wachovia said it, like others, is responding
to inquiries from regulators.
State
attorneys are also probing the activities of Merrill
Lynch & Co., Citigroup Inc. and others. Merrill
Lynch and Citigroup declined to comment.
The
securities are backed by pools of other financial instruments,
such as student loans, ultra-safe municipal bonds or
complex subprime-mortgage debt. Even the safe municipal
bonds were drawn into the unfolding mortgage crisis
because they were backed by struggling bond insurers
with exposure to mortgage debt.
In
normal times, when weekly auctions of auction-rate securities
failed to generate sufficient demand, Wall Street firms
stepped in to support the market, buying the instruments
themselves. But as they became strained by other problems,
Wall Street firms stopped supporting the market with
their own bids. By February, nearly every auction wasn't
drawing enough buyers and the securities suddenly became
illiquid, impossible for investors to cash in.
In
February, the market for auction-rate securities collapsed
when the big dealers in the market -- including UBS,
Citigroup, Merrill and others -- stopped supporting
struggling auctions, leaving investors unable to sell.
Many companies have had to mark down their value, individuals
have been stuck unable to access cash, and issuers of
the instruments have had to pay higher interest rates
or find a new way to raise money.
Before
it fell apart, Wall Street firms raised some brokers'
commissions to get the securities out the door. Merrill
Lynch published reassuring research just days before
it pulled out of the market. At UBS, executives mobilized
its financial advisers to sell the securities to institutional
and retail investors, many of whom have since filed
complaints alleging UBS and others offered sugar-coated
assurances in the months leading up to the February
collapse.
One
example unearthed in the Massachusetts investigations:
Last November, Edward Hynes, an institutional sales
manager at UBS, was preparing for a conference call
with salespeople who worked directly with investors.
In an email to three colleagues who would be leading
the call, he laid out a strategy for the message that
salespeople should take to UBS clients, according to
documents filed by the state of Massachusetts against
UBS.
"We
need them to walk out and believe that this is a strong
credit w [sic] strong UBS commitment to support the
liquidity," Mr. Hynes wrote in an email to several
colleagues about auction-rate securities backed by student
loans, according to the Massachusetts case. At the time,
the market was still a few months away from breaking,
but cracks were already showing up. Mr. Hynes isn't
named in the New York complaint.
People
familiar with the email say the call would have been
with institutional salespeople, not retail investment
advisers.
"We
are not going to address specific emails taken out of
context," said Ms. Byrne in a statement. "UBS
has acted in clients' best interests in this matter."
Another
example involves a lawsuit filed early in June by Latham,
N.Y., energy company Plug Power Inc. The company claims
UBS assured Plug Power's chief financial officer, Gerry
Anderson, in a conversation in October that auction-rate
securities backed by student loans were safe and liquid,
despite spikes in their interest rates that suggested
otherwise.
Plug
Power Inc. had bought $62.9 million in auction-rate
securities backed by pools of student loans starting
in 2005, comprising 44% of its total investment portfolio,
according to the complaint. The claim alleges UBS put
Plug Power into more student-loan auction-rate securities
throughout the fall, after the CFO expressed concern.
UBS
declined to comment on the lawsuit.
Wall
Street firms started raising commissions paid to some
brokers at outside dealers who sold the securities to
clients, an action that might serve as an enticement
to them to sell more.
On
Nov. 2, 2007, for example, Credit Suisse's short-term
trading desk sent out an email informing its salespeople
that Citigroup was increasing its commissions to outside
dealers from 0.15 of a percent of the security sold
to 0.20 of a percent on certain of its auction-rate
securities, according to a person familiar with the
email. By the start of January, their commissions on
all types of Citigroup's auction-rate securities rose
to 0.15 of a percent, instead of 0.1, says the person.
Citigroup
and Credit Suisse both declined to comment.
Wall
Street analysts also put out reassuring research just
days before the auction-rate market hit a breaking point.
For example, investigators are looking at one Merrill
Lynch note that went out days before the market collapsed,
according to people familiar with several investigations.
The
note refers to problems in a $60 billion slice of the
auction-rate securities market that was issued by closed-end
mutual funds, called auction-rate preferred securities.
These auctions were faltering by the end of 2007 as
well.
"Auction
yields still attractive despite spread compression,"
reads one bullet point of the report, published by analyst
Kevin J. Conery on Feb. 8. It touted the bonds, saying
they yielded at least 0.45 percentage points more than
other types of bonds. "We continue to be impressed
by the auction market's resiliency in the face of challenging
times," the report said.
The
inside of the report notes "noise around failed
auctions," but goes on to highlight ways investors
can invest in the market most safely, and states that
securities issued by closed-end mutual funds are "still"
viewed by the firm as "the conservative's conservative
investment."
By
Feb. 13, Merrill and UBS had stopped supporting the
market.
A
call to Mr. Conery was directed to Merrill's press office.
"The research report was fair and balanced,"
says Mark Herr, a Merrill Lynch spokesman, in a statement.
"Our analyst struck the right balance between sounding
cautionary notes and concluding that there were insufficient
alarms to herald the imminent and unprecedented collapse
of the ARS market."
Write
to Liz Rappaport at liz.rappaport@wsj.com
July
24
UBS
Faces New York Lawsuit Over Auction-Rate Sales (Update4)
By
Michael McDonald and Karen Freifeld
July
24 (Bloomberg) -- UBS AG was sued today by New York
Attorney General Andrew Cuomo, alleging the Zurich-based
bank's promotion of auction-rate securities as safe,
money market-like investments was fraudulent.
Cuomo
seeks to force UBS to offer to buy back at face value
$25 billion in auction-rate securities held by
the bank's customers in New York and nationwide. Massachusetts
and Texas have filed similar complaints against UBS
since the $330 billion market collapsed in February
in an effort to force the firm to repurchase securities
it marketed in their respective states.
"We
believe we have nationwide jurisdiction, and we're looking
for recoveries nationwide,'' Cuomo said today at a press
conference in New York announcing the suit. He said
his investigation into UBS and other banks that sold
auction-rate securities is continuing, and he declined
to rule out additional complaints or criminal charges.
State
and federal regulators have been probing Wall Street's
sale of auction-rate securities since investment banks
abandoned the market in February, permitting thousands
of auctions to fail and leaving investors unable to
sell the debt. Municipalities, closed-end funds and
student loan organizations sold the long-term bonds,
and the banks ran the auctions where the interest rates
were reset every week or month.
U.S.
prosecutors and regulators are separately investigating
allegations that UBS helped wealthy U.S. citizens conceal
$20 billion in assets and evade income taxes. The company
reported a net loss of 25.4 billion Swiss francs ($25.6
billion) in the nine months through March, more than
any other bank hit by the global credit-market contraction.
"This
is something I believe can be settled because they are
not worthless; they are simply not liquid,'' said John
Coffee, a Columbia Law School securities law professor
in New York, regarding the auction-rate securities.
The investigation of tax evasion is of "an order
of magnitude more serious to them,'' Coffee said.
Cuomo
alleges in the lawsuit filed today that UBS began an
"aggressive marketing'' campaign to sell the securities
to investors as demand began to wane last year, forcing
the bank to step in as a buyer at the auctions to prevent
them from failing. UBS continued selling the securities
even as the market unraveled, with at least seven bank
executives involved in the marketing campaign unloading
$21 million in personal auction-rate holdings, the attorney
general said.
UBS
spokeswoman Karina Byrne in an e-mailed statement said
the bank will "vigorously defend'' itself against
the allegations in the suit, and "categorically
rejects any claim that the firm engaged in a widespread
campaign'' to shift auction-rate debt off its books
and into client accounts.
"While
UBS does not believe that there was illegal conduct
by any employee, we have found cases of poor judgment
by certain individuals and are evaluating appropriate
disciplinary measures for these individuals,'' Byrne
said.
The
bank on July 16 said it plans to offer to buy back as
much as $3.5 billion in auction-rate preferred shares
it sold for closed-end funds. Cuomo said today that
the offer is insufficient and that it needs to buy back
all the securities it sold.
UBS,
which closed its municipal investment banking operations
in May, was the second-biggest underwriter of municipal
auction-rate securities behind Citigroup Inc., according
to data from Thomson Reuters. It held more than $11
billion of the debt on its books when the market collapsed,
the bank has said.
Thousands
of investors have been left stuck with securities that
they thought were akin to money-market funds, facing
losses if they attempt to sell their holdings in secondary
markets, according to Barry Silbert, chief executive
of Restricted Stock Partners in New York, which operates
an exchange.
States
and local governments have refunded or plan to replace
at least $91.8 billion in auction-rate securities since
the market's collapse in February sent borrowing costs
as high as 20 percent, according to data compiled by
Bloomberg News. Closed-end funds replaced $19.7 billion
and student loan organizations less than $3 billion.
Cuomo's
complaint echoes the findings in a lawsuit filed on
June 26 by Massachusetts Secretary of State William
Galvin that attempted to show through e-mails obtained
from UBS that executives increased pressure on financial
advisers at the company to sell the securities as demand
from corporate cash managers waned. The suit alleges
the company failed to warn investors that the securities
might become illiquid, and instead continued to market
them as cash equivalents.
Galvin
is also investigating Bank of America Corp. and Merrill
Lynch & Co. More than five states participated in
a search of the securities division headquarters of
Wachovia Corp. in St. Louis on July 17 as part of a
coordinated auction-rate probe.
At
least 12 state securities regulators are probing the
collapse of the market, excluding New York, according
to the North American Securities Administrators Association.
The Texas State Securities Board this week filed a notice
of hearing to suspend UBS's state license, claiming
the bank engaged in fraud by marketing the long-term
bonds as "liquid investments.''
Regulators
in New York, Massachusetts and Texas are also seeking
damages against UBS for its sale of the securities.
Cuomo's probe involves at least 18 different banks.
The
Securities and Exchange Commission and Financial Industry
Regulatory Authority are also probing the banks. Investors
have filed about 110 arbitration claims against their
financial advisers related to auction-rate securities,
according to Nancy Condon, a spokeswoman for Financial
Industry Regulatory Authority.
UBS
said in a recent securities filing that it has also
been named in three class-action lawsuits related to
the securities.
"Certainly
the pressure is building,'' said Peter Henning, a former
federal prosecutor and law professor at Wayne State
University Law School in Detroit. "They need to
figure out a way to get the states and the SEC off its
back, then it can just deal with the customers.''
The
case is People of the State of New York v. UBS Securities
LLC, New York state Supreme Court (Manhattan).
To
contact the reporter on this story: Michael McDonald
in Boston at mmcdonald10@bloomberg.net; Karen Freifeld
in New York State Supreme Court at kfreifeld@bloomberg.net.
July
25
From
Times Online
New
York sues UBS over auction-rate securities
by
Michael Herman
Senior
bankers at UBS pulled $21 million of their own money
out of the collapsed auction-rate securities market
while continuing to tell clients their money was safe,
according to charges from the New York Attorney-General.
Andrew
Cuomo said seven UBS bankers, who have not been named,
sold their personal holdings in the three months leading
up to the collapse of the auction-rate securities market
because they knew it was heading for a crisis.
At
the same time, Mr Cuomo alleges in a lawsuit filed against
UBS in New York, the bank continued to market and sell
tens of billions of dollars of the securities to its
clients.
The
lawsuit, filed last night, does not target any individual
bankers. Mr Cuomo declined to comment on whether any
may face criminal charges as the investigation progresses.
In
a statement, UBS said that while some of its employees
had exercised “poor judgment” and it was considering
disciplinary action, none had broken the law.
The
bank said it was “frustrating” that the Attorney-General
had brought the case while the bank was involved in
negotiations to rescue the auction-rate securities market,
which collapsed in February leaving investors with $37
billion of illiquid assets.
Auction-rate
securities are a popular US debt instrument that is
held as an alternative to cash because they earn slightly
higher rates of interest but can usually be sold at
any time.
Several
large investment banks are active brokers in the $330
billion (£165 billion) market, which became a
casualty of wider credit market problems.
UBS
is facing similar charges from the state of Massachusetts
and Mr Cuomo has requested documents from other banks.
“UBS
is not alone in this scheme, we are looking at a number
of other banks.” Mr Cuomo said.
Friday
July 18
Investors
sue Bank of America over auction rate securities
St. Louis Business Journal - by Kelsey Volkmann
Investors
filed a class-action lawsuit Thursday against Bank of
America Investment Services Inc. and Bank of America
Securities, alleging that brokers deceived them about
their risk.
Bank
of America offered and sold auction rate securities
to the public as highly liquid cash-management instruments
and as suitable alternatives to money market mutual
funds, the suit alleges.
On
Feb. 13, all of the major broker-dealers, including
Bank of America, withdrew their support for the auctions,
leaving the market to crumble and investors unable to
access their money.
The
investors involved in the suit bought the securities
between June 11, 2003 and Feb. 13, 2008.
The
lawsuit, filed the same day state regulators investigated
Wachovia Securities in downtown St. Louis for its handling
of auction rate securities, is pending in the U.S. District
Court for the Southern District of Illinois.
The
lawsuit alleges that Bank of America failed to disclose
the following facts to investors:
* The auction rate securities were not cash alternatives
like money market funds but were instead complex long-term
financial instruments with 30-year maturity dates.
* The auction rate securities were only liquid at the
time of the sale because Bank of America and other broker-dealers
were artificially supporting and manipulating the market
to maintain the appearance of liquidity and stability.
* Bank of America and other broker-dealers routinely
intervened in the auctions for their own benefit to
set rates and to prevent all-hold auctions and failed
auctions.
* Bank of America continued to market auction rate securities
as liquid investments even after Bank of America and
other broker-dealers determined that they would likely
be withdrawing support for the periodic auctions and
that a freeze of the auction rate securities market
would result.
Auction
rate securities are municipal or corporate debt securities
or preferred stocks that pay interest at rates set through
periodic auctions.
The
instruments typically have long-term maturity dates
or no maturity date.
The
law firm representing the investors is Carey & Danis,
a national law firm based in St. Louis that aids represents
victims of "corporate abuse, greed and neglect,"
according to the firm.
Thursday
July 17
Super
news:
State
Regulators Raid Wachovia's Offices Looking for more
Smoking Guns on Auction Rate Securities.
Before
we get to Wachovia, let's look at what we now know.
We know that a bunch of brokerage firms deliberately
misled their clients. They told them that auction rate
securities were "cash equivalents" and you,
the client, only had to wait until the next auction
date (typically every seven days) to get 100% of your
principal back.
We
know the brokerage firms deliberately misled their customers
by not telling them of the risks that the auctions could
fail (and had failed). And we now know that virtually
every brokerage firm who peddled auction rate securities
to their clients knew there were risks and there was
a huge likelihood that the auctions would fail and their
clients would get stuck with paper securities they could
not cash out of.
Massachusetts
has discovered enough dirt on UBS to sue it for fraud
and to force UBS into redeeming $3.5 billion of ARPS.
And a bunch of state regulators are smelling dirt at
Wachovia. Based on emails and phone calls from readers
of this column, I can guess the next "bad guys"
will include Allianz, Merrill Lynch, PIMCO and Citigroup.
I'll think of a few more this evening.
Before
we get to "Why?" what's really interesting
is how many brokerage firms peddling ARPS actually deliberately
misled their own employees -- the brokers who foisted
the ARPS on unsuspecting people like you and me. (As
of tonight, I still have $3.3 million of ARPS.) I've
spoken to many brokers and they're livid that their
management lied to them as much as they ended up lying
to their own clients. There are many brokers out there
whom this ARPS experience has destroyed 20+year career
and left them with a really bad taste in their mouth
for Wall Street and eveything it stands for.
Now
why? Why did the brokerage firms lie to their brokers
and their customers? My take:
1.
They had ARPS on their balance sheets. They knew it
would soon be toxic and they wanted to get rid of it,
asap.
2.
They made a commission for putting their customers into
ARPS, versus putting them into money markets. They also
received an on-going commission for keeping the ARPS
into their customers' accounts -- the mutual funds pay
the same sort of fee. I believe it's called a 12b-1.
The
basic problem is that today investment banks and brokerage
firms can one and the same thing. There are horrible
conflicts of interest. For example, an investment bank
will have stuff on its balance sheet which it can't
sell to other institutions. So it chooses to sell the
crap to the clients of its brokerage arm.
You
get the message. Now to today's new. Today is a big
victory for us. Wachovia has been one of the most irresponsible
sellers of auction rate securities. -- Harry Newton
Auction
rate probe hits Wachovia
By
IEVA M. AUGSTUMS, AP Business Writer, July 17
CHARLOTTE,
N.C. - Securities regulators from several U.S. states
on Thursday raided the St. Louis headquarters of Wachovia
Securities, seeking documents and records on the company's
sales practices.
The
move is part of a broad investigation into questionable
practices involving auction rate securities, Missouri
officials said.
Missouri
Secretary of State Robin Carnahan's office said the
"special inspection" at the Wachovia division,
the former A.G. Edwards, concerned the $330 billion
auction rate securities crisis. Wachovia Securities
is part of the Charlotte-based bank, Wachovia Corp.
"Hundreds
of Missouri investors have called my office because
of inability to access their money," Carnahan said
in a statement. She added that she aims to take actions
to "to make these investors whole."
The
action, which also sought information on internal evaluations
and marketing strategies, comes after more than 70 formal
complaints were filed with the Missouri Securities Division
over the last four months, representing more than $40
million of frozen investments.
In
April, the Securities Division launched a full-scale
investigation, requesting documents, e-mails, transcripts
and other records from Wachovia Securities and other
banks.
Wachovia
Securities has not fully complied with these requests,
prompting Thursday's onsite inspection, Missouri officials
said.
However,
a Wachovia spokeswoman said, "Most securities firms,
including Wachovia, are responding to inquiries from
regulators about the auction rate securities industry."
"The
discussions that are occurring today are a part of this
ongoing process," spokeswoman Christy Phillips-Brown
said.
Wachovia,
the nation's fourth-largest bank, is the subject of
arbitration claims and a class action lawsuit that was
filed in New York in March.
In
a regulatory filing in May, Wachovia said the Securities
and Exchange Commission and other regulators are seeking
information concerning the underwriting, sale and subsequent
auctions of municipal auction-rate securities and auction-rate
preferred securities. The interest rates on such securities
are reset at regular auctions. Troubles have arisen
as demand for some high-rate securities dries up as
rates fall.
"Further
review and inquiry is anticipated by the regulatory
authorities and Wachovia will cooperate fully,"
the company said in the filing.
According
to the filing, the bank and Wachovia Securities have
also been named in a lawsuit filed in March in New York.
The lawsuit seeks class action status for customers
who purchased and continue to hold such securities based
on alleged misrepresentations concerning the quality,
risk and characteristics of the securities. The bank
said it "intends to vigorously defend the civil
litigation." ...
July
15
Galvin
Finds The Smoking Gun at UBS.
Forces UBS, The Worst ARPS peddler, to Shine with New
Virtue
by
Harry Newton
UBS
was the worst -- the company I received more emails
complaining of unfeeling UBS brokers and unresponsive
UBS management. It was the first company to write down
the value of its clients' ARPS on its clients' monthly
statements. It was the first company forced to reimburse
some of its customers -- in this case Mass municipalities
-- for selling them stuff they weren't authorized to
buy (certainly without disclosure of what they were
buying). And it was the first company to be sued for
fraud.
Internal
UBS emails discovered by William Galvin secretary of
the Commonwealth of Massachusetts contained apparently
more than enough smoking guns to sue UBS for fraud and,
I'm guessing, sufficient to force them into today's
startling development. Mark my words. UBS is not doing
this out of the goodness of its cold Swiss heart, or
out of concern for its poor suffering customers. Read
the Bloomberg story first and then we'll talk about
ramifications:
UBS
to Buy Back Up to $3.5 Billion of Frozen Shares (Update1)
By Christopher Condon
July
15 (Bloomberg) -- UBS AG, the Swiss bank being sued
for fraud over its sales of auction-rate securities,
plans to buy back up to $3.5 billion of the frozen
securities sold by its brokers and financial advisers.
UBS
clients who purchased auction-rate preferred shares
issued by tax-exempt closed-end funds can get their
money back in full along with unpaid dividends, the
Zurich-based company said today in a statement.
Massachusetts
Secretary of State William Galvin last month sued
UBS, saying investors were told the securities were
safe and easy-to-trade alternatives to cash. UBS said
at the time it will "defend the specific allegations.''
UBS
will finance the repurchases by reissuing the preferred
shares through a trust that will be consolidated on
the bank's balance sheet. The reissued shares will
carry a put option, guaranteeing the holder the right
to sell, and will be marketed to money-market funds
and other institutional investors.
To
contact the reporter on this story: Christopher Condon
in Boston at ccondon4@bloomberg.net.
Last Updated: July 15, 2008 17:06 EDT
You
can read the entire UBS release. Click
here.
Now
here's today's UBS story from Dow Jones:
UBS
Plans New Security To Rescue Auction-Rate Shareholders
By
Daisy Maxey of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--UBS AG (UBS), which is facing
increasing fallout as a result of its sales of auction-rate
securities, said it's working to create a structure
that would allow it to buy back auction-rate preferred
shares.
The
bank is working to develop Trust Preferred Securities
with a liquidity put or similar demand feature. The
new product would permit it to offer to purchase all
auction preferred stock issued by registered closed-end
tax-exempt funds held by eligible UBS advisory and
brokerage clients in UBS accounts at par.
The
new securities, which would be issued in one or more
private placements by the trust, are meant to be eligible
for purchase by money-market funds. The liquidity
feature would be provided by UBS or another highly
rated bank, UBS said in a statement.
UBS
clients hold about $3.5 billion of auction-rate preferred
stock issued by registered closed-end tax-exempt funds
in UBS accounts, the bank's statement said.
Municipalities,
mutual-fund companies, nonprofit institutions, corporations
and student-lending companies borrowed money in the
$330 billion auction-ratesecurities market, where
they obtained long-term financing that had the features
of short-term securities. The rates reset periodically
in auctions conducted and backed by Wall Street firms
until the second week of February, when dealers stopped
supporting the market. Investors were then left stranded
with no way to sell their auction-rate shares.
UBS
is likely anxious to find some liquidity for its clients.
In
June, Massachusetts Secretary of the Commonwealth
William Galvin's office charged UBS Securities LLC
and UBS Financial Services Inc. with fraud for offloading
millions in auction-rate securities to retail clients
as a way to clean out its inventory once it was clear
that the auction market was in trouble. Other states
may follow, and the Securities and Exchange Commission
and the Financial Industry Regulatory Authority are
also looking into sales of auction-rate securities
to retail clients by various firms.
Implementing
the proposed security is dependent on a number of
factors, including legal requirements, UBS said. The
bank said it has been working for several months to
develop the structure and has obtained guidance from
the Department of Treasury in relation to tax considerations,
and met with staff of the Securities and Exchange
Commission regarding aspects of the proposed structure.
It
expects that offers to purchase the auction-rate preferred
shares will come within about 30 days of resolving
regulatory issues.
The
proposed securities appear to be similar to those
planned by sponsors of closed-end funds, including
Eaton Vance Corp. (EV), Nuveen Investments and BlackRock
Inc. (BLK). Whether money-market funds will be willing
to purchase any versions of such securities remains
to be seen.
UBS
had faced mounting concerns due to its sales of the
securities. In addition to the scrutiny by Galvin's
office, UBS Financial Services settled with the Massachusetts
attorney general's office in May to return $37 million
to the Massachusetts Turnpike Authority and 17 municipalities
that invested in auction-rate securities after the
firm agreed that the securities weren't permissible
investments under their official investment mandates.
In
addition, an investor has filed an arbitration claim
against UBS Financial Services Inc. and the global
head of its Municipal Securities Group, David Shulman,
seeking the return of $2.5 million now frozen in auction-rate
securities along with punitive damages for alleged
fraudulent sale of the shares. The claim, filed with
the Financial Industry Regulatory Authority by New
York law firm Stuart D. Meissner LLC., alleges that
the division of UBS misled investors by not providing
material information regarding the liquidity risks
of such securities.
And
Timothy Flynn, a financial advisor who sold millions
in auction-rate securities to municipalities while
working for UBS Investment Services Inc., filed a
federal whistle-blower complaint with the U.S. Department
of Labor against the firm in mid-June, alleging that
he faced retaliation after cooperating with a Massachusetts
investigation into the sales.
-By
Daisy Maxey, Dow Jones Newswires; 201-938-4048; daisy.maxey@dowjones.com
As
to ramifications?
1.
UBS obviously believes it can sell the re-morphed securities
to money-market funds. If they can do it, then all the
issuers -- like Nuveen, BlackRock, Eaton Vance, etc.
-- can also do it. This should speed up the whole redemption
process.
2.
UBS is only one of around nine or so brokerage firms
whose auction rate securities sales practices are being
investigated. I bet there's dirt on all of them -- conversations
and emails they don't want revealed publicly on low-class
web site (like this one). Hence I'm hoping that they'll
all choose valor over secrecy and get us our money back
ASAP. Are you listening Deutsche Bank and Nuveen (the
two perpetrators of the $3.5 million of ARPS I still
am stuck with)?
3.
None of this relieves any ARPS owner (that's you and
me) of the obligation to continue putting pressure on
his brokerage firm, his ARPS issuer... and letting his
local attorneys-general and others know also. You might
also drop Paulson and Bernanke a letter telling them
you can't spend money you can't get to. Until you can
get to it, the economy will suffer.
+++++++++++++
Regulators
press Wall Street to help revive auction-rate securities
By
Joanna Chung, Francesco Guerrera and Ben White in New,York
Published:
July 14 2008 03:00 in the Financial Times (the pink
paper)
Wall
Street banks are coming under growing pressure from
US regulators to help unfreeze the market for auction-rate
securities, one of the biggest casualties of the credit
crunch.
Officials
from the enforcement division of the US Securities and
Exchange Commission are talking to a number of banks
in an effort to find solutions to restore liquidity,
according to several people briefed on the matter.
The
discussions are focusing on parts of the $330bn (€207bn)
market that have affected retail investors unable to
access their investments since liquidity started to
dry up in February.
The
SEC has floated the idea of large players in the auction-rate
securities market, such as Citigroup, Merrill LynchUBS
and Morgan Stanley, buying back some of the securities
at their original price, several people said.
However,
the plan is being resisted by several banks. They argue
that holding such illiquid securities, whose price has
fallen sharply, would lead to further writedowns and
losses, worsening their financial plight and depleting
their capital base.
"The
auction-rate market will be dead for a long time and
the last thing we want to do is hold this stuff on our
balance sheet," said one senior banker.
The
SEC, which is among the regulators investigating how
the securities were sold to investors and whether they
were informed of the risk they could become illiquid,
declined to comment, as did the banks.
However,
people close to the situation say some banks are willing
to devise a solution, not least to avoid draconian
actions by regulators and to limit reputational damage.
Many
investors have treated auction-rate securities as they
would cash deposits or money market accounts. While
the securities are long-term debt, interest rates are
periodically reset at auctions supported by banks.
But
the sector started to falter as dealers stepped back
and stopped taking on unsold securities in auctions
they managed.
A
dozen state securities regulators and Andrew Cuomo,
New York's attorney- general, are conducting inquiries.
Nearly all the leading investment banks are the subject
of investigations into the auction-rate market's failure.
More
than half of the outstanding securities have been refinanced
or bought back by the issuers, according to industry
sources. (This is not true. HN)
Harsh
lesson in student lending
By
Michael McDonald | Bloomberg News
July 14, 2008
Five
months after the collapse of the $330 billion auction-rate
securities market, bonds backed by student loans show
no signs of recovering. And that means no new house
for Martin Doolan.
The
former corporate turnaround executive delayed buying
a home in Dallas because he can't access the $4.85 million
he has in student loan auction-rate bonds without selling
them at a loss of at least 20 percent. Doolan said he
bought the securities over the past two years through
Zurich-based UBS AG because they were billed as easy
to turn into cash, like money market funds.
"I
was advised these were the safest" of all the auction-rate
securities, said Doolan, 68, who declined to identify
his financial adviser at UBS.
Kris
Kagel, a spokesman for UBS, said the firm doesn't comment
on individual cases, though it is "working with
clients on a case-by-case basis to address their immediate
liquidity needs," including offering loans.
The
$85 billion of auction-rate securities sold by state
agencies and private lenders to finance student loans
are emerging as the most toxic type since Wall Street
dealers abandoned the auction-rate market in February
amid worries about the financial health of the bond
insurers who guaranteed the debt.
The
auctions—held every seven, 28 or 35 days to set
interest rates on the student loan debt—fail about
99 percent of the time, leaving investors with no choice
but to take discounts to get out of the bonds.
Companies
that hold student-loan auction-rate securities wrote
down the value of the debt this year, some by as much
as 35 percent, according to a survey by Pluris Valuation
Advisors LLC. More than two-thirds of the publicly traded
companies tracked by Pluris marked down the debt, compared
with half that took a loss on their municipal auction-rate
debt or securities sold by closed-end funds.
"The
entire issue is one of lack of liquidity, and the very
poor returns," said Espen Robak, president of Pluris,
a New York-based firm that helps companies place values
on their holdings.
Auction-rate
bonds, invented about two decades ago, allowed local
governments, hospitals and universities to borrow money
for the long term at cheaper, short-term rates.
Until
mid-February, banks supported prices by bidding for
bonds that went unsold. Once the banks stopped buying,
interest costs soared as high as 20 percent because
the failed auctions triggered a penalty rate for issuers.
While
rates on student loan securities initially rose, they
have ultimately fallen because the bonds contain provisions
that prevent rates from rising for an extended period
of time. The solvency of the lenders is dependent on
their ability to borrow at lower rates than those at
which they lend.
According
to Moody's Investors Service, more than half the student
loan securities contain these provisions. That has resulted
in interest on at least $8.6 billion of the debt falling
to zero percent as the auction failures persisted, Bloomberg
data show.
"That
made them, needless to say, totally unattractive to
other investors," said David Hartung, a structured
finance analyst in New York at Dominion Bond Rating
Service Ltd.
The
collapse of the auction-rate market compounded the financial
problems for lenders after Congress last year cut the
subsidies it makes to those who sell bonds backed by
federally guaranteed loans. More than 100 lenders curtailed
or ceased making federally guaranteed loans this year,
forcing lawmakers to intervene by expanding its direct
lending program, according to data from FinAid.org,
a Pennsylvania-based Web site about student loans.
"There
is no easy solution," said Andrew Davis, executive
director of the Illinois Student Assistance Commission,
which has $880 million in auction-rate securities outstanding
in the market. "The alternatives for us in raising
new money are significantly more expensive."
July
9
Credit
Suisse Helps With U.S. Probe of Former Brokers (Update2)
By
Warren Giles
July
9 (Bloomberg) -- Credit Suisse Group, Switzerland's
second-biggest bank, said it is helping U.S. prosecutors
in an investigation of two former cash management employees
who resigned after engaging in "prohibited activity''
related to the sale of auction-rate debt.
Investigators
are looking into whether the brokers lied to investors
about how their funds were put into short-term securities,
the Wall Street Journal said, citing people familiar
with the situation. The investigation, which doesn't
target the Swiss bank, is the first criminal probe stemming
from the collapse of the auction-rate market, the newspaper
said.
Credit
Suisse said it found out about the two employees' actions
almost a year ago and notified regulators. The brokers
were immediately suspended and resigned in September,
the Zurich- based bank said in an e-mail.
The
employees "violated their obligations to Credit
Suisse and to our clients,'' the bank said. "We
promptly notified our regulators when this matter arose
last year and we have continued to work closely with
them.''
Auction-rate
securities, with maturities of 20 years or longer, were
treated like money-market investments by individuals
and corporations because they were easy to buy and sell
at the auctions run by dealers to set rates, typically
every seven, 28 or 35 days. The $330 billion market
was used by states, cities, hospitals, student loan
agencies and mutual funds to raise money.
Demand
for the securities started to evaporate last year after
an accounting ruling determined that they should be
classified by corporations holding the securities as
long-term, not short-term, holdings. Investors, who
viewed the securities as money-market instruments, also
began to flee because much of the market was insured
by companies facing losses from guaranteeing subprime
mortgage-related debt.
Securities
dealers that routinely supported the auctions for almost
two decades suddenly abandoned the market in February
under the weight of their own credit losses, causing
thousands of auctions to fail. Issuers such as the Port
Authority of New York & New Jersey were left paying
penalty rates as high as 20 percent and investors got
stuck with bonds they couldn't sell.
The
former Credit Suisse brokers, who were based in New
York City, later took jobs with Morgan Stanley, the
Journal said. An unidentified Morgan Stanley spokeswoman
said the pair were fired on July 7, according to the
newspaper.
The
criminal probe adds to civil complaints and lawsuits
filed by investors over how banks sold auction-rate
debt.
Massachusetts
Secretary of State William Galvin last month sued UBS
AG for fraud, alleging Switzerland's largest bank told
investors the long-term bonds were "safe, liquid
cash alternatives,'' when the bank knew the securities
weren't. UBS "stepped up'' its campaign to sell
the bonds to individual investors as cash managers at
corporations began shunning the securities last year,
Galvin said. UBS has said it will defend itself.
Massachusetts
is part of an 11-state task force that is investigating
how banks marketed auction-rate securities, while New
York Attorney General Andrew Cuomo, in a separate probe,
subpoenaed 18 banks and financial firms in April. The
SEC and Financial Industry Regulatory Authority, a self-regulatory
body, have been investigating sales practices and disclosures
made to investors, according to filings by brokerage
firms.
At
least 24 proposed class-action lawsuits have been filed
against brokerages since March.
To
contact the reporter on this story: Warren Giles in
Geneva at wgiles@bloomberg.net
'Banker's
Dream Market' Appears in UBS Muni Lawsuit
Commentary by Joe Mysak
July
1, 2008 (Bloomberg) -- "This is a banker's dream
market.''
That's
how David Shulman, head of UBS AG's municipal securities
group, described the freeze-up of the $330 billion auction-rate
securities market in an e-mail to a colleague earlier
this year.
The
message was sent on Feb. 14, a day after the firm decided
to stop bidding in the auctions, which forced most issuers
of the securities to start paying penalty rates, sometimes
10 percent or more.
To
avoid paying such rates, issuers such as states and
municipalities sought to convert their auction-rate
debt to fixed, or to variable-rate backed with a letter
of credit.
"After
the fails -- I am being bombarded!!!!'' wrote banker
Seema Mohanty to Shulman. "We have a money-making
opportunity,'' she wrote. Referring to the municipal
issuers, she added: "They are desperate.''
Massachusetts
Secretary of State William Galvin describes the scenario
a little differently: "Within a day after failing
its auctions and leaving investors stuck with instruments
that were no longer liquid, UBS seized upon the opportunity
to profit from this calamity of their own making.''
The
UBS e-mails are featured in Galvin's administrative
complaint against the firm for defrauding investors,
filed on June 26. They provide the back-story to the
whole sorry episode, which is still unfolding.
Falling
Apart
Galvin's
complaint says that UBS sold auction-rate paper to investors
in his state without disclosing that the whole market
was falling apart. The firm's brokers told clients the
auction- rate securities were cash equivalents, and
they could get their money at any auction.
In
fact, when UBS and most other securities dealers stopped
supporting the market, it collapsed, leaving investors
holding billions of dollars of paper they couldn't get
rid of.
Galvin
wants UBS to make its investors whole, by giving them
back 100 percent of their money and making good any
losses incurred by those who sold their holdings at
a discount.
For
its part, UBS says it intends to fight to the death,
of course, and that it is committed to its clients'
best interests.
In
the meantime, issuers are converting their auction-rate
paper to give investors the ability to cash out of it.
Some closed-end funds are trying to do the same for
holders of preferred shares who are similarly trapped.
Man
the Pumps
The
Galvin complaint, posted on his Web site, is 100 pages,
and the various exhibits, including marketing materials,
account statements and e-mails, take up an additional
276 pages. The story they tell isn't a simple one.
There
are actually two tales here. There's the story of how
investors were sold a product by people who didn't seem
to have a clue as to how it really worked. This doesn't
excuse them, but all investors who were scarred in this
affair and who now hate their brokers should give this
material a read.
Then
there's the story of the auction-rate market itself,
and how UBS was frantically trying to hold it together
behind the scenes.
The
last time I read such spellbinding stuff was in "Ship
of Gold in the Deep Blue Sea,'' a 1998 book about how
the SS Central America went down in a horrific storm
off the coast of the Carolinas in 1857, and how more
than a century later, its cargo of gold coins and bars
was retrieved from the ocean floor.
Bogus
Market
The
first story is straightforward. Here, the brokers said,
buy this stuff, it's just like a money-market fund,
except you get a little more yield.
The
second story is as grim as that of the guys at the pumps
trying to save the sinking ship. Here you have executives
talking about how the market is dying, how the auction-rate
paper is like "an albatross,'' even as they are
being urged by the higher-ups to get rid of inventory
that keeps piling up as they buy more and more of it
to prevent auctions from failing.
How
bogus was this market? From Jan. 1, 2006, to Feb. 28,
2008, UBS submitted support bids in 27,069 auctions
for preferred shares, and its bids were drawn upon to
prevent auctions from failing 13,782 times. During the
same period, the firm submitted support bids in 30,367
auctions for municipal and student-loan securities,
and its bids were drawn upon 26,023 times.
The
funny part about it all is that it truly is the "banker's
dream market'' now as issuers convert their auction-
rate paper and even variable-rate securities backed
by the mainly moribund bond insurers. This might turn
out to be another record year for municipal bond issuance.
Just
not for UBS, which on May 6 announced it was getting
out of the municipal bond business.
(Joe
Mysak is a Bloomberg News columnist. The opinions expressed
are his own.)
To
contact the writer of this column: Joe Mysak in New
York at jmysakjr@bloomberg.net
June
27
UBS
E-Mails Show Conflicts With Auction-Rate Clients (Update2)
By
Michael McDonald
June
27 (Bloomberg) -- UBS AG was attempting to liquidate
an $11 billion "albatross'' of auction-rate bonds
by selling the debt to individual investors as the market
for the securities started to collapse, according to
company e-mails.
While
executives at the Zurich-based bank identified the hazards
of auction-rate securities in August, they simultaneously
began to ``mobilize the troops,'' holding more than
a dozen conference calls with salesmen and giving them
new marketing materials to promote the bonds, according
to e-mails from David Shulman, the head of UBS's municipal
securities group. ``The pressure is on to move inventory,''
he said in an Aug. 30 note.
The
e-mails between Shulman and UBS executives were disclosed
in a lawsuit filed yesterday by Massachusetts Secretary
of State William Galvin, who claimed the bank committed
fraud by selling the bonds as the equivalent of money
market securities without disclosing to investors that
the $330 billion market was lurching toward a breakdown.
Investors who own the bonds now can't get their money.
UBS
officials considered pulling out of the auction-rate
market, where yields are set through periodic bidding,
as early as September, five months before the company
stopped supporting the programs, the e-mails show. The
bank accumulated bonds by acting as a buyer of last
resort to prevent auctions it managed from failing.
Yields are set through auctions every seven, 28 or 35
days.
Demand
Evaporates
``I
have legal looking into options to exit some business
lines,'' Shulman wrote on Sept. 6 to Panagiotis Koutsogiannis,
a risk manager at the firm in London. ``We are looking
into discounting the paper to distribute as well as
potentially resigning from supporting as senior manager.''
Demand
for auction-rate bonds evaporated last year as corporate
cash managers stopped buying after an accounting ruling
determined that they should be classified as long-term,
not short-term, investments. Companies liquidated $70
billion of auction-rate securities in the last half
of 2007, according to Chicago-based Treasury Strategies,
which consults with companies on money management.
Investors,
who viewed the securities as money-market instruments,
also began to flee because much of the market was insured
by companies facing losses from guaranteeing subprime
mortgage-related debt.
Securities
firms that supported the auctions for almost two decades
abandoned the market in February, causing thousands
of auctions to fail. Issuers such as the Port Authority
of New York & New Jersey were left paying penalty
rates as high as 20 percent and investors got stuck
with bonds they couldn't sell.
SEC,
State Probes
The
U.S. Securities and Exchange Commission and at least
nine state regulators are investigating how banks sold
the bonds. Individual investors have also filed lawsuits
and complaints with state and federal regulators.
``Here
you've got these e-mails, and that could give prosecutors
a more favorable forum,'' said John Coffee, a Columbia
University professor who specializes in corporate law.
Karina
Byrne, a spokeswoman for UBS in New York, said in a
statement yesterday the bank was ``disappointed'' with
Galvin's complaint and ``will defend the specific allegations.''
Zurich-based
UBS is cutting 5,500 jobs, shutting businesses at the
investment-banking unit and trying to stem client defections
after posting the highest net losses in the subprime
crisis of any bank in the world. The U.S. Justice Department
is also investigating whether it may have helped clients
evade American taxes.
Increasing
Risks
The
bank sold $42 billion of auction-rate securities for
municipalities and student loan corporations between
2002 and 2007, second to New York-based Citigroup Inc.,
according to data compiled by Thomson Reuters. The bank
earned fees from underwriting and managing the auctions.
Galvin
is seeking to force UBS to liquidate all the auction-rate
bonds it sold to investors in Massachusetts, which he
estimated totals $190 million. He is also probing Merrill
Lynch & Co. and Bank of America Corp.
"The
increasing risks that developed in 2007 were known to
the financial services firms that sold them, but were
not disclosed to investors who bought them,'' said J.
Boyd Page, an attorney at Page Perry LLC in Atlanta
specializing in securities fraud.
'Huge
Albatross'
UBS's
auction-rate holdings began to balloon last August,
frequently topping a $2.1 billion-limit set by its risk
management department, according to Galvin's investigation.
Shulman, who is based in New York, was pressured to
unload $1 billion as the firm looked to free up capital,
the e-mails show.
"This
is a huge albatross,'' Shulman wrote in an Oct. 31 e-mail,
referring to the growing inventory. Shulman, who didn't
return calls seeking comment yesterday, is 46 according
to voter registration and campaign finance records obtained
by Bloomberg News. He isn't personally being sued by
Galvin.
UBS
increased marketing efforts to individual investors
in August. Financial managers, who told Galvin they
were never informed about how risky the securities could
be, were paid 40 percent of the marketing fee from the
periodic auctions, according to e-mails.
Shulman
sold his own auction-rate holdings last year, telling
Galvin during a deposition that was released as part
of the documents that his ``risk tolerance'' changed.
Conference
Calls
UBS
managers and financial advisers in the wealth management
division held 15 conference calls to discuss sales between
Aug. 22 and Feb. 15, according to Galvin's investigation.
When the market collapsed in February it was holding
as much as $11 billion of the debt, the documents show.
"We
need to move this paper and have to explore all angles
possible,'' Shulman said in a Dec. 11 e-mail to Paul
Wozniak, co-head of the student loan group at UBS. ``We
need to do this as quickly as possible.''
The
collapse of the auction-rate market didn't stop the
bankers from seeing an opportunity. When hundreds of
auctions were permitted to fail in February, many municipalities
were forced to pay interest rates approaching 20 percent,
and they called their bankers looking to refinance the
debt, which would generate new underwriting fees.
``We
have a money making opportunity,'' Seema Mohanty, an
investment banker at UBS, wrote to Shulman on Feb. 14.
``They are desperate.''
Shulman
in an e-mail that day called the refinancing of the
bonds ``the single greatest opportunity in decades for
us to leverage our banking relationships.''
``This
is a bankers dream market,'' he wrote.
To
contact the reporter on this story: Michael McDonald
in Boston at mmcdonald10@bloomberg.net.
June
29
Fair
Game
E-Mail That Investors
Might Like to Read
By GRETCHEN MORGENSON
The New York Times
EVERY
few years, the conflicts of interest so deeply embedded
in the Wall Street business model emerge from the shadows
for all to see. Coming to light last week, courtesy
of Massachusetts regulators, was UBS’s dual roles
in the auction-rate securities market, which have had
devastating effects on the people and institutions that
invested in them.
Because
every big brokerage firm that participated in this market
faced the same conflicts as both underwriters of the
securities and managers of the auctions that set their
prices, similar ugliness will likely turn up elsewhere
as regulators continue their digging.
Auction-rate
securities are preferred shares or debt instruments
with rates that reset regularly, usually every week,
in auctions overseen by the brokerage firms that originally
sold them. They have long-term maturities or, in the
case of the preferred shares, no maturity dates whatsoever.
The securities are issued by municipalities, student-loan
companies, closed-end funds and tax-exempt institutions
like hospitals and museums.
In
mid-February, the $300 billion market for these instruments
collapsed, trapping investors who had been told that
they were safe and easy to cash in — leaving both
wealthy investors and those of modest means unable to
finance their small businesses, buy homes, pay college
tuition and otherwise use their money as they had planned.
After
receiving a flood of complaints from investors in his
state, William F. Galvin, secretary of the Commonwealth
of Massachusetts, subpoenaed documents from some major
market participants. Thursday, he released materials
produced by UBS and filed a civil suit against the firm,
accusing it of defrauding investors.
MR.
GALVIN’S complaint says UBS misled investors by
peddling auction-rate securities as cash equivalents
and ultrasafe. But the suit also asserts that UBS dumped
these securities on individual investors to minimize
its own exposure to the risks inherent in keeping them
on its own books.
Karina
Byrne, a spokeswoman for UBS, said the firm would defend
itself. “Contrary to the allegations, UBS is committed
to serving the best interests of our clients. We continued
to support the auction rate securities market longer
than any other firm,” she said in a statement.
“We have offered our clients loans of up to 100
percent of the par value of their A.R.S. holdings at
preferred lending rates. UBS, our clients and clients
of other industry participants all share the impact
of this unprecedented loss of liquidity in the A.R.S.
market.”
Nevertheless,
the e-mail messages attached to the Massachusetts complaint
support Mr. Galvin’s accusations in stunning black
and white.
The
problem UBS faces began in August, when the credit markets
seized. Corporations — which are big buyers of
auction-rate securities because of their slightly-higher-than-money-market
yields — were beginning to sell. New buyers had
to be found or UBS, as underwriter and auction manager,
would be stuck with the securities. The firm was going
into shell shock because of losses from subprime mortgages
on its books, so it needed to find a way out of the
auction-rate mess.
Throughout
the autumn, increasingly frantic e-mail messages flew
among UBS executives. “As you can imagine during
these stressful times, the pressure is on to move our
inventory,” wrote David Shulman, global head of
fixed income distribution at UBS, on Aug. 30. “I
am aware that JPM and Citi are on all ‘alert’
in the same fashion with their retail groups.”
Joel
P. Aresco, chief risk officer for the Americas, sent
this message on Nov. 15: “Why the continual increase”
in the inventory of auction-rate securities? “What
measures are being taken to reduce this exposure?”
On
Dec. 11, Mr. Shulman wrote: “I am pushing every
angle here to move product.”
As
it turned out, some of that product being moved was
Mr. Shulman’s own stake in auction-rate securities,
the complaint said. He testified that he began selling
in September, because of his “risk tolerance.”
By Dec. 12, he had dumped all his holdings.
UBS
declined to make any of these executives available.
On
Feb. 12, just days before the auctions ground to a halt,
another UBS executive wrote: “We need to beat the
bushes harder than ever to unload this paper.”
UBS’s
Web site, meanwhile, continued to identify auction-rate
preferred stock as a highly liquid cash alternative,
the lawsuit said.
“The
Massachusetts complaint alleges that sophisticated Wall
Street insiders, knowing that the market for auction-rate
securities was failing, foisted these same securities
off on innocent public investors through profoundly
deceptive sales practices,” said Lewis D. Lowenfels,
a securities law expert at Tolins & Lowenfels who
represents a handful of auction-rate securities investors.
“If these allegations prove to be true and prevalent
throughout the Wall Street community, then civil actions
awarding punitive damages and possibly even criminal
actions may well become widespread.”
UBS’s
clients were not the only ones that the firm’s
executives appear to have misled. Its brokers, too,
seem not to have been told about the risks that auctions
could fail and their clients could be locked into their
holdings.
“We
continue to be frustrated by the lack of information
that they are providing to us,” one broker wrote
about the firm’s auction-rate unit in a Jan. 10
message. “Given the strange and difficult environment,
it is imperative that we are fully aware of the risk
we are taking. We do not want to imperil any relationships
over something as ‘simple’ as their cash investments.
The lack of clarity regarding ARPS is contrary to our
focus on ‘improving the client experience.’
” (ARPS refers to auction-rate preferred shares.)
NO
Wall Street firm likes to acknowledge that conflicts
of interest bedevil its business. And UBS says its clients
come first.
But
one of the e-mail messages amassed by Mr. Galvin stands
out for its cogent discussion of these troubling biases.
It was written by Joe Gallichio, a managing director
in the municipal finance department at UBS, on Feb.
21, after the market for auction-rate securities had
frozen.
“As
things change they also remain the same,” Mr. Gallichio
begins. “What we face now in the firm as related
to muni short term is classic Wall Street. In its core,
it is trading versus sales, risk management versus client
franchise.”
“As
a firm we tell people we are client focused,” he
went on. “So if the client is always right, then
we should fix the problem this product has created in
WM,” the firm’s wealth management unit, which
includes retail investors. “To let WM and the firm
as a whole go through costly litigation, the loss of
investor confidence and significant assets, the cost
in management time, legal and compliance, IT spend,
the total distraction from our core growth strategy
and overall employee morale — will certainly be
in excess of the multibillion-dollar hit to balance
sheet we would take by just buying the rest of the assets
from WM. I just don’t get it.”
Reached
Friday, Mr. Gallichio declined to comment. He didn’t
have to. His e-mail said it all.
Keep
reading....
June
26 and 27
Galvin
charges UBS with fraud
By Chris Reidy and Beth Healy, Boston Globe staff
Massachusetts
Secretary of State William F. Galvin said today that
he has charged UBS Securities LLC and UBS Financial
Services Inc. "with fraud and dishonest conduct
in retail sales of auction rate securities to investors
who were told by their UBS representative that the investments
were safe, liquid 'cash alternatives' when UBS knew
they were not."
William F. Galvin, Mass Secretary of State
UBS
today vowed to defend itself against Galvin's allegations.
The
Globe reported today that Galvin's action was expected.
That story is below.
In
a statement emailed to the Globe, UBS referred to auction
rate securities as ARS.
"We
are disappointed that the Massachusetts Securities Division
has filed this complaint against us, as we, our peers,
and the industry work toward solutions," UBS said.
"We continued to support the auction rate securities
market longer than any other firm. We held approximately
$11 billion worth of ARS at the end of 1Q08. We have
offered our clients loans of up to 100 percent of the
par value of their ARS holdings at preferred lending
rates. UBS, our clients, and clients of other industry
participants all share the impact of this unprecedented
loss of liquidity in the ARS market."
UBS
also said: "We will defend the specific allegations
of the complaint. Contrary to the allegations, UBS is
committed to serving the best interests of our clients.
We will continue to work with the industry toward broad
solutions."
Galvin
said in a statement today: “UBS pushed the sales
of these instruments as ‘cash alternatives’
without telling their customers of their vulnerabilities.
Nor did UBS tell them that the only ARS products being
offered were what UBS had underwritten and that UBS
was trying to unload at the eleventh hour. The game
was fixed; only the customers were in the dark.”
To
read the complaint that Galvin's office filed, please
click here.
(If it doesn't appear immediately, be patient. It's
101 pages.)
Read
also the column on the right for a chronological order
of some of UBS's acts. And read the next story on the
same subject, but from the New York Times.
June
27
Suit
Claims UBS Misled Investors
By
Gretchen Morgenson, the New York Times
The
top securities regulator in Massachusetts has sued UBS
on the grounds of fraud, saying that the firm misled
clients when it sold them auction-rate securities and
that it pushed the increasingly risky instruments on
individual investors to reduce its own potential losses.
The
roughly $300 billion market for auction-rate securities
ground to a halt last February when buyers all but vanished.
Existing holders were locked into shares and notes issued
by municipalities, tax-exempt institutions, student
loan companies and closed-end funds. Many of these investors
say they were told that the securities were as safe
and liquid as cash and had no idea that their holdings
could be tied up indefinitely.
In
the complaint, William F. Galvin, secretary of the Commonwealth
of Massachusetts, cited numerous and sometimes urgent
email messages indicating that as early as last August
UBS executives knew the market was imperiled. As sellers
began to outnumber buyers, the messages show, UBS executives
urged the sales force to promote the notes and shares
as aggressively and widely as possible.
“The
thing that is most amazing to me is what a comprehensive
and deliberate strategy this was by UBS,” Mr. Galvin
said. “They wanted to reduce their inventory, so
they decided to gear up their sales campaign using cashlike
arguments deliberately.”
Mr.
Galvin wants UBS to buy investors out at the prices
they paid for the securities and to make up any losses
for clients who have sold their stakes.
A
UBS spokeswoman expressed disappointment that the lawsuit
had been filed Thursday and said the firm was working
on solutions to the frozen market for auction-rate securities.
“We will defend the specific allegations of the
complaint,” the firm said in a statement. “Contrary
to the allegations, UBS is committed to serving the
best interests of our clients.”
Many
Wall Street firms sold auction-rate securities to clients
and acted as underwriter to issuers that needed capital.
Recently, some of the issuers, including Eaton Vance
and John Hancock, have bought investors out of their
frozen holdings. But the only relief offered by Wall
Street firms like UBS has been to allow their clients
to borrow against the value of their holdings.
Auction-rate
securities are debt obligations whose interest rates
are set at auctions every 7 to 35 days. The bonds typically
have maturities of 30 years, but the preferred shares
have no maturity dates.
A
true auction, however, involves a meeting of buyers
and sellers to determine the price and yield of the
securities. But Wall Street firms in charge of the auctions
had stepped in with their own capital in recent years;
it was easier than locating thousands of buyers to meet
up with sellers every week or so.
As
the credit crisis deepened last year, the firms no longer
had as much capital to devote to keeping the auctions
going. Investors were stuck.
According
to a Dec. 15 email message attached to the complaint,
UBS underwrote $43 billion of the securities, or about
14 percent of the total market. That message also estimated
that the wealth management unit of UBS, which includes
individual investors, held $33 billion of auction-rate
securities.
The
Massachusetts complaint identified David Shulman, UBS’s
global head of fixed income distribution, as a major
participant in the firm’s effort last fall to unload
its inventory of auction-rate securities. But in August,
even as he was urging employees to drum up clients to
buy the securities, Mr. Shulman began selling his personal
stake in the instruments, the complaint said. By Dec.
12, Mr. Shulman had sold his entire position in the
securities.
In
testimony before Massachusetts investigators, Mr. Shulman
said that his “risk tolerance” drove him to
sell. He said he replaced the securities with issues
that were more liquid and that seemed to offer “more
protection,” according to the complaint.
UBS
said Mr. Shulman would not be available for comment.
The
internal UBS documents released by Mr. Galvin show that
the stress in the market for auction-rate securities
began last August and continued through the fall as
the firm’s institutional customers moved to sell
their holdings. This required UBS to find buyers for
the securities or to take them onto its books.
“It
is critical that we reach out on a wholesale basis away
from our traditional buying base to recognize this value
and similarly understand the credit dynamics,”
a Sept. 12 email message stated. “I want to broaden
our distribution base and need us to better market this
product and educate our groups.”
The
firm’s individual investor clients were a target,
the complaint contends. An August email message said:
“We have encouraged” wealth management partners
“to mobilize the troops internally to focus on
value so that we can move more product through the system.”
But
as the year was ending, the problem was unresolved.
Asking for a sales force call on the matter on Dec.
11, Mr. Shulman wrote: “We need to move this paper
and have to explore all angles possible. ... we need
to do this as quickly as possible. ... please work on
this priority.”
So
far, almost 100 investor arbitration cases have been
filed against UBS and other firms that sold these securities.
Stuart D. Meissner, a New York lawyer, represents a
handful of investors who have brought such cases. He
said the messages attached to the Massachusetts complaint
should help investors who have sued UBS. “What
they released today opens up the window toward punitive
damages in any arbitrations filed against UBS,”
he said. “There are smoking guns in this report
that UBS will have a difficult time circumventing.”
State
set to allege
securities fraud
Complaint
to cite offerings by UBS;
Seeks fine, return of investor funds
By
Beth Healy, Boston Globe Staff | June 26, 2008
Massachusetts
securities regulators today are expected to file civil
fraud charges against UBS Financial Services Inc. for
allegedly selling investments it claimed were as safe
as cash even though the Swiss firm knew they were risky,
according to a state official briefed on the case.
The
complaint, to be filed by the state Securities Division,
is expected to allege that UBS knowingly let its brokers
sell so-called auction-rate securities - a type of bond
issued by nonprofits and municipalities - without warning
investors that they might have trouble getting their
money back, the Massachusetts official said.
UBS
spokeswoman Karina Byrne said the firm had not yet been
notified of any complaint. "UBS has been providing
information to the Massachusetts Securities Division
and we are committed to helping our clients who have
been adversely affected by the unprecedented marketwide
loss of liquidity in auction rate securities,"
she said.
The
Globe previously reported that UBS brokers were still
making sales early this year, when the firm knew the
multibillion-dollar trading market for these securi
ties was on the brink of collapse - another victim of
the credit crisis that was then sweeping financial markets.
The
market did indeed collapse on Feb. 13 and has remained
closed since, leaving trapped investors with an estimated
$220 billion worth of securities they cannot sell.
The
state is looking to force UBS to return all investor
funds in these investments and will seek to have the
firm pay a fine.
Last
month, UBS agreed to buy back $37 million worth of these
securities sold to 17 Massachusetts towns and cities
and to the Massachusetts Turnpike Authority, under an
agreement with Attorney General Martha Coakley.
Little
known before the market froze, auction-rate securities
have ensnared the savings of thousands of investors
across the country, many of them retirees who put their
life savings into the investments on the advice of their
brokers.
As
reported by the Globe, UBS investment bankers were warning
some large clients of the market's looming problems
while, at the same time, continuing to permit brokers
to sell the investments to individual investors without
providing them with similar warnings.
As
a result, clients seeking risk-free investments purchased
securities they were led to believe would be as safe
as money market funds. Indeed, even many brokers from
UBS and other investment firms appear to have been surprised
by the market's shutdown.
Massachusetts
regulators have been investigating UBS and two other
firms, Banc of America Investment Services Inc. and
Merrill Lynch & Co., since March, shortly after
the auction-rate markets failed. Those investigations
are ongoing, according to the state official. New Hampshire
regulators also are probing UBS.
Auction-rate
securities are primarily the long-term debt of student
lenders and municipalities. They traded for years in
private markets run by brokers, where weekly or monthly
auctions reset the interest rates on the securities.
Typically, those rates were a little higher than those
of money-market funds.
What
most investors didn't know was that the auction-rate
market functioned only as long as buyers and sellers
placed bids for the bonds on a routine basis. The brokers
who ran the auctions, including UBS, in February decided
to stop trying to keep the auctions going by using their
own funds to buy the bonds.
One
of the many people interviewed by state investigators
was Richard Stahl, a retired auto dealer in Hollis,
N.H., whose ordeal was detailed by the Globe. He has
$1.4 million tied up in auction-rate securities, half
in bonds issued by a New Hampshire student lender. That
student lender had been advised by UBS, its investment
banker, to offer a sharply higher interest rate to generate
demand for its bonds if the market began to shut.
The
lender, the New Hampshire Higher Education Loan Corp.,
agreed to the higher rate deal in mid-December. It did
so "at the suggestion of UBS Securities LLC, its
investment banker and broker-dealer, in order to respond
to disruptions in the auction-rate securities market
and attempt to prevent 'failed auctions,' " the
lender said in a letter to investors on its website.
But
individual investors have said that UBS did not share
its concerns about the market with them. Weeks later,
in January, a UBS broker sold the New Hampshire group's
bonds to Stahl, promising him the investments were as
safe as cash. Stahl said he received no warning about
the bonds' risks.
In
February, Stahl learned that he could not sell the bonds
because the trading market had closed.
In
May, UBS stopped listing these investments under "cash"
on customer statements and started listing them under
the category of "fixed income," or bonds.
The change is an acknowledgement that the securities
were not equivalent to cash, but in fact carried risks,
as do bonds, which can fluctuate in value.
UBS
also has been marking down the value of these investments
on customer statements. The firm has reduced the value
of some student-loan and other auction-rate bonds by
at least 5 percent, and sometimes by much more, according
to customer statements reviewed by the Globe.
Lance
Pan, director of investment research at Capital Advisors
Group Inc. in Newton, said UBS and other investment
banks should buy back the securities. "Investment
bankers can and should take them back on the balance
sheet. I don't see why they don't do that, for business
reasons," Pan said.
Beth
Healy can be reached at bhealy@globe.com.
June
26
Wall
Street Sold Auction-Rate Debt, Warned Issuers (Update1)
By
Darrell Preston and Michael McDonald
June
26 (Bloomberg) -- Yanping Cui, 57, says she invested
in auction-rate bonds last December at the urging of
a broker at UBS AG in Long Beach, California. The same
month, UBS told one of the issuers of those securities,
a New Hampshire student-loan agency, that the $330 billion
market was in danger of failing.
That's
exactly what happened in February, when mounting mortgage
losses forced dealers who underwrote and managed the
market for more than 20 years to stop acting as buyers
of last resort. Cui was told she wouldn't get her money
back until the market recovered.
"He
said it's very safe and as liquid as possible,'' Cui
said of the advice she received from UBS broker Brian
Meehan. "I'm so angry. That's my bloody money.''
Meehan, now at Wells Fargo Investments in Newport Beach,
declined to comment.
Cui
is one of dozens of investors who say they were sold
auction-rate securities as a low-risk alternative to
cash at the same time underwriters, including UBS and
Citigroup Inc., were telling issuers that demand was
softening, bond documents and interviews with investors
show.
The
chronology shows that dealers "knew they didn't
have enough demand,'' said Christopher "Kit'' Taylor,
executive director of the Municipal Securities Rulemaking
Board from 1978 to 2007, who now consults investor groups
on financial markets and regulation. "They were
not telling the other side of the story.''
Massachusetts
Charges
At
least 24 proposed class-action lawsuits have been filed
against brokerages since March, and a nine-state task
force is examining how the firms marketed the securities.
Those burned in the meltdown see it as a case of Wall
Street hiding known risks from investors, much like
the dot-com scandal over former Merrill Lynch &
Co. analyst Henry Blodget, who once advised buying a
stock while privately calling it "junk.''
"Everybody
was just rolling into this market and trading on the
basis of what the salespeople told them,'' said Joseph
Mason, a finance professor at Louisiana State University
in Baton Rouge who follows securities markets. "As
long as everything keeps chugging along that is fine,
but when the market turns, we're done.''
Massachusetts,
part of the task force, charged UBS with fraud today
for its sales of auction-rate securities to investors
in the state, Secretary of State William Galvin said.
The complaint alleges UBS told investors the long-term
bonds were "safe, liquid cash alternatives'' when
the bank knew the securities weren't.
"A
Lot of Doughnuts"
"They
were selling me their junk student-loan bonds, knowing
the market was going down,'' said Jimmy Walker, 53,
who owns a doughnut business in Dallas and who bought
$1 million of auction-rate securities on Jan. 23 from
Bank of America Corp.
He
says his banker brought in a broker who recommended
the securities and never mentioned anything about auctions.
"It took a lot of doughnuts to get $1 million in
the bank,'' Walker said. "That's my life savings.
I'll be dead by the time I collect.''
Bank
of America spokesman Matt Card said the bank doesn't
discuss individual cases. The Charlotte, North Carolina-based
bank, like other firms, has offered loans to clients
stuck in the securities who need money immediately.
"The
global credit markets have been going through an unprecedented
period of dislocation,'' Card said. "This has affected
firms, including Bank of America. The market for auction-rate
securities has changed dramatically.''
Supported
by Banks
Auction-rate
bonds, invented about two decades ago, allowed local
governments, hospitals and universities to borrow money
for the long term at cheaper, short-term rates by reselling
the debt at auctions held every seven, 28 or 35 days.
Until mid-February, banks supported prices by bidding
for bonds that went unsold.
Once
the banks stopped buying, rates soared as high as 20
percent because the failed auctions triggered a penalty
rate for issuers.
In
several cases, that rate was only set in recent months,
as banks recognized demand was fading and asked issuers
to waive limits on how much interest they would pay
if the auctions failed, according to the interviews
and documents.
In
November the Illinois Student Assistance Commission
approved raising the penalty interest on its $880 million
of auction-rate debt on the advice of Zurich-based UBS,
said executive director Andrew Davis.
First
Failure
UBS
had been telling officials for several months that investors
wanted to be paid more interest to own the Springfield,
Illinois-based student lender's auction-rate bonds,
Davis said.
"No
one wanted to be the first guy to have an auction fail,''
Davis said. ``The thinking was if we paid that much
more interest there would be demand, and it would give
the market time to heal itself.''
Some
securities filings didn't disclose the new penalty rates
and their implications of turmoil in the market until
March, after buyers like Walker and Cui purchased auction-rate
debt recommended by their brokers.
In
Cui's case, she says her broker recommended bonds issued
by the Pennsylvania Higher Education Assistance Agency,
the Missouri Higher Education Loan Authority, the New
Hampshire Higher Education Loan Corp. and similar agencies.
UBS and New York-based Citigroup, which ran auctions
for the Missouri and New Hampshire authorities, sought
waivers from the student-loan lenders on how high the
rates on the bonds could go in case demand was insufficient.
Avoiding
Failures
At
the insistence of UBS, Missouri Higher Education agreed
on Dec. 14 to pay higher rates on $3.21 billion of auction
debt if bidding wasn't successful, according to disclosure
documents posted in March. The authority made the change
"in an attempt to avoid having `failed auctions,'''
the documents said. Will Shaffner, a spokesman for the
Missouri lender, didn't return calls seeking comment.
New
Hampshire Higher Education also disclosed in March that
it changed its bond documents as of December to pay
a higher penalty rate in the event of a failed auction.
The change resulted in rates as high as 18 percent,
the filing says.
The
nonprofit lender said it changed the document at the
request of UBS "to respond to disruptions in the
auction-rate securities market.'' New Hampshire Higher
Education spokeswoman Tara Payne declined to comment,
referring questions to its Web site and to UBS.
Liquidity
Breakdown
Karina
Byrne, a spokeswoman for UBS, declined to discuss individual
cases, saying the firm is "committed to addressing
our clients' concerns about the market events that caused
the breakdown of liquidity for auction-rate securities.''
UBS is offering investors stuck in the securities loans
of as much as 100 percent of their par value.
That
value is diminishing, according to UBS, which said in
March it was cutting the estimated value of auction-rate
securities held by its customers by 5 percent to reflect
the lack of trading.
A
close reader of bond documents might have learned about
the potential failures.
Pennsylvania
Higher Education said in a Sept. 30 quarterly report
that as early as August "disruptions in the capital
market related to subprime mortgages began affecting
the pricing of the auction-rate debt securities financing
our portfolio of student loans.''
A
settlement with the SEC in May 2006 over auction-rate
securities sales practices required dealers to disclose
risks to investors. A description of those practices
can be found on most dealers' Web sites.
Corzine's
View
While
investors may have believed the securities were liquid,
"I don't know why they really did think that because
they had a maturity on them,'' New Jersey Governor Jon
Corzine said in an interview. The state is refinancing
as much as $375 million of its own auction-rate debt.
Investors' confusion ``may be how they were sold,''
Corzine, a former bond trader and head of Goldman, Sachs
& Co., said.
That
is the argument made by Aaron Friedman, 51, a computer
programmer from Delray Beach, Florida. He said he bought
$175,000 of auction-rate preferred shares from Citigroup
on Jan. 29. On Feb. 11, two days before hundreds of
auctions began failing, Friedman said his broker at
Citigroup told him ``he had a lot more available.''
Friedman
said he refused to buy more after getting a document
confirming his earlier purchase that listed a Web site
where he could learn about Citigroup's auction-rate
procedures. That was the first time Friedman said he
had heard the word ``auction'' used to describe his
investment.
'Conflict
of Interest'
"At
that point I didn't want to any more,'' said Friedman,
who has hired the law firm of Williams Kherkher Hart
Boundas LLP in Houston to bring a lawsuit.
Steven
Sapirstein, the manager of the Boca Raton, Florida,
branch where Friedman opened his account, declined to
comment. Bruce Glassberg, who was handling Friedman's
case in Citigroup's early dispute-resolution group in
New York, referred questions to Citigroup's public relations
department. Citigroup spokeswoman Danielle Romero-Apsilos
said the bank wouldn't comment.
Harry
Newton, 66, a New York City investor with $3.5 million
of auction-rate securities, said telling borrowers that
cracks in the market were developing and leaving investors
in the dark "pointed up the immorality on Wall
Street.''
"Most
of them knew that auction-rate securities had problems
and they didn't tell anyone,'' said Newton, who runs
the AuctionRatePreferreds.org blog.
Also
suffering is Richard Stahl, 73, a retired car dealer
in Hollis, New Hampshire, who said he bought $650,000
of auction- rate bonds on Jan. 10 issued by New Hampshire
Higher Education from his UBS broker, Christian Parker
in Boston.
A
month later Stahl learned he couldn't sell the debt.
Stahl says he was never told about the change the authority
made to the bond documents or that he was investing
in the auction-rate market. Parker declined to comment.
"This
is a definite conflict of interest,'' Stahl said. "On
the one side they're my financial adviser, and on the
other side they're the underwriter and the auction manager.''
To
contact the reporter on this story: Darrell Preston
in Dallas at dpreston@bloomberg.net;
Michael McDonald in Boston at Mmcdonald10@bloomberg.net.
June
25
IRS
reduces Auction Rate Holding Period from 12 to 6 months
This is good news for US ARPS holders.
Apparently
auction rate preferred stock is actually equity, not
debt. As equity, it can pass tax-free interest payments
through tax-free to you and me. If it were debt, it
couldn't. As many of the issuers get ready to switch
auction rate preferreds to securities with put options
which money market funds will be allowed to own, it
was important for the IRS to reduce the holding period.
And that it has now done -- from 12 to 6 months. The
industry apparently asked for six months and the IRS
complied. So this is good news for us, the stuck ARPS
holders.
Yesterday
the IRS emailed me a press release, which included:
Notice
2008-55 provides guidance regarding the effect of
adding certain liquidity facilities to support certain
auction rate preferred stock on the equity character
of the stock for Federal income tax purposes. This
Notice provides administrative relief in furtherance
of public policy in light of special liquidity needs
in the auction rate securities market as a result
of recent significant auction failures in this market.
Notice
2008-55 will appear in Internal Revenue Bulletin 2008-27
on July 7 2008.
If
you'd like to read more, here's the
official IRS release. Also a law firm called
Willkie Farr &
Gallagher LLP. has issued a Client Memorandum,
called "IRS revises notice relating to liquidity-protected
preferred stock issued by closed-end funds." In
their memo, Willkie Farr wrote:
In
the original version of Notice 2008-55, the IRS had
announced that if liquidity-protected preferred stock
of such funds met certain criteria, the IRS would
not challenge the characterization of the liquidity-protected
preferred stock as equity for federal income tax purposes
even if a put to the issuing fund, an affiliate, or
a nonaffiliate were included in the structure. The
IRS also noted that it would not challenge the equity
status of interests in a liquidating partnership that
aggregates auction-rate preferred stock if certain
requirements set forth in the Notice were satisfied.
Frankly,
I don't understand all this -- much to the amazement
of the man at the U.S. Treasury I spoke to. But he assured
me it was good news for the ARPS holders and the ARPS
issuers. It was what the issuers wanted. And it was
one step closer to getting our money back. -- HN
June
23
Fund
firm pitches plan to exit auction-rate mess
Eaton Vance would issue newfangled security—LPPs—to
replace ARPs
By
Megan Johnston, Financial
Week
Regulators
have given closed-end fund providers the green light
to issue a new kind of security to replace auction-rate
preferred securities (ARPs), which fund companies say
could bail out the remaining investors stuck holding
the illiquid paper. But ARPs investors can’t breathe
a sigh of relief just yet, as it’s not clear whether
closed-end funds will be able to unload the new securities
on institutional investors, namely money market mutual
funds.
Even
before the market tanked, money market mutual funds
were not permitted to buy ARPs, because the securities
lacked a liquidity guarantee that the Securities and
Exchange Commission’s Rule 2a7 requires of all
money fund holdings.
Auction-rate
securities are long-term bonds that are turned into
short-term instruments through auctions backed by broker-dealers.
The auctions began to fail last summer, and the $330
billion market froze entirely in February when broker-dealers
said they would stop supporting auctions.
ARPs
are a type of auction-rate securities employed by closed-end
funds. The market for ARPs totals approximately $64
billion.
Roughly
half of closed-end funds issued ARPs, which they used
to finance investments in additional securities, thus
boosting returns. Closed-end fund providers have been
scrambling to find ways to refinance the frozen debt,
but to date, just 30% of existing ARPs have been redeemed
or refinanced, according to Cecilia Gondor, an analyst
at Thomas J. Herzfeld Advisors, which specializes in
closed-end fund research.
But
most of the big closed-end fund firms have been working
on ways to either restructure ARPs so that they have
a liquidity feature or replace them with a new kind
of preferred security that has one, in order to make
them money-fund eligible and bail out investors holding
the ARPs.
Eaton
Vance, the third-largest manager of closed-end funds
in the U.S., said this month it received a no-action
letter from the Securities and Exchange Commission allowing
it to go forward with a plan to issue a new type of
security: liquidity protected preferred shares
Called
LPPs, the shares would pay a dividend reset every seven
days in a remarketing process administered by one or
more financial institutions, a structure similar to
that of ARPs. But banks that agree to provide liquidity
for LPPs must purchase all unsold shares, unlike the
broker-dealers that back ARPs auctions.
Eaton
Vance doesn’t yet have any formal agreements with
liquidity providers, although Jonathan Isaac, head of
its closed-end fund business, said the firm is close.
“We’re in conversations with many, and fairly
confident that we’ll get agreements in place.”
On
the same day that Eaton Vance received its no-action
letter, the Treasury Department issued guidance on adding
liquidity features to ARPs. According to its guidance,
the Internal Revenue Service “will not challenge
the equity characterization of auction-rate preferred
stock for Federal income tax purposes as a result of
adding a liquidity facility.”
The
treatment of the new preferred shares as equity, and
not debt, gives closed-end funds more freedom to issue
them. Under the Investment Company Act of 1940, closed-end
funds can only issue debt if they have at least $3 of
assets for every $1 of debt issued. The minimum ratio
for equity, however, is only $2.
Meanwhile,
the largest and second-largest closed-end fund managers,
Nuveen Investments and BlackRock, respectively, have
been working on solutions of their own. Like Eaton Vance,
Nuveen said it has been developing a new type of security,
called variable rate demand preferred shares, which
would replace ARPs. In a press release last month, Nuveen
said it expected the new securities to come to market
within the next 30 to 60 days. BlackRock, on the other
hand, says it will likely apply a put feature to existing
ARPs.
A
key difference between Eaton Vance’s plan and the
others would be that for a limited time, the company
would allow the liquidity provider to put shares directly
back to Eaton Vance. In a statement, the firm added
that it did not think there would be an ongoing need
to put the LPP shares back to Eaton Vance once a market
gets rolling.
Mr.
Isaac said that since the ARPs market stalled, Eaton
Vance has been able to redeem $3.3 billion of its $5
billion of outstanding ARPs through various refinancing
methods. He added that if the new securities take off,
he hopes LPPs will replace a majority of the remaining
ARPs.
For
that to happen, Mr. Isaac must not only line up liquidity
providers, he also needs to find money-market funds
willing to buy the securities. Even though the Treasury
Department and the SEC have more or less given their
blessing to the new securities, money-market funds may
choose to steer clear of anything connected to the troubled
auction-rate market. But Mr. Isaac is optimistic. “I
think everything we’ve heard suggests that they
are interested,” he said. “The proof of the
pudding will be when [LPPs] are out there, available
to be purchased.”
Last
month, Federated Investors issued a statement about
the new securities resulting from the refinancing of
ARPs, saying that “Federated will consider these
notes for investment in prime money market funds only
after employing the same thorough due diligence process
that we use for all investments.”
“How
well will the money-market funds accept the new product?
That is a big question mark,” Herzfeld’s Ms.
Gondor said, adding that the firms have been talking
with money market fund managers, who seem receptive.
“The question is, are they going to put their money
where their mouth is?” FW
++++++++++++++++++
June
24
ARS
Suits Against Citigroup Consolidated
By
Amanda Ernst, amanda.ernst@portfoliomedia.com
Portfolio
Media, New York (June 24, 2008)
A district court has consolidated five proposed class
actions brought against Citigroup Inc. on behalf of
purchasers of auction rate securities, despite arguments
that consolidating all the claims, including those that
do not fall under the Private Securities Litigation
Reform Act, would delay recovery for the class members.
On
Tuesday, Judge Laura Taylor Swain of the U.S. District
Court for the Southern District of New York consolidated
four cases that asserted violations of federal securities
laws against Citigroup with one case that only asserted
claims under the Investment Advisor Act, which is not
subject to the PSLRA.
Judge
Swain noted that one of the four cases that asserted
claims that are subject to the PSLRA also claimed violations
of the Investment Advisor Act.
Samuel
Sporn, an attorney for the lead plaintiffs in the Investment
Advisor Act case – Stockhamer et al. v. Citigroup
Inc. et al. – claimed that the progress of his
case would be slowed by the consolidation, but Judge
Swain ruled that other class members would be prejudiced
if the Stockhamer case was not combined with the other
cases.
“Consolidation
of the Stockhamer case with the other actions is warranted,”
Judge Swain concluded. “These cases deal with substantially
the same claims, substantially the same defendants and
substantially the same discovery.”
After
determining that the cases were to be consolidated,
Judge Swain set about ruling on the lead plaintiff and
lead counsel motions.
Sporn
had also requested that his client and his firm, Schoengold
Sporn Laitman & Lometti PC, be considered for roles
as co-plaintiff and co-counsel to handle all of the
Investment Advisor Act claims.
Besides
Stockhamer, two plaintiffs sought the lead role before
Judge Swain on Tuesday: Dr. Michael A. Passidomo, a
retired doctor who had purchased almost $11 million
of auction rate securities during the proposed class
period; and Wedgewood Tacoma LLC along with Jemstone
LLC, which purchased almost $4 million in ARS and still
have significant assets frozen in the market.
Although
Passidomo had the greatest assets involved in the dispute,
making him an ideal candidate for lead plaintiff, Wedgewood
Tacoma’s attorney, Jerome Congress of Milberg LLP,
claimed the doctor had not been forthright about his
background and was therefore unfit to be lead plaintiff
in the consolidated case.
According
to Congress, Passidomo had been reprimanded by medical
boards in various states and had his license to practice
medicine revoked in Kentucky after a dispute arose over
allegations that he ordered possibly unnecessary high-contrast
scans for some patients.
Congress
told Judge Swain that Passidomo had hid this information
about his background and had avoided answering questions
about it when the Milberg firm queried him in court
papers.
Passidomo’s
attorney, Jeffrey Zwerling of Zwerling, Schachter &
Zwerling LLP, said Passidomo would be a “zealous
advocate on behalf of the class,” as evidenced
by his challenge of the claims waged against him over
the allegedly unnecessary scans. He fought for years
to “set the record straight,” Zwerling said.
Ultimately,
Judge Swain named Passidomo the lead plaintiff in the
case and appointed Zwerling Schachter lead counsel.
“There
is no dispute that Dr. Passidomo has the largest financial
interest in the litigation,” Judge Swain said.
The
judge also ruled the Passidomo met the typicality and
adequacy requirements of a lead plaintiff, and said
that the other plaintiffs seeking lead status had not
rebutted that assumption.
Judge
Swain also was not persuaded that a co-lead plaintiff
or counsel was necessary to pursue the Investment Advisor
Act claims in the consolidated suit. She instructed
Zwerling to include those claims in his amended consolidated
complaint, due in 60 days.
After
Judge Swain finished ruling on the matter, Zwerling
said he thought the judge had followed the requirements
necessary for appointing a lead plaintiff in such a
case.
“There
were some unwarranted attacks made against Dr. Passidomo,”
Zwerling said. “I think the judge also saw things
that way.”
Attorneys
for Citigroup, which supported the consolidation of
the cases, declined to comment Tuesday.
The
suits against Citigroup claim that during the class
period of March 27, 2003 to Feb. 13, 2008, Citigroup,
Citigroup Global Markets Inc. and Citi Smith Barney
were among the largest sellers and underwriters of auction
rate securities.
“Throughout
the class period, defendants represented to investors
that ARS were highly safe and liquid investments that
were equivalent to cash or money market funds,”
Passidomo said in his motion seeking lead plaintiff
status. “However, unbeknownst to investors,
ARS were complex, long-term financial instruments whose
liquidity and stability was dependent on defendants’
artificial support and manipulation of the ARS market.
“Thus,
when defendants and the other major broker dealers withdrew
their support of ARS auctions, the ARS market quickly
collapsed.”
The
plaintiffs are represented in this matter by attorneys
from Zwerling, Schachter & Zwerling LLP; Schoengold
Sporn Laitman & Lometti PC; Milberg LLP; Zimmerman,
Levi & Korsinsky LLP; Girard Gibbs LLP and Seeger
Weiss LLP.
Citigroup
is represented in the matter by attorneys from Paul,
Weiss, Rifkind, Wharton & Garrison LLP.
The
cases are LHB Insurance Brokerage Inc. v. Citigroup
Inc. et al., case number 1:08-cv-3095; Swanson v. Citigroup
et al., case number 1:08-cv-3139; Wedgewood Tacoma LLC
v. CitiGroup Inc. et al., case number 1:08-cv-4360;
Ghalayini v. Citigroup Inc. et al., case number 1:08-cv-5016
and Stockhamer et al. v. Citigroup et al., case number
1:08-cv-3904, all in the U.S. District Court for the
Southern District of New York.
All
Content Copyright 2007, Portfolio Media, Inc.
+++++++++++++++++
June
24
Hooray
for HSBC!!!!
Finally An Honest Broker
Yes,
there is one. Only one!
From
Bloomberg yesterday:
HSBC
Securities Offers to Buy Clients' Auction-Rate Securities
By
Christopher Condon
June 23 (Bloomberg) -- HSBC Holdings Plc's U.S. securities
arm became the first major brokerage to offer to buy
back auction-rate securities from customers unable to
sell since that market froze in February.
HSBC Securities USA will buy all its clients' municipal
bonds and student-loan-backed bonds sold on the auction-rate
market, spokeswoman Juanita Gutierrez said in an e-mailed
statement from New York today. The brokerage will also
repurchase some auction-rate preferred shares issued
by closed-end funds,
Gutierrez said.
Firms organizing the $330 billion auction-rate market
stopped acting as buyers of last resort when demand
faltered amid concern that bond insurers would be downgraded.
Investors holding about $230 billion in auction-rate
securities remain unable to sell.
Auction-rate securities allowed sellers to raise long-term
capital while paying short-term rates. The securities
carry a fixed face value and a variable interest rate
that resets at auction every 7, 28 or 35 days.
HSBC Securities didn't disclose how much its clients
hold in auction-rate securities. The company said securities
and banking laws prevented it from buying some closed-end
preferred shares.
Gutierrez said she couldn't provide more details.
London-based HSBC is Europe's largest bank by market
value. Its brokerage unit isn't an auction manager.
Firms that sold auction-rate securities, including Citigroup
Inc. and Morgan Stanley, have been named in at least
24 proposed
lawsuits in which shareholders claim they were misled
and told they were buying safe, liquid investments.
The companies have said the suits are without merit.
State
and local governments, hospitals and colleges were the
largest users of the auction-rate market. Many were
forced to pay high penalty rates when their auctions
failed. Since March, they have bought back or made plans
to repurchase at least $81 billion of the $166 billion
they issued.
Closed-end funds also used auction-rate securities to
boost returns. About 70 percent of closed-end funds
borrowed money by selling preferred shares on the auction-rate
market.
When the market collapsed, closed-end funds had $64.3
billion in outstanding preferred shares, which weren't
subject to high penalty rates. Pressure from shareholders
and regulators has led closed-end fund companies to
repurchase or schedule redemptions for about $16.5 billion.
Debt backed by student loans makes up most of the rest
of the auction-rate market.
To
contact the reporter on this story:
Christopher Condon in Boston at +1-617-210-4633 or
ccondon4@bloomberg.net
To
contact the editor responsible for this story:
Larry Edelman at +1-617-210-4621 or ledelman3@bloomberg.net.
HSBC's
Public Statement
I
contacted HSBC this morning and a very sweet Juanita
Gutierrez sent me HSBC's statement:
In
light of the unprecedented market conditions in the
auction rate securities market and the high value we
place on our customer relationships, HSBC Securities
(USA) Inc. is making a private offer to purchase at
par from its customers certain auction rate securities
which have been impacted by the disruption in that market.
This offer is being made to provide liquidity to HSBC
Securities' customers, should they need or want it,
and adheres to HSBC’s values and principles. HSBC
Securities (USA) Inc. services the brokerage needs of
its private bank, premier and retail clients.
Key
points to consider:
+ In light of the unprecedented market conditions in
the auction rate securities market and the high value
we place on our customer relationships, HSBC Securities
(USA) Inc. is making this private offer to address the
liquidity needs of its customers affected by the disruption
in that market.
+
In order to provide liquidity to its customers currently
holding auction rate securities, HSBC Securities is
offering to purchase at par all ARS issued by student
loan providers and all ARS issued by municipalities
currently held in its customers' accounts. To provide
additional liquidity, HSBC Securities is offering to
purchase from its customers certain ARS issued by closed
end mutual funds within the limits of applicable law.
HSBC Securities has placed limitations on offers to
purchase ARS issued by closed end mutual funds to comply
with certain securities and banking laws.
HSBC
Securities has not managed or co-managed any auctions
of ARS that have experienced failed auctions this year.
As
this is a private offer to our customers, HSBC is not
disclosing further details. I thank you for your understanding.
However, please let
me know if I can be of further assistance.
Juanita
Gutierrez
Dir, Public Relations | HSBC Bank USA, N.A.
452 Fifth Avenue, 13th Floor
New York, New York 10018
Phone. 212-525-6282
Fax. 212-525-6875
Mobile. 917-560-7983
Email. juanita.gutierrez@us.hsbc.com
++++++++
June
24
Today's
Wall Street Journal shows what we've known all along:
Our auction rate preferreds are ultra-cheap (perhaps
the cheapest) leverage financing and that financing
can't be easily replaced. Hence the only solution to
get our money of disgusting companies like Pimco,
Neuberger Berman, Dreyfus and Pioneer Investments
-- remains PRESSURE -- legal and public. These companies
need to understand that we (and no one else) will ever
do business with them ever again if they continue their
present immoral, greedy behavior. I think an avalanche
of letters, emails, and phone calls to Bill Gross is
called for.
This
is villain number one -- Bill Gross. He manages the
world's biggest bond fund at PIMCO.
Here's
today's Wall Street Journal piece. -- Harry Newton.
When
'Preferred' Holders Come Second
In Auction-Rates, Some Funds
Choose Not to Redeem,
Protecting Common Shares
By
SHEFALI ANAND, Wall Street Journal
June 24, 2008; Page C1
Over
recent weeks, some of the biggest closed-end fund companies,
ranging from Eaton Vance Corp. to Nuveen Investments
Inc., have unveiled plans to redeem their auction-rate
preferred securities, allowing frustrated investors
to cash out.
But
some other prominent closed-end fund companies, like
Pimco, are not rushing to redeem auction-rate preferreds,
because cashing out this quasi-debt would hurt the funds'
common shareholders. Funds function like stand-alone
companies, with common shareholders and debtholders.
As of now, Pimco and its cohorts appear to be favoring
investors in the common.
REDEEM
OR NO?
• What's New: Some closed-end funds
aren't jumping to redeem their "auction rate"
preferred securities partly because it could be
costly for common shareholders.
• Background: The market for auction-rate
securities has been frozen since February, thanks
to the credit crunch.
• Bottom Line: Investors in preferreds
issued by companies like Pimco and Neuberger Berman
may be stuck in these for a while. |
So
their preferred holders may have to wait months or even
years before they can cash in. For closed-end funds,
issuing auction-rate preferreds adds leverage that can
juice returns, a potential boon to investors in the
funds' common.
Allianz
SE's Pimco and Nicholas-Applegate funds, Lehman Brothers
Holdings Inc.'s Neuberger Berman funds, Bank of New
York Mellon Corp.'s Dreyfus funds, and Pioneer Investments
are among the prominent closed-end operations that have
not announced plans to redeem auction-rate preferreds.
They have a total of $7.6 billion of auction-rate preferred
among them.
Pimco's
closed-end funds have some powerful common shareholders,
including legendary bond-fund manager Bill Gross and
Pimco Funds' chairman, Brent Harris.
According
to data from FactSet Research Systems Inc., Mr. Gross
has about $43 million in nine Pimco closed-end funds,
which have issued auction-rate preferreds, based on
filings made last year, the latest available. He was
the largest investor in one of these funds as of last
August, the Pimco Corporate Opportunity fund. Mr. Harris
has $775,000 in two Allianz closed-ends, one from Pimco
and another from Nicholas-Applegate.
A
Pimco spokesman said employees' personal holdings "play
no role whatsoever in the firm's search for an appropriate
and sustainable solution." To say otherwise, it
added, "is outrageous."
Auction-rate
preferreds are long-term securities that functioned
like short-term investments. When the market was working
as intended, rates would be reset at weekly or monthly
auctions, and investors could sell the securities there.
In February, as the credit crunch worsened, buyers for
these securities vanished.
Holders
of auction-rate preferreds are left in limbo by fund
houses like Pimco and Neuberger Berman. Ed Dowling,
53 years old, of Huntington Station, N.Y., owns preferreds
issued by five fund companies. Neuberger Berman is the
only one that has stayed silent on redemptions. He holds
$300,000 in Neuberger's preferreds, and he worries that
he could be stuck in them for a long time.
"What
if Lehman goes under? What happens to Neuberger? What
happens to me?" Mr. Dowling asks. He is considering
selling the securities in the secondary market, even
if it means getting 90 cents on the dollar. "I
don't want to wait and bite my fingernails," he
says. Neuberger says it is "actively pursuing a
broad solution" it expects to announce "near-term."
In
February, when the auction-rate market melted down,
there were about $64 billion of these securities issued
by closed-end funds. Now, around 31% of this amount
has been redeemed or is expected to be redeemed shortly,
according to data from Thomas J. Herzfeld Advisors Inc.
Monday,
Eaton Vance unveiled a plan to redeem about $310 million
in auction-rate preferreds for 15 of its municipal funds.
This move brings Eaton Vance's redemption total to $3.6
billion, or 72% of its amount outstanding as of February.
Meanwhile,
funds like Pimco are giving no indication how quickly
they will move to help preferred investors. A Pimco
spokesman wrote in a statement that the company is "working
diligently" to find a solution that "reconciles
the competing considerations facing common and preferred
shareholders."
The
big problem here for fund managers is that replacing
the auction-rate debt with other leverage likely would
be more expensive, and that could eat into fund earnings.
It is too early to measure what the extent of this may
be, though.
Plus,
auction-rate financing has the virtue of longer maturities
than bank loans and bonds typically have. The funds
that have replaced the preferreds with bank borrowings
run the risk the bank may charge a higher rate to extend
that loan, or it may not extend at all.
Many
of the closed-end funds that have not announced redemptions
invest in municipal bonds, and it has been more complex
to refinance these, says Cecilia Gondor of Thomas Herzfeld.
These funds pay a lower interest rate on their auction-rate
preferreds than a taxable fund, and replacing that with
bank debt would be very costly. To address this, firms
like Eaton Vance and Nuveen Investments have made attempts
to create new securities to replace auction-rate preferreds
in municipal and other closed-end funds.
Funds
that have not redeemed, including Neuberger Berman,
Pioneer Investments and Dreyfus funds, are mostly mum
on their plans to help preferred holders. In a recent
notice, Neuberger Berman said that while it is looking
at various options, "a critical part of our efforts
is the full recognition of, and focus on, the best interests
of all of our Fund shareholders."
In
a press release Thursday, Dreyfus said it was mulling
options, but it did not specify a solution. A spokesman
for Pioneer Investments said the company plans to merge
one of its municipal-bond closed-end funds into an open-end
fund, which would help redeem a fifth of its outstanding
auction-rates. He did not specify if the company would
pursue this option for the remaining preferreds.
+++++++++++++++++
June
24
A
Summer Thaw for Frozen ARPS?
By
James B. Stewart (whom I believe is the only reporter
who actually owns ARPS himself -- HN)
THE
AUCTION RATE Preferred Security (ARPS) crisis may yet
have a happy ending.
This
is welcome news for every fixed-income investor and
anyone who depends on healthy credit markets. It's especially
good news for the holders of $330 billion in ARPS who
thought they'd invested in money-fund equivalents only
to discover they were among the victims of the credit
crisis that gripped financial markets earlier this year.
When the credit markets seized, big brokerage firms
and investment banks stopped providing liquidity, the
auctions failed, and the securities were essentially
frozen in accounts. Many people lost access to their
life savings, money they had counted on to fund their
retirements, college educations, home purchases and
to pay taxes.
Here's
what's happening now: Major issuers of ARPS, including
industry leader BlackRock, are in the process of partially
redeeming the frozen ARPS by refinancing them with tender
option bonds. The issuers are basically packaging and
selling the choicest bonds in the underlying portfolios
based on credit quality, maturity date, and insurability,
among other factors. BlackRock announced it will refinance
$1.6 billion of its tax exempt ARPS by the end of July,
bringing total redemptions to $2.4 billion, or about
25% of the total issued by BlackRock. How much is being
redeemed depends on the particular security. BlackRock
said investors will regain access to as much as 42%
of the face value and as little as 2% through these
tender option bonds. (Investors should check the web
sites of the issuers for a detailed breakdown of redemption
rates and payment schedules.)
Obviously
this is only a first step. But Steven Baffico, a BlackRock
director in charge of closed-end funds, told me progress
is also being made toward converting the rest of the
ARPS into money-market eligible paper. The SEC and Treasury
issued rulings last week that should help the process.
Some hurdles remain, the chief one being attracting
liquidity from the same institutions that walked out
on the auctions, but Baffico said he's optimistic. "Progress
has been good, measurable, and consistent," he
said.
I've
been hammering away on this subject both in these columns
(SmartMoneySelect) and in SmartMoney magazine, not just
because I'm one of the victims, but because the injustice
was so flagrant and so painful to many investors. This
was not a case of greed run amok, or of people chasing
high yields without regard to the risks. Investors were
told by their brokers that these investments were the
equivalent of money-market funds, highly liquid and
safe. This was reflected in the yields, which were barely
higher than the money-market equivalent. No one expected
to get rich investing in ARPS. It was just a convenient
place to park cash while earning a slightly higher return.
The
ARPS that I bought, and all of them with which I'm familiar,
were backed by triple-A-rated securities. This was not
analogous to the investment products backed by packages
of subprime loans: Virtually none of the bonds that
made up the underlying portfolios defaulted. The ARPS
have continued to pay interest throughout the crisis.
Even so, many investors have been shocked to see the
value of the ARPS lowered on their brokerage statements.
(This depends on the brokerage firm. Mine continue to
be reflected at full face value, not that this matters
when you can't access the money.)
Lawsuits
triggered by the crisis have argued there was inadequate
disclosure of risks to investors and that any liability
should rest with those who sold the securities. In many
cases disclosures were woefully inadequate or nonexistent.
But to be honest, full disclosure wouldn't have changed
my decision to invest. Though the risk of auction failure
existed, no auction had ever failed in the 20-year history
of ARPS. It's not rational to plan for something that
has never happened.
So
why did the auctions fail? As best I can tell, as panic
swept the bond markets in the wake of the subprime crisis,
all structured debt products were suspect, the sound
as well as the shaky. Once one of the big investment
banks stopped bidding (reportedly Goldman Sachs (GS4)),
everyone else stopped committing capital to what threatened
to become illiquid securities, further depleting their
weakened balance sheets. This in turn became a self-fulfilling
prophecy. Once several auctions failed, many ARPS investors
wanted their money back. It was the equivalent of a
run on the bank. (Under the contractual terms of the
securities, the auctions are still held every week,
and continue to fail.)
With
benefit of hindsight, there was no need to panic. The
issuers have kept paying interest. Defaults on the underlying
bonds have been negligible. If Goldman and the other
banks had continued to bid at the auctions as usual,
the crisis would never have arisen. But I concede that
no one had the benefit of hindsight when these decisions
were made and the entire financial system seemed on
the brink of collapse. Much as I would like to blame
Goldman, it's hard to argue with the firm's financial
results or its overall assessment of risk, given its
recent excellent earnings, especially compared with
other investment banks. (I continue to be a Goldman
shareholder.)
Of
course none of us will probably buy another ARPS again,
which means that the market is essentially dead. In
a sense this is too bad, since ARPS helped provide the
liquidity that enabled a wide array of institutions,
from schools to hospitals, to fund their operations.
I am, of course, delighted that these frozen assets
are finally thawing and that thousands of investors
are likely to get their money back plus interest. Hundreds
of investors wrote me about their plight, and I applaud
them for helping keep up the pressure on their brokers,
the issuers, the investment banks and in Congress. This
we still need to do, until the ARPS crisis is fully
resolved.
June
16
IRS
Gives Guidance on Auction Rate Preferred Stock
Washington,
D.C. (June 16, 2008)
By WebCPA staff
The
Internal Revenue Service has issued a notice providing
guidance on the effect of adding liquidity facilities
to support auction rate preferred stock on the equity
character of the stock.
Previously
the IRS ruled that certain auction rate preferred stock
qualified as equity for federal income tax purposes,
but that ruling did not address the question of the
effect of guarantees or liquidity facilities on the
equity character.
Notice
2008-55 is intended to provide greater certainty and
flexibility regarding federal tax issues that have arisen
in connection with efforts to address liquidity needs
in the auction rate securities market as a result of
recent significant auction failures in this market.
The
IRS said it will not challenge the equity characterization
of auction rate preferred stock for federal income tax
purposes as a result of adding a liquidity facility
to support the stock if the conditions of the notice
are met. The notice takes effect June 13.
June
14 - update 1
Good
News: The Magic Bullet?
This
may be the silver bullet to make our ARPS finally saleable
and free up our locked money. Every big issuer of ARPS
has drooled at the idea of money market funds being
able to buy their ARPS. Today, money market funds, which
are truly huge, are not allowed to buy ARPS. I don't
know why. But I'm guessing the reason is that the SEC
has rules about the things money market funds can invest
in -- those securities must be highly liquid, otherwise
the fund could fail if there were a run on it. I"m
guessing the SEC is more intelligent than all us idiots
(like you and me) who bought ARPS securities which later
turned un-sellable when the auctions failed in mid-February.
These new securities (see next two stories) which would
replace ARPS would have some form of "buy-back"
-- also called a "put" provision -- whereby
the issuer agreed to buy it back when the money market
wanted cash. This article and the following press release
don't explain precisely how it will all work. But it's
a great glimmer of hope for us all. Read on -- Harry
Newton.
SEC
Action May Help Eaton Vance Auction-Rate Holders
NEW
YORK -(Dow Jones)- Shareholders stranded in auction-rate
preferred shares issued by closed-end funds sponsored
by Eaton Vance Management may be able to breathe a sigh
of relief soon.
The
subsidiary of Eaton Vance Corp. (NYSE:EV) (EV) said
late Friday that it has received relief from the Securities
and Exchange Commission, making it possible for the
asset manager to offer a new security that may help
rescue auction-rate preferred shareholders.
The
no-action relief assures the SEC won't recommend enforcement
action if Eaton Vance's closed-end funds offer Liquidity
Protected Preferred shares, new equity securities with
a put feature which are expected to be eligible for
purchase by money-market funds.
The
new securities may provide a cost-effective form of
leverage to replace auction-rate preferred shares that
closed-end funds sponsored by the company have issued.
Eaton Vance hopes to have the first of them to market
very soon, Payson Swaffield, chief income investment
officer at Eaton Vance, said in an interview with Dow
Jones Newswires.
"The
hope is to open up a much larger market for LPPs than
ever existed for auction-rate preferred shares,"
he said. Eaton Vance believes it is the first to receive
relief for this new type of security. "We are aware
that other fund companies were working on similar forms
of money-market eligible securities, but we believe
this to be the first," he said.
The
issuance of the LPP is subject to approval by the board
of Eaton Vance's funds, which will be sought "as
soon as possible," Swaffield said.
In
addition, five taxable income funds sponsored by Eaton
Vance have asked the SEC for exemptive relief that would
permit the funds to take on additional debt so they
could redeem auction-rate preferred shares, the firm
said.
Eaton
Vance originally had $5 billion in outstanding auction-rate
preferred securities, but has redeemed $3.3 billion
using various debt strategies. It expects to redeem
the majority of the $1.7 billion outstanding auction-rate
preferred shares with the new securities, and the balance
of it using a debt strategy, Swaffield said.
"The
real advantage of the LPP is that it can be used to
refinance auction- rate preferred shares issued by both
taxable as well as tax-free closed-end funds,"
he said.
Closed-end
funds sponsored by Eaton Vance and others issued preferred
shares as a way to boost income for their common shareholders.
The preferred shares were routinely sold at auction,
but many preferred shareholders have been unable to
sell since February, when buyers pulled back and auctions
failed. The problem has mushroomed for Eaton Vance and
other issuers as investors have grown increasingly frustrated
and vocal, with some turning to arbitration and others
filing lawsuits.
Liquidity
Protected Preferred shares are a new type of preferred
equity security that will pay a dividend rate that will
be reset weekly and based on a rate determined by a
remarketing agent. Unlike auction-rate preferred shares,
the LPP is designed to have liquidity backing from a
bank or group of banks so that the holder of the LPP
will have "an unconditional put to the liquidity
provider," Swaffield said.
Initially,
the shares will be used on a test basis to provide financing
for a specific taxable closed-end fund, Swaffield added.
"As
we get comfortable with the cost of that issuance and
how that LPP trades over time, then we will roll out
new LPP issues to refinance a significant portion of
the remaining auction-rate preferred shares outstanding
in Eaton Vance closed-end funds," Swaffield said.
Eaton
Vance has no firm commitments from liquidity providers
at this time, but is "very confident" that
it will be able to obtain liquidity backing, he said.
On
the first issuance of an LPP, Eaton Vance plans to backstop
the liquidity bank, Swaffield said.
"For
the first issue, we're putting our money where our mouth
is because we believe that a strong secondary market
will develop for LPPs driving the cost of this financing
to below other forms of financing," he said. "Quite
frankly, what we're trying to do is create a huge market
for which there is quite a bit of demand. Money-market
funds are flush with cash."
Eaton
Vance has no commitment from money-market funds, but
there have been discussions, he said. "We do believe
that with the liquidity backing, these securities become
very attractive," said Swaffield, "not only
to money-market funds, but also potentially to traditional
buyers of auction-rate preferred shares, because they
now have an unconditional put right to the liquidity
providers."
Swaffield
said the SEC had been very responsive. "When you
think that this became an acute problem in February,"
he said, "they've really acted in a prudent, yet
expedient way."
-By
Daisy Maxey, Dow Jones Newswires; 201-938-4048; daisy.maxey@dowjones.com
Eaton
Vance funds get SEC nod
for new security
BOSTON,
June 13 (Reuters) - U.S. money manager Eaton Vance Corp
said on Friday it has won regulatory relief for the
issuance of a new instrument by its closed-end funds,
a key step that may ultimately end the auction-rate
securities crisis faced by its funds.
Eaton
Vance, the third-largest closed-end fund firm, said
in a statement the U.S. Securities and Exchange Commission
has given its assurance Eaton's funds will not face
enforcement action for the issue of the new security
called Liquidity Protected Preferred (LPP) shares.
Companies
routinely seek regulatory relief before issuing new
types of securities.
"Eaton
Vance believes that the granting of no-action relief
is an important step in the development of the LPP shares,"
the money manager said.
"This
is a significant development in overcoming the hurdles
in developing a new product to replace the auction-rate
securities," said Cecilia Gondor, executive vice
president at Thomas J. Herzfeld Advisors, specialists
in closed-end funds.
Closed-end
funds issue auction-rate securities to borrow and boost
their returns. But since February the credit crisis
has disrupted the market for the securities and kept
buyers away.
Investors
who own these securities have been unable to sell them
and have been pressuring funds to buy them back. Closed-end
funds have been exploring alternatives to substitute
the auction-rate securities.
The
LPP shares are preferred equity securities that will
be eligible for purchase by money market funds, Eaton
Vance said. Money market funds currently cannot buy
auction-rate securities.
The
LPP shares will help in "opening up a large new
market of potential buyers," Eaton Vance said.
Eaton
Vance has about $29.5 billion in closed-end fund assets
and about $1.7 billion in auction-rate securities outstanding.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
June
9
A
firm announces a partial redemption -- say 50%. But
some investors get 25%; others (the favorite ones) get
75%. How is this possible? Welcome to one of the great
mysteries of the western world. Read this release from
ING. See if you can figure it all.
ING
Prime Rate Trust Announces Intended Refinancing of ARPS
NEW
YORK,
June 9 /PRNewswire-FirstCall/ -- ING Prime Rate Trust
PPR has announced today its intention to redeem a portion
of its outstanding auction-rate preferred securities
(ARPS). The Trust's Board of Trustees has approved a
partial redemption that would be paid by drawing on
leverage available under the Trust's credit facilities
the extensions of which were also approved by the Board.
The redemption will provide liquidity at par for the
holders of a portion of the Trust's ARPS. The Trust
is a diversified closed-end management investment company
listed on the New York Stock Exchange.
The
Trust expects to redeem approximately $225 million of
the $450 million ARPS outstanding, approximately 50%
by series, subject to satisfying the notice and other
requirements that apply to ARPS redemptions. Upon completion
of such notice and other requirements, the Trust will
issue a formal redemption notice to the paying agent
and record holders. The Trust expects to issue a formal
redemption notice by the end of June and anticipates
that the redemption of $225 million of ARPS will be
completed by mid- to late August.
The
Depository Trust Company (DTC) will determine how partial
series redemptions will be allocated among each participant
broker-dealer account. Each participant broker-dealer,
as nominee for its customers that are beneficial owners
of the ARPS (street name shareholders), in turn will
determine how redeemed shares are to be allocated among
its customers. The procedures used by different broker-dealers
to allocate redeemed shares among beneficial owners
may differ from each other as well as from the procedures
used by DTC.
ING
Investments, LLC, the Trust's investment adviser, is
part of ING, a global financial institution of Dutch
origin offering banking, investments, life insurance
and retirement services to over 75 million private,
corporate and institutional clients in more than 50
countries. With a diverse workforce of about 130,000
people, ING is dedicated to setting the standard in
helping our clients manage their financial future.
For
more complete information about the Trust, shareholder
inquiries or to obtain a prospectus, please call ING
Funds Shareholder Services at 800-992-0180. The prospectus
should be read carefully before investing. Consider
the Trust's investment objectives, risks, and charges
and expenses carefully before investing. The prospectus
contains this information and other information about
the Trust.
Certain
statements made on behalf of the Trust in this release
may be considered forward-looking statements. The Trust's
actual future results may differ significantly from
those anticipated in any forward-looking statements
due to numerous factors, including but not limited to
a decline in value in markets in general or the Trust's
investments specifically. Neither the Trust nor ING
undertakes any responsibility to update publicly or
revise any forward-looking statement.
June
9 from 
ARPS
issuers see progress on solutions
But 'take it or leave it' attitude irks investors
By David Hoffman
In
a bid to quell investor anger that erupted when auctions
of preferred securities sold by closed-end mutual funds
started to fail in February, fund advisers are developing
competing solutions to address the situation.
Some
investors stuck in illiquid auction rate preferred securities
issued by closed-end funds, however, said it might be
too little, too late.
"The
owners of these things like me — we're being treated
like we are stupid," said Harry Newton, a New York-based
investor with $3.5 million tied up in ARPS from closed-end
funds advised by Nuveen Investments Inc. of Chicago.
Though
some fund advisers have been helpful, others have provided
investors with little or no information, he said.
"I
think the implications for Wall Street are going to
be immense," said Mr. Newton, who has started a
website, auctionratepreferreds.org, where investors
can find information on what different fund advisers
are doing to make investors whole.
Investors
who hold illiquid ARPS have two options, said Cecilia
L. Gondor, executive vice president of Thomas J. Herzfeld
Advisors Inc., a closed-end-fund specialist in Miami.
They
can wait until the industry comes up with a solution
to redeem their ARPS at par value, she said.
Or
they can sell their ARPS in the secondary market where
— depending on the ARPS they own — they will
have to take an 8% to 18% discount, Ms. Gondor said.
Some
investors may decide to do just that, and sue their
broker for the rest, Mr. Newton said.
Class
actions have already been filed against firms such as
Citigroup Inc., JPMorgan Chase & Co. and Merrill
Lynch & Co. Inc., all of New York.
"We
have been going though a rough time," said one
East Coast broker with Merrill Lynch who asked not to
be identified.
Lawsuits
have yet to hit closed-end fund advisers, but industry
experts said they could come if the ARPS situation isn't
resolved quickly.
Fund
advisers said that they are moving as fast as they can.
BlackRock
Inc. of New York said last week that it has made progress
in developing a comprehensive solution.
Its
proposed liquidity enhanced adjustable rate securities
would make ARPS available for purchase by money market
funds, a move that would bring liquidity back to the
market.
LEARS
require a structural enhancement be made to the existing
ARPS structure by either stapling a "put"
feature to a third-party liquidity provider, or issuing
a new form of preferred stock that includes the put
feature.
The
put feature is needed to make ARPS available to money
funds.
When
LEARS could become available is uncertain, Steven A.
Baffico, director of closed-end funds at BlackRock,
said during a conference call last week.
"It's
anticipated that certain aspects will require regulatory
approval," he said.
Nuveen
and Eaton Vance Corp. of Boston are also working on
comprehensive solutions.
Both
their proposals are essentially the same as BlackRock's,
except that they would replace, not augment, existing
ARPS with a totally new security.
Industry
observers think that Nuveen and Eaton Vance are closer
to getting their solutions approved by regulators.
Eaton
Vance's plan calls for the creation of what it calls
liquidity protected preferred securities to replace
existing ARPS.
The
proposal requires regulatory relief in the form of a
no-action letter from the Securities and Exchange Commission,
but that is expected soon, said Jonathan Isaac, head
of closed-end funds at Eaton Vance.
Nuveen
has decided to structure its offering, which it calls
variable rate demand preferred securities, to conform
with regulatory relief already available.
"We
believe that our design does not need any additional
regulatory relief," said Anne Kritzmire, a managing
director and head of closed-end-fund business at Nuveen.
On
May 21, Nuveen said that an initial transaction involving
the variable rate securities could be completed within
30 to 60 days.
A
comprehensive solution has been elusive because there
are many complicated issues that must be addressed,
industry experts said.
The
most complicated issues involve municipal closed-end
funds.
They
were able to offer low interest rates on the securities
because buyers benefited from a tax advantage on dividends,
Ms. Gondor said.
To
replace that leverage would require paying a substantially
higher interest rate, thereby reducing returns for common
shareholders, she said.
While
they work on comprehensive solutions, closed-end providers
have already implemented partial fixes.
REFINANCING
PROGRAM
Some closed-end fund advisers — most notably Nuveen,
Eaton Vance and BlackRock — have announced tender
option bond programs that allow them to refinance ARPS
that were issued by muni closed-end funds without harming
common shareholders.
Tender
option bond programs, however, only offer a partial
solution for muni closed-end funds because they can
only be used to replace those ARPS of the highest quality.
June
10
Brokers
Should Unlock Their ARSs
by Felix Salmon, Condé Nast Portfolio.com
Bloomberg's
Darrell Preston has found three investors in auction-rate
securities who have found buyers for their holdings.
That's the good news. The bad news is that these investors'
brokers are refusing to let the owners sell.
Franklin
Biddar bought $100,000 of ARSs through Bank of America;
Chris Longman bought $375,000 of ARSs through UBS; and
David Wilner and Maxwell Stokes bought $200,000 and
$50,000, respectively, of ARSs through Wachovia. All
four of them would like to sell their holdings; three
of them have buyers lined up; and none of them are being
allowed to sell.
Why
can't the banks in question simply do as their clients
are asking them to do? Well, they could, if they wanted
to. But they don't want to, because that might open
them up to legal liability:
"By
allowing customers to sell at a discount, the banks
allow customers to establish damages," said Bryan
Lantagne, the securities division director for Massachusetts
Secretary of State William Galvin. Lantagne is head
of a task force for nine states looking at whether brokers
misrepresented the debt as an alternative to money-market
investments.
This
definitely has the ring of truth to it: I'm sure it's
the real reason that the banks aren't allowing their
clients to sell. And it stinks. It's not the banks'
money, after all, and they have no right to hold on
to it against their clients' wishes. Will the clients
thereby establish damages? Quite possibly, yes. But
if you've screwed up once, it's not generally advisable
to compound the error by acting unprofessionally a second
time. (And if you didn't screw up originally, then you
have nothing to fear from your clients taking a loss:
clients take losses every day.) These orders should
be filled, forthwith. And if they are, a much more liquid
secondary market might even start to spring up in such
things.
June
9
from 
Wall
St. firm told only some about risk
Files
show UBS quietly kept selling to clients;
States, SEC investigate role in market crash
By
Beth Healy, Globe Staff | June 9, 2008
UBS
Financial Services Inc. knew as early as December that
a segment of the municipal bond business was in trouble,
but the Wall Street firm kept selling the investments
to some clients without warning them of the risk, according
to documents reviewed by the Globe.
By
February, the $330 billion auction-rate securities market
had collapsed, locking out the nonprofits and municipalities
that had used the market for years to issue inexpensive
debt, as well as the investors who had purchased it.
UBS brokers have said they were as surprised as anyone
about the market's shutdown.
But
on the other side of the firm, UBS was advising some
large investment banking clients of the looming problems
at least three months before all trading stopped, according
to a letter to investors by one of those clients, a
New Hampshire bond issuer.
It
is a conflict that could mean UBS bears more responsibility
for its role in the auction-rate securities debacle
than it has acknowledged so far. The Swiss firm is under
investigation by Massachusetts and New Hampshire regulators,
and the Securities and Exchange Commission for allegedly
misleading investors in the auction-rate market. These
officials are also examining whether UBS played a role
in allowing the market to fail.
"Investment
banks were principals in this whole thing," said
Secretary of State William F. Galvin, head of the Massachusetts
Securities Division. "There had to be more knowledge
or more planning on their part."
UBS
declined to discuss why it told some clients but not
others about the risks of auction-rate securities. These
are debt securities sold by nonprofits, arts institutions,
and local government entities, which use the money to
fund their operations. They offer low interest rates
for the borrowers, which are reset at frequent auctions
run by brokerage firms.
In
one instance to date, UBS has admitted that it did not
provide enough warning to investors. The firm is repaying
18 Massachusetts cities and towns and the Massachusetts
Turnpike Authority for $37 million in auction-rate securities,
under a settlement last month with Attorney General
Martha Coakley.
Securities
lawyers said evidence that one side of the firm knew
about the impending market collapse without telling
the other could pose legal trouble for UBS.
Philipp
A. Uhlmann, assistant professor of finance at Bentley
College in Waltham, said he believes investors share
responsibility with brokers for making sure they know
what they are buying. But to the extent the securities
were misrepresented, he said, "A retail investor
would have a very good argument."
Richard
Stahl of Hollis, N.H., may be one of those investors.
He
is among the many individuals, businesses, and small-town
treasurers who have $250 billion still trapped in the
auction-rate market, according to Capital Advisors Group
Inc. in Newton.
Stahl,
a retired car dealer, has $650,000 stuck in the auction-rate
bonds of a nonprofit student lender in New Hampshire.
He said his UBS broker, Christian Parker, told him the
investments were in municipal bonds of his state, the
same kind of holdings that make up about 30 percent
of his portfolio. So on Jan. 10, without much deliberation,
Stahl bought them.
On
his UBS statement, the investment appeared under the
heading "municipal securities." But what he
thought were municipal bonds, paying 4.6 percent interest,
actually were the debt of the New Hampshire Higher Education
Loan Corp.
Five
weeks later, on Feb. 13, Stahl learned that he could
not sell those bonds - not that day and not any time
since. then. His broker seemed as confused as he was,
Stahl said. The buyers who had come to the auction market
routinely for 20 years had suddenly vanished; now there
were only sellers. Spooked by the subprime mortgage
crisis, they feared student lenders and other bond issuers
might also default on their debts.
Parker,
Stahl's broker, declined to be interviewed.
"I
was told explicitly that it was a New Hampshire municipal
bond," Stahl said of his investment, which is being
investigated by state and federal securities regulators.
Stahl blames UBS for failing to inform its brokers that
the securities were not, as he was told, as safe as
cash.
Indeed,
a letter to investors on the website of the New Hampshire
student loan group shows that UBS was not a hapless
bystander when the auction-rate market failed. The firm
knew far more about the market's prospects than it has
let on publicly.
The
conflict arose last December. UBS had been the investment
banker to the New Hampshire Higher Education Loan Corp.,
since 1997, handling $773 million in debt offerings
for the student lender. It was by now several months
into the mortgage lending crisis and the resulting credit
crunch that was damaging a host of debt markets. And
UBS had bad news for its client: the money it had borrowed
so cheaply for years was about to get harder to come
by.
The
Concord, N.H., loan group was paying investors about
5.2 percent, on average, across its outstanding bonds.
But to keep investors and rating agencies happy amid
a difficult market, UBS advised the group to offer a
special supplement, according to the letter and an interview
with a top executive of the lending group. Under the
arrangement, if the lender's bonds ever stopped trading,
they would pay a much higher rate - 17 percent or 18
percent, based on the particular bond.
The
loan group, in its letter to investors, says it agreed
to the high emergency rates "at the suggestion
of UBS Securities LLC, its investment banker and broker-dealer,
in order to respond to disruptions in the auction-rate
securities market and attempt to prevent 'failed auctions.'
"
That
deal took effect on Dec. 17, more than three weeks before
UBS sold some of these bonds to Richard Stahl. Stahl
said there was no mention of the potential of "failed
auctions," or he would never have bought the debt.
And he was not told of the 17 percent rate in case the
market failed. He was aware only of the 4.6 percent
he was promised.
And
Stahl was not alone. Here in Massachusetts, the City
of Holyoke Retirement System, one of the groups involved
in the attorney general's settlement, bought student
loan auction-rate securities in December 2007, according
to officials there, when UBS was apparently aware that
there was trouble afoot in the market.
A
UBS spokeswoman, Karina Byrne, said, "UBS is committed
to addressing our clients' concerns about the market
events that caused the breakdown of liquidity for auction
rate securities." The firm is offering cash loans
to clients, using their locked-up investments as collateral.
But
the firm is not offering a sunny outlook. Last month,
UBS said it was leaving the municipal bond business.
Stahl,
73, just wants his money back - as UBS is doing for
the Massachusetts municipalities. But his request was
flatly turned down, a letter from Kenneth A. Christie,
UBS assistant general counsel, shows.
"I
feel like Don Quixote fighting windmills," Stahl
said.
Beth
Healy can be reached at bhealy@globe.com.
© Copyright 2008 The New York Times Company
June
6
Auction-Rate
Investors Say:
We're No Buffetts
by
Daisy Maxey, Dow Jones Newswires
NEW YORK (Dow Jones)--Lisa Colantuono says life isn't
the same now that money she and her husband set aside
to buy a home is stranded in auction-rate securities.
"My
life is turned upside down," says Colantuono, 33
years old, of Coram, N.Y., who invested $200,000 in
a student loan auction-rate bond, Iowa Student Loan
Liquidity Corp., late last year through a financial
adviser at UBS AG (UBS). "I've cried. I've begged.
I've pleaded."
Media reports and comments by financial-industry insiders
have implied that those trapped in auction-rate securities
are sophisticated investors who should have known what
they were getting into. But a rising number of investors
like Colantuono -- who admits to being no financial
wizard -- are coming forward.
These investors and others who plunged a good chunk
of their life savings into what they thought were liquid
securities, which could be sold at frequent auctions,
take issue with the view that they're savvy traders.
These weren't high-stakes gamblers willing to take big
risks for souped-up gains. Some say they invested in
these securities at the suggestion of their brokers
to earn yields only slightly higher than those offered
by money-market funds.
All say they never read a prospectus describing their
investments, and thought they were putting their money
into cash alternatives. It wasn't until auctions began
failing widely in February that they realized they'd
become short-term investors stranded in long-term instruments.
Ed Dowling, 53, of Huntington Station, N.Y., says he
and his wife have more than $2 million trapped in auction-rate
securities issued by closed-end funds managed by Eaton
Vance Corp. (EV), Nuveen Investments Inc., BlackRock
Inc. (BLK), Nueberger Berman Management and Van Kampen
Investments. He purchased the securities through Oppenheimer
& Co. He says the money is about 50% of their savings,
money he and his wife have saved up while running a
clothing manufacturing company in New York City, and
with which they planned to build a home.
"Having
a lot of money and being a sophisticated investor have
nothing to do with one another," he said. On television,
"they spin it like we're a bunch of whining rich
people that basically got what they deserved. In reality,
if I was a sophisticated investor, why would I need
a broker?"
Auction-rate securities, Dowling and others said, were
pitched to them as liquid money-market-like cash accounts.
"I was told that they were totally safe because
they were collateralized by triple A-rated bonds; that's
not a sophisticated investment," he said.
Indeed, a statement from Oppenheimer for the period
Sept. 1, 2007 to Sept. 30, 2007 lists the Dowling's
investment under "cash equivalents," but a
statement for the period Feb. 1, 2008 through Feb. 29,
2008, shows it under "other securities."
Oppenheimer did not return calls seeking comment. Dennis
Pascale, who recently retired after 30 years as a firefighter,
has had to tap his savings to pay medical bills and
settle the estate of his late father, while his money
is tied up.
Pascale, 50, of Tamarack, Fla., consolidated the modest
amount of money his father left when he died about a
year ago, and put it into an account at UBS. He planned
to use the money to pay back-taxes and medical bills,
among other things, but auctions began failing shortly
after the money was invested.
Since then, Pascale has transferred what money he could
away from UBS, but $50,000 remains stranded in auction-rate
securities issued by student-loan trusts.
"That's
a lot of money when you're a fireman; that's what you
make in a year," he said. "This is significant
and a high percentage of my savings, what I anticipated
to have as a reserve in my retirement."
Pascale's receiving no interest from the investments,
and their worth as reflected on his statements has dropped
significantly, he said. The bonds backing Pascale's
investment don't mature until 2046. "I don't think
I'm going to be around in 2046," he said.
Like the Wild West
Pascale said he invested in the instruments because
he was promised slightly more interest than a money-market
fund would pay, that they were insured and that UBS
had decades of experience with them.
"I
traded a few stocks early in my life; just really, really
basic stuff," he said. "Certainly, I don't
know anything about something like this. I believed
the person I met at UBS."
UBS does not comment on individual client accounts,
said Kris Kagel, a spokesman for the firm. UBS is committed
to addressing clients' concerns about the events that
caused the liquidity breakdown, he said, and is working
with clients, on a case-by-case basis, to address their
immediate liquidity needs offering, in many cases, "loans
of up to 100% of the par value of their ARS holdings
at preferred lending rates."
UBS is also committed to working with its peers and
industry groups to develop solutions to restore liquidity,
Kagel said.
Colantuono said she had no experience investing. When
the news of auction failures came, she said her broker
told her it was "a blessing in disguise" because
the interest rate paid on her securities reset to 17%.
At a later date, he called to say the rate would reset
to a lower level.
Now, she's getting no interest, and the bonds underlying
her auction-rate securities don't mature until 2031.
"There's nothing I can do," she said her broker
has told her.
She and Pascale said they've refused offers from UBS
for loans. Asking her to pay interest to access her
own money, said Colantuono, "is like a double slap
in the face." And a bid of 48 cents on the dollar
for her securities, which she received a few weeks ago
on the secondary market, is just too low, she said.
Colantuono says she doesn't have the resources to sue.
Her husband is now working two jobs and barely sees
their two sons, 2 and 6 years of age, during the week,
she said.
Pascale and others say they're troubled that regulators
haven't done more to help them.
The Securities and Exchange Commission is conducting
exams regarding auction-rate securities at broker-dealer
firms in conjunction with the Financial Industry Regulatory
Authority.
In addition, the office of the Massachusetts Secretary
of the Commonwealth William Gavin has an ongoing investigation
into the practices used to sell auction-rate securities
to Massachusetts investors, and has subpoenaed UBS Securities,
Merrill Lynch & Co (MER), Pierce, Fenner & Smith
Inc. and Bank Of America Corp.'s (BAC) Bank of America
Investment Services, said spokesman Brian McNiff. New
York State Attorney General Andrew Cuomo and other state
regulators are also pursuing probes.
David Chandler, 68, a retired attorney and commodities
trader in San Diego, Calif., has tired of waiting. Chandler,
who says he has several hundred thousand dollars tied
up in auction-rate securities which he purchased through
a UBS financial adviser has sued UBS.
Chandler said he sought a conservative investment, but
what he got was a group of preferred securities, some
issued by Eaton Vance closed-end funds, but most issued
by closed-end funds managed by Pacific Investment Management
Co. About 9% of his investment has been redeemed by
Eaton Vance. "My wife and I worked all our lives
for this money," he said. "This was the savings
of a lifetime."
(Daisy Maxey is a Getting Personal columnist who writes
about personalfinance; she covers topics including hedge
funds, annuities, closed-end funds and new trends in
mutual funds.)
By Daisy Maxey; Dow Jones Newswires; 201 938 4048 daisy.maxey@dowjones.com
June
6
Banks
Say Auction-Rate Investors Can't Have Money (Update1)
by
Darrell Preston
June
6 (Bloomberg) -- Franklin Biddar wants his money, and
says Bank of America Corp. won't let him have it.
The
65-year-old real estate investor from Toms River, New
Jersey, said he hasn't had access to cash the bank invested
for him in auction-rate preferred shares ever since
the market seized up in mid-February. Even when Biddar
agreed to sell $100,000 worth of the securities to Fieldstone
Capital Group, Charlotte, North Carolina-based Bank
of America wouldn't release the bonds, saying the transaction
wasn't in his interest, he said.
"I
can't do anything,'' said Biddar, who was so eager to
unlock his money that he was willing to accept 11 percent
less than what he paid for the securities. "Bank
of America got me into these securities that are supposed
to be as safe as a money market, and now they won't
get me out.''
Bank
of America, UBS AG, Wachovia Corp. and at least four
dozen other firms that sold $330 billion of securities
with rates set through periodic bidding are thwarting
attempts to create a secondary market that would allow
investors to access their cash, according to investors.
Dealers claim they are saving customers from needless
losses on securities they marketed as similar to cash-like
instruments.
"By
allowing customers to sell at a discount, the banks
allow customers to establish damages,'' said Bryan Lantagne,
the securities division director for Massachusetts Secretary
of State William Galvin. Lantagne is head of a task
force for nine states looking at whether brokers misrepresented
the debt as an alternative to money-market investments.
At
least 24 proposed class action suits have been filed
since mid-March against brokerages over claims investors
were told the securities were almost as liquid as cash.
Investors
ranging from retirees to Google Inc. in Mountain View,
California, have been trapped in auction-rate bonds
for more than three months after dealers that ran the
bidding suddenly stopped supporting the market as their
losses mounted on debt linked to subprime mortgages.
Before February, dealers routinely bought securities
that went unsold, reassuring investors that they could
get their money back on a moment's notice.
About
99 percent of public auctions for auction-rate securities
sold by student-loan agencies and closed-end funds fail,
as do 48 percent of those for municipals, according
to data compiled by Bloomberg. UBS, which cut the value
of auction-rate securities held for its customers by
5 percent in March, said yesterday it plans to close
its municipal bond business.
"For
someone needing their cash, the only choice is to go
to the secondary market and sell them with a haircut,''
said Steven Caruso, an attorney at Maddox Hargett &
Caruso in New York who is representing investors in
lawsuits against dealers. "I don't think brokerage
firms have any interest in selling these.''
Fieldstone
managing director Robert Franz declined to comment on
potential auction-rate purchases by the New York-based
investment firm. Bank of America spokesman Matt Card
said the bank isn't "talking about specifics of
the auction-rate securities topic.'' Calls to Biddar's
broker, Thomas Cali, and Cali's regional manager, Jon
Foster, weren't returned.
UBS
told Chris Longman, 35, a lawyer in San Diego, and his
wife, Paige Hazard, 30, that it wouldn't try to find
a buyer for their $375,000 of auction-rate securities
in the secondary market because "it's inefficient
and results in low prices,'' said Longman. They were
willing to take a discount on the Franklin Templeton
Limited Duration Income Trust shares because they want
the money available to buy a house, Longman said.
"The
secondary market is inefficient compared to what?''
asked Longman. "The primary market doesn't even
exist any more.''
Karina
Byrne of UBS said the secondary market for auction-
rate securities is "generally very illiquid,''
though the Zurich firm "will seek to execute client
sell orders, where available, at the best price we can
find.''
"We
are actively working with the issuers of these securities
to refinance them, which is the ultimate answer,'' John
Thain, chief executive officer of New York-based Merrill
Lynch & Co., told reporters in Mumbai on May 8.
"The securities are significantly over-collateralized,
so we are confident that our investors will eventually
get the par. In fact, as the securities get refinanced,
they do get that par back.''
States,
cities and other municipal issuers refinanced, converted
or disclosed plans to redeem by July 18 at least $76.1
billion of auction-rate securities, according to data
compiled by Bloomberg. Mutual-fund companies have redeemed
or said they would refinance about $19.8 billion.
John
Hancock Funds announced today that it restructured $89
million of debt for its John Hancock Income Securities
Trust, allowing it to replace auction-rate preferred
securities sold by the trust. The refunding marks the
seventh and final fund to be refinanced by the unit
of Toronto-based Manulife Financial Corp.
After
David Wilner, a 32-year-old New Yorker, found a buyer
for $200,000 of auction-rate securities issued by Chicago-based
Nuveen Investments Inc., Wachovia refused to complete
the sale for him, he said. Instead, the bank offered
to lend him money at 5 percent interest, using the securities
as collateral, he said. At the time, Wilner said he
was getting only 2 percent interest.
"They
said no without an explanation,'' Wilner said. "Then
they offered to loan me my money. What can I do? I am
handcuffed.''
Justin
Gioia, a spokesman for Charlotte-based Wachovia, declined
to comment. Frank Russo, a Wachovia attorney Wilner
said he was directed to, said he isn't allowed to comment
on clients.
Documents
governing auction-rate securities typically say there
is no obligation for dealers to support a secondary
market, said John Duvall Sr., a former Merrill Lynch
broker in Milan, New York, who is now an expert witness
in securities fraud cases.
An
investor who finds a buyer should be able to move the
securities to another dealer or take possession to complete
the transaction, said Vincent DiCarlo, who worked as
a lawyer at the SEC's enforcement division.
"If
a dealer is refusing to complete a transaction it sounds
like stonewalling,'' said DiCarlo, who is now a securities
lawyer in Davis, California.
The
Securities Industry and Financial Markets Association,
a New York-based association for dealers, put a list
of secondary market resources on its Web site. It said
in a statement that it "has undertaken a number
of projects to be helpful in this period of dislocation
in the auction-rate securities market.''
Officials
at the Financial Industry Regulatory Authority, the
self-regulatory group for securities dealers in Washington,
declined through spokesman Herb Perone to respond to
questions.
Restricted
Stock Partners has handled "a few hundred'' secondary
market trades for auction-rate investors, said Barry
Silbert, chief executive officer of the New York-based
firm.
"It's
securities dealers' duty to facilitate the transactions,''
Silbert said.
Some
investors who didn't need immediate access to their
cash initially enjoyed high returns for about two months
as auction failures drove up rates.
The
rate on municipal auction-rate bonds with weekly bidding
shot up to 6.89 percent for the week ended Feb. 20 from
3.90 percent at the start of the year, according to
an index compiled for Sifma. The rate has since fallen
to 3.12 percent.
Maxwell
Stokes, 30, a commodities trader with Hoya Capital in
New York, said he was told by his broker at Wachovia
eight weeks ago that he was stuck in $50,000 of auction-rate
preferred shares issued by money manager Cohen &
Steers Inc. in New York. Needing the cash for an Oct.
12 wedding and to buy a house, Stokes said he moved
his account to online brokerage TD Ameritrade Corp.
of Omaha, Nebraska.
'When
I bought these I wanted a safe security and I was told
they were redeemable at par,'' said Stokes. "Then
when the market failed and I wanted a secondary market
to trade out, I was told that Wachovia doesn't make
a secondary market.''
Biddar,
the New Jersey investor, said he plans to press Bank
of America to complete the trade with Fieldstone, even
if he has to put a billboard on a trailer complaining
about how he was treated and take it to the bank's branches.
"I'm
going to do what I have to,'' Biddar said. "I want
them to sell my securities.''
Following
is a chart of largest issuers of outstanding municipal
auction-rate securities, 2000-2007.
1.
Citigroup, $39.73 billion *
2. UBS, $31.50 billion
3. Morgan Stanley, $20.13 billion
4. Goldman Sachs, $17.80 billion
5. JP Morgan, $15.72 billion
6. Bear Stearns, $12.61 billion
7. Merrill Lynch, $12.37 billion
8. Bank of America, $11.03 billion
9. RBC Dain Rauscher, $10.25 billion
10. Lehman Brothers, $9.74 billion
*Includes Salomon Smith Barney.
Source: Bloomberg data.
To
contact the reporter on this story: Darrell Preston
in Dallas at dpreston@bloomberg.net.
June
4
Funds
seek to break the ARS deadlock
By
Deborah Brewster and Aline van Duyn in New York
Fund
managers are seeking regulatory approval for a new type
of security in an attempt to break the deadlock in parts
of the $300 billion auction rate securities market,
which collapsed four months ago.
The
new security has been devised by closed-end fund managers,
which in the past have issued more than $60 billion
in auction rate preferred shares (ARPs) and are facing
complaints from investors who cannot trade them. The
auction rate securities issued by closed-end funds are
referred to as auction rate preferred shares, but have
the same structure.
If
the new security proves popular with investors, its
structure could potentially be used by other users of
the auction-rate markets that are struggling to find
a way to quell investor discontent.
Jonathan
Isaac, the head of product development at Eaton Vance,
said his group had filed a registration with the Securities
and Exchange Commission and was awaiting approval that
could come within weeks. The new security would have
greater built-in liquidity than ARPs, by including a
put option, and be eligible to be bought by money market
funds.
Eaton
Vance, one of the largest closed-end fund managers,
has redeemed $3.3 billion in auction-rate securities.
Mr Isaac said that if the new security was approved,
his group would immediately begin issuance and use the
proceeds to redeem outstanding ARPs.
Fund
managers have already bought back close to half the
securities they issued, according to industry estimates.
BlackRock said this week it would lift to $1.6 billion
– from an original target of $1 billion –
the amount of auction rate securities it would buy back
from investors.
Mr
Isaac said: “From a legal standpoint, there
is not an obligation to buy back securities issued by
us, but from a reputational standpoint, we don’t
want people out there holding paper with Eaton Vance’s
name on it and thinking they have been cheated by us.”
One
industry executive said that buying out investors could
be risky from a legal perspective, because it could
come at the expense of common shareholders.
Pimco,
another big issuer of ARPs, has not yet announced any
buyback or other plan. A representative said: “We
have been working diligently to find a solution that
is consistent with our fiduciary duty to all shareholders,
both common and preferred.”
US
closed-end funds, which hold $300 billion in assets
under management, have suffered their worst crisis in
decades as a result of the failure of the auction rate
market.
The
funds use leverage to lift returns. Auction rate preferred
shares are a central component of that strategy.
Copyright
The Financial Times Limited 2008
June
3
Great
News. Pressure Works.
Hey
Harry, just a bit of good news. I had 60% of my arps
redeemed from Evergreen yesterday. My broker is Stifel
Nicholas. Just thought i would share with you, so our
pressure is working..
Have
a good day.
Jon
Levine
June
3
BlackRock
to Refinance Bonds
BlackRock
Inc. said it will redeem $1.6 billion in auction rate
shares issued by its tax-exempt closed-end funds. The
company is essentially refinancing the tax-exempt
municipal bond funds, which has proved to be a challenge
because of the tax advantages to their investors.
The
refinancing announced today represents 20% of the securities
issued by BlackRock's funds.
"To
date, this announcement represents the largest tax-exempt
ARPS redemption," said President Robert Kapito.
"BlackRock believes this is a meaningful step that
balances the interests of both preferred and common
shareholders. We continue to work diligently to address
liquidity issues for both taxable and tax-exempt ARPS
still outstanding."
The
securities will be replaced with tender option bonds.
June
1
Blown
Away by Neuberger Berman BS
Nearly
four months after the auctions failed, this is the best
Neuberger Berman (now part of Lehmann Brothers) could
do.
We
are very aware of our preferred shareholders’
need for liquidity. However, while we continue to
vigorously pursue solutions, our actions must be guided
by the best interests of both common and preferred
stockholders. To the extent that there is no negative
impact on common stockholders, we fully intend to
assist preferred stockholders in obtaining liquidity
as equitable solutions become available.
For
the entire Neuberger
Berman nonsense.
May
30
Pimco's
Auction-Rate Holders Fail to Get Satisfaction (Update1)
By
Christopher Condon
May
30 (Bloomberg) -- David Chandler is tired of waiting
for Pacific Investment Management Co. to decide whether
to help investors trapped by the collapse of the $330
billion auction- rate securities market.
The
retired commodities trader and lawyer from San Diego
bought "several hundreds of thousands of dollars''
in auction- rate preferred shares issued by the company's
closed-end funds before trading seized up in February.
Pimco is the only one of the five largest managers of
publicly traded closed-end funds that hasn't initiated
a buyback to let investors cash out.
"They
are a major institution and they are not standing behind
the clients,'' Chandler, 68, said in a telephone interview
from his home in San Diego. He has sued UBS AG, the
broker that sold him the Pimco securities.
Pimco
is caught between the sometimes competing interests
of preferred holders like Chandler and investors who
own the funds' common shares, which trade on exchanges
like stocks. A major obstacle for fund managers is how
to refinance auction-rate securities without increasing
costs, which would penalize the common holders. While
rivals say they have found a solution, Newport Beach,
California-based Pimco is working on it.
"Pimco
knows and understands that this is a difficult issue
for some preferred shareholders,'' a company spokesperson
said in an e-mailed statement to Bloomberg. "We
are devoting considerable time, energy and attention
to finding an approach that, consistent with our fiduciary
obligation, reconciles the competing considerations
facing common and preferred shareholders.''
The
firm, whose investments are overseen by Bill Gross and
Mohamed El-Erian, has more than $800 billion under management.
Pimco's closed-end funds sold $4.3 billion of preferred
shares, ranking the company fourth among U.S. managers,
after Nuveen Investments Inc., BlackRock Inc. and Eaton
Vance Corp. and ahead of Cohen & Steers Inc.
"The
funds' boards have to carefully weigh the benefit of
redeeming the preferred shares, which gives a reputational
benefit, against the duty they have to the common shareholders,''
said Cecilia Gondor, a Miami-based analyst at Thomas
J. Herzfeld Advisors Inc., who tracks the fund industry.
Gross,
64, has been chief investment officer since Pimco's
founding in 1971, and he runs the $128 billion Total
Return Bond Fund, the world's largest fixed-income mutual
fund. His average annual return of 6.91 percent in the
past 10 years through April 30 ranks first among intermediate
bond funds, according to data compiled by Morningstar
Inc. in Chicago.
El-Erian,
49, joined Pimco in 1999 and earned a reputation as
one of the most skilled emerging-markets investors,
posting a 19 percent annualized return through October
2005 with his Emerging Markets Bond Fund. He left in
2006 to head Harvard University's endowment before abruptly
quitting and returning to Pimco in 2008. He serves as
co-chief investment officer with Gross.
Pimco
preferred shareholders such as Chandler have been frustrated
by the company's relative lack of communication. Munich-based
insurer Allianz SE, Pimco's parent, held a conference
call for investors March 11. A second call, scheduled
for April 3, was canceled.
Allianz
said in a letter dated May 12 on its U.S. Web site that
it had so far rejected refinancing options as too risky
for common shareholders, whose returns could fall if
their funds' reduced leverage or borrowing costs rose.
"A
shift in the funds' financing facilities would increase
the future risk of short-term financing being withdrawn
or re-priced at inopportune moments, thereby damaging
the interests of some shareholders,'' the company said
in the letter.
Allianz
didn't provide details on what refinancing options Pimco
had examined. Allianz spokeswoman Megan Frank in New
York said the company was "committed to finding
a solution.''
Until
February, closed-end funds used preferred shares issued
on the auction-rate market to raise debt with maturities
as long as 30 years, while paying interest at short-term
rates that reset through auctions every seven, 28, 35
or 49 days. Most of the funds used the money to expand
their investments by as much as 50 percent to boost
returns for common shareholders.
The
auction-rate market, dominated by municipal-bond issuers,
failed as companies that insured the bonds faced possible
credit-rating downgrades. Concerns in the market left
investors holding $63.4 billion of preferred shares
unable to sell securities that they thought were as
liquid as money-market funds.
Under
pressure from stranded investors, regulators and legislators
led by Chairman of the House Financial Services Committee
Barney Frank, fund companies have lined up financing
to repurchase about $7 billion of preferred shares and
announced plans to buy back another $13.6 billion. Funds
have used bank loans, commercial paper conduits, tender
option bonds and other instruments to finance the transactions.
"In
the short term, there is very little risk in replacing
the preferred shares, though it's true that in the longer
term there are things that can happen with the new financing
that are out of your control,'' said Alex Reiss, a closed-end
fund analyst at Stifel Nicolaus & Co. in New York.
Eaton
Vance, the third-largest U.S. manager of closed-end
funds, has redeemed about $3.3 billion of the $5 billion
it had outstanding in February by refinancing funds
through loans and debt instruments.
The
Boston-based company also asked the U.S. Securities
and Exchange Commission on May 20 for permission to
issue a new form of preferred share eligible for purchase
by money-market funds, whose $3.5 trillion in assets
would expand the pool of potential buyers. Eaton Vance
said the new product could help the company liquidate
its remaining frozen shares. Douglas Scheidt, an associate
director in the SEC's investment-management division,
said on May 23 he expected the agency's staff to respond
within ``the next couple of weeks.''
Chicago-based
Nuveen and BlackRock, the largest and second- biggest
closed-end managers, have secured financing to redeem
a combined $2.6 billion by mid-June. Each is also working
to introduce a money-fund eligible product that will
help finance additional redemptions.
"There
have been a lot of fits and starts to this,'' said Steven
Baffico, head of closed-end funds at New York-based
BlackRock. "We've probably looked at 50 different
options as part of the challenge of finding a wholesale
solution.''
Chandler,
who owns preferred issued by Pimco California Municipal
Fund II and Pimco California Municipal Fund III, is
lead plaintiff in a lawsuit against Zurich-based UBS,
according to a March 21 statement from law firm Girard
Gibbs LP in San Francisco. Chandler said he doubts he
will recover his investment at face value.
The
complaint, which seeks class-action status, alleges
UBS marketed auction-rate securities as easy-to-trade
alternatives to money market funds. Chandler's suit
is one of at least 15 filed since March 17 over auction-rate
securities against firms, including Citigroup Inc.,
Morgan Stanley and Wachovia Corp.
UBS
spokeswoman Karina Byrne said the company doesn't comment
on individual claims by investors. She said UBS is 'working
with clients on a case-by-case basis to address their
immediate liquidity needs.''
Phillip
Goldstein, a hedge-fund manager and founder of Saddle
Brook, New Jersey-based Bulldog Investors, has about
$300 million invested in closed-end fund common shares.
"I'm
suspicious of some of the managers that are redeeming
preferred shares, whether they are acting in the interest
of the funds or the management company to salvage their
reputations,'' he said.
To
contact the reporter on this story: Christopher Condon
in Boston at ccondon4@bloomberg.net
May
27
Auction-Rate
Securities: Out of Luck
Holders
of these bonds backed by student loans are facing big
losses, even as issuers begin discounted buybacks
by Aaron Pressman of BusinessWeek
The auction-rate securities mess is starting to clear
up for some investors, but for those who own any of
the $85 billion of such debt backed by student loans,
the news is bad and getting worse. Sold as rock-solid,
highly liquid, cash-equivalent investments, student-loan-backed
auction-rate bonds have ended up as one of the worst-performing
segments of the market.
In
limited secondary market trading, student-loan-backed
debt is trading for as little 75¢ on the dollar,
a huge loss for investors who were pitched the securities
as a higher-yielding alternative to certificates of
deposit or money market mutual funds. Analysts expect
bids to continue dropping as more holders, particularly
public companies, look to sell.
"A
lot of people are coming to the realization that there's
no light at the end of the tunnel for these," says
Cathy Gregg, a partner at corporate finance consulting
firm Treasury Strategies in Chicago. For the full
article.
May
23
Goldman
Sachs Faces Suit On Auction-Rate Securities
Goldman
Sachs Group faces a purported class-action lawsuit alleging
the company shared materially false information or withheld
certain facts concerning its auction-rate securities,
resulting in the artificial inflation of those securities'
value.
According
to law firm Stull, Stull & Brody, a suit was filed
in the U.S. District Court for the Southern District
of New York on behalf of all purchasers and repurchasers
of auction-rate securities offered by Goldman Sachs
and its broker-dealer, Goldman Sachs & Co., between
March 25, 2003, and Feb. 13, 2008.
The
firm said Goldman Sachs misrepresented the securities
as cash alternatives, which turned out to be liquid
solely because of artificial manipulation of the auction
market.
A
representative from Goldman Sachs had no immediate comment.
++++++++++++++++
May
22
Nuveen
had a conference call
Nuveen
Investments had a short conference call on Thursday,
May 22, 2008, to discuss its latest press release which
you can read here.
You can also listen to a replay of the conference
call here. You
won't learn much except they're working hard to get
us our money back and Nuveen begs for our "continued
patience and understanding." I figure, with
luck, we Nuveeen ARPS holders have a shot at getting
our money back by Christmas, 2008.
The
Chicago Tribune grabbed the Nuveen press release
(the one above) and wrote the following story:
from
chicagotribune.com
Nuveen
to restructure auction-rate debt issues
Arranges financing for up to $1.75 billion in variable-rate
debt instruments to replace the troubled securities
By
James P. Miller, Tribune staff reporter
5:24
PM CDT, May 21, 2008
Chicago-based
Nuveen Investments Inc. said Wednesday that the firm
is gaining traction in its effort to refinance billions
of dollars worth of auction-rate securities that are
currently frozen.
Nuveen-sponsored
mutual funds issued the so-called "auction-rate
preferred shares" in past years as a way to use
leverage to enhance returns for fund investors: the
low-cost short-term debt, when invested in higher-paying
investments the funds make, have helped juice the earnings
of the closed-end funds.
Since
the credit market seized up several months ago, however,
the auction process has been effectively paralyzed.
As a result, holders of the total $15.4 billion in such
debt issued by Nuveen funds are now stuck holding what
they had thought were short-term, highly liquid investments.
The
failure of the auction system has put other mutual-fund
operators, including Calamos Asset Management and Eaton
Vance Corp., in the same predicament.
Nuveen
said Wednesday that it has arranged support that would
allow it to issue up to $1.75 billion in a new variable-rate
debt instrument that officials think could replace the
troubled auction-based securities.
"If
we are successful in completing our efforts to develop
VRDP, and market it to investors, we believe we can
achieve our key goals of reducing costs of leverage
over time for common shareholders of Nuveen municipal
funds while providing liquidity at par for ARPS holders,"
said Nuveen Investments Executive Vice President Bill
Adams.
Adams'
comments underscore how Nuveen must walk a tightrope
between two opposing interests involved in the ARPS
mess.
On
one hand, investors in the closed-end funds that made
use of the ARPS-based leverage receive higher returns
than they would if the ARPS debt is refinanced with
a more costly form of leverage.
On
the other hand, investors who purchased the ARPS from
their brokers expecting to be able to easily liquidate
their "as-good-as-cash" investment are noisily
demanding to be released from their holdings.
Nuveen
is hoping to address both sides' concerns by refinancing
the ARPS debt with the VRDP debt.
Under
the auction system, a borrower issues debt that has
a long-term maturity, but is structured in such a way
that holders can liquidate their investment at weekly
or monthly auctions. Each auction resets the interest
rate on the obligation.
The
auction system worked reasonably well for a number of
years, but turmoil in the credit markets has driven
buyers for such debt to the sidelines -- leaving existing
holders stuck holding the bag.
Among
other things, the VRDP that Nuveen is seeking to arrange
would provide holders with an unconditional "put"
option, which means that investors would have the right
to demand return of their principal. That provision
would make the debt attractive to money-market funds
which are currently prohibited from investing in ARPS.
The
variable-rate debt would be handled by a "remarketing
agent," Nuveen said, which would set the dividend
rate and match buyers and sellers of the debt instrument.
Nuveen
said Wednesday that it hopes to bring an initial VRDP
issue to market within thirty to sixty days.
For
technical reasons, it is easier for Nuveen's taxable
closed-end funds to refinance their ARPS debt than it
is for the company's tax-free municipal bond funds to
do so. While none of the company's tax-free funds have
refinanced their ARPS debt yet, Nuveen taxable funds
have announced refinancings of $1.7 billion of their
about $4.3 billion in outstanding ARPS.
The
VRDP option is promising, Nuveen officials said, because
it has the potential to help the company's tax-free
funds resolve their auction-related debt difficulties.
May20
Should
I borrow from UBS?
Answer:
Only if you're 100% certifiable
"Hi
Harry - A month ago our UBS broker called from New York
after a Manager's Meeting and told us that UBS would
lend us the full value of the money we have tied
up in auction rate securities. This is the agreement
he gave us. I especially like item #4 on page 2. Who
in their right mind would sign an agreement like this?"
Read
and enjoy UBS's
Agreement.
++++++++++++++++
How
do partial redemptions work -- allegedly?
Many
auction rate securities are being redeemed partially.
The issuer will say it will redeem 50% of an issue.
Does this mean, if you hold that issue, that you will
get 50% of your money back back? Logic would say "Yes."
But what's happens tells the standard Wall Street story
-- some people get screwed and the good clients preferential
treatment. Here's an explanation from Wachovia:
"Once
Wachovia Securities receives notice of any allocation
from a partial call of an ARS issue, it conducts a
computer-generated lottery to allocate the partial
call in a fair and impartial manner among customers
who hold ARS in “street name.”
Why
they need a lottery when any moron can figure 50% beats
me. Here's the full Wachovia
document. See if you can undertand it. I think
the SEC needs to know about this nonsense.
Linda,
a reader, writes:
Harry,
Is this lottery process that Wachovia is doing legal?
How do they get away with this stuff? I have read
your site and agree with if they redeem 50% then I
should get 50% of my investment back but outside of
SEC investigation which is slow and biased toward
the securities industry - how do we fight this stuff?
Dear
Linda,
I don't know how you fight this stuff. I suspect you
make a big stink, threaten to sue, contact all the usual
authorities, get some publicity. I believe this week's
issue of BusinessWeek has a story exposing the
blatant unfairness / crookedness of these partial redemptions.
-- Harry Newton
From
Mike:
I saw an allegation of possible discriminatory partial
redemptions on your website. I am not sure if this is
actually happening (it is -- Harry), but I would
suggest the following:
1. Monitor your funds closely for press releases of
partial redemptions.
2. As soon as you know of a partial redemption, e-mail
or write your broker on how the redemption will be allocated
before happens.
3. If you don't understand their responses, ask direct
questions until you get a clear understanding of the
redemption process.
4. Make sure you ask how shares owned by the broker
will be handled. More specifically, will the shares
owned by the broker be withdrawn from consideration
during the redemption to increase the redemption probability
for their clients?
5. Keep the written responses you receive.
6. Start following up with the broker on redemption
day to see how many of your shares were liquidated and
when you will receive the cash.
Merrill
Lynch's Incredible Smoking Gun
On
February 4, 2008 (nine days before the auctions failed),
Merrill Lynch wrote:
Can
I be sure of getting my money back when I want it?
Auction
market securities do not provide the daily access to
funds that money market funds do, but we think that
the higher rates compensate for the slightly lesser
degree of liquidity. Except in the rare case of a failed
auction (see below), investors who choose to do so can
receive their principal back at the next regularly scheduled
auction. ...
How
often do closed-end fund auctions fail?
Hardly
ever. There was one failed auction on January 22, 2008.
But that was isolated event that involved only a small
number of shares, and the next auction from that same
closed-end fund was successful. Prior to the recent
episode, the last failure that involved closed end fund
securities held by individual investors was in 1990.
The
auction failures in 1990 stemmed from the descent to
insolvency of Drexel, Burnham, Lambert, who was the
sole broker-dealer involved in the auctions. The fails
lasted for several months until a new broker-dealer
began supporting the auctions. Investors who held on
did not lose money, as they received par value back
when the auctions returned with the new broker-dealer.
For
Merrill's full "research,"
click here.
What's
most amazing about the above piece of investor-reassuring
"research is that nine days later it was Merrill
Lynch and Goldman Sachs who stopped supporting the auction
rate markets -- and their withdrawal from the market
caused the auctions to fail. What was Merrill Lynch
thinking? Did they deliberately push these securities
on their clients, knowing it would rid Merrill's own
balance sheet of some of them, knowing that their clients
would be stuck with them? Was this your typical Wall
Street "screw the client, do the best for us"
strategy? It sure smells like it. I think the regulators
need to investigate this one. This one seriously stinks.
-- Harry Newton
May
20
Lawyers
write
Buyers’ and Brokers’ Remorse
Grows Over Auction-Rate Securities
As
the furor over auction-rate securities continues to
grow, so too, do the lawsuits. To date, the majority
of Wall Street’s major investment banks and brokerage
firms, including Citigroup, E-Trade Financial Corp.,
Merrill Lynch, Morgan Stanley, Raymond James Financial,
UBS, AG, Wachovia Corp. and Wells Fargo Investments,
are the target of investor litigation over failed auction-rate
securities.
The
outcome of these lawsuits is anyone’s guess. Regardless,
an even bigger problem now awaits Wall Street: an unprecedented
crisis in confidence with investors. The unspoken bond
of trust between broker and client is supposed to be
sacred; once broken, it’s difficult, if not impossible,
to reconstruct. It becomes a situation reminiscent of
the age-old children’s nursery rhyme in which,
“all the king’s horses and all the king’s
men couldn’t put Humpty together again.”
|
| |
May
15, 2008
How to read this site:
If
you own auction rate securities, you should visit this site
every day. You should read from the top down. You should
be aware that I add stuff in chronological order -- and sometimes
I'll add stuff in the middle as I find it, like the piece of
crap from Allianz, which I just found. The site looks best using
the browser, Firefox. It doesn't look so good in Microsoft's
Internet Explorer. I don't know why.
My
present recommendations:
1. Pressure is the key strategy today. Phone calls. Emails.
Letters. Get public.
2. Email me your story. 
Reporters from the nation's financial press want to hear your
story. You need to get public. Do not be embarrassed because
you got sold this crap and you're stupid. I did also and I
also feel stupid. And I bet I have more of it than you. But
embarrassment and stupidity has not stopped me screaming and
shouting about my injustice.
3. You can sell. But you need to push your broker. See below
for places to sell.
4. You can get a long-term loan -- one expiring when your
auction rate securities are redeemed. But you need to push
your broker.
5. If you are being redeemed -- but not in full -- you need
to scream really loud, otherwise your broker will screw you
(financial term) and redeem fewer of your securities than
he should. Many brokers are acting dishonestly. See
here.
--
Harry Newton
|
May
14
Reporter
Alert
I
have two reporters who need help. One is working on a story about
discriminatory redemption. Let's say your issuer says it's redeeming
45% of the issue you have ARPS in. Then one day you discover that
only 5% of your ARPS have been redeemed. You ask your broker, "What
happened? Why weren't 45% of my position redeemed?" He
denies all, acts dumb and ignorant, and directs you to someone else,
whom you can't find or contact.
Another
reporter is trying to find owners of auction-rate securities who
are willing to accept less than par just to get out of their securities,
but haven't been able to get their brokers to sell them.
If
either of these have happened to you, please send me an email. Both
reporters have said they will not use your name, if you wish. You
will remain anonymous. My email is
+++++++++++++++++++
May
13
The quote below from the weekend's Barrons is very important.
It shows that the pressure we're all bringing on our brokers and
our issuers is actually getting through. It's having some effect.
And please keep it up. These people must be made to understand that
if we don't get 100% of our money back and soon, there'll be legal
problems for them beyond their wildest imaginations and none of
us (nor our friends, nor our enemies) will ever do business with
these miserable people again ever. -- Harry Newton.
May
12 from
"... But some closed-end BlackRock funds sold auction-rate
preferred stock, which has stopped trading amid an effective shutdown
of the auction-rate-securities market. Until the situation is
resolved, it will be tough for BlackRock -- and many other asset
managers -- to sell new closed-end funds."
++++++++++++++++++++
May
13
from The Law Blog, WSJ.com on law and business and the business
of law.
Auction-Rate Securities:
Legal
Headache for Wall Street, and How
Posted
by Amir Efrati
When
we last told you about the now-frozen auction-rate securities market,
Law Blog readers engaged in a spirited debate about legal theories
plaintiffs could use against Wall Street.
We
asked some knowledgeable defense lawyers to see what they thought.
The
conclusion: Some lawyers say Wall Street banks may have a tougher
time defending auction-rate suits than claims related to mortgage-backed
securities in part because the banks played such an extensive role
in facilitating the market. And legal claims by individuals have
a more public and sympathetic face than some of the litigation arising
out the woes in the mortgage-backed market¸ which largely
concern institutional players. Here’s today’s WSJ story
by Amir Efrati (that’s me) and Liz Rappaport, and here’s
a breakdown of the legal angles.
Gov’t
probes: The SEC and AGs like New York’s Andrew Cuomo are
investigating. Cuomo’s probe is focused on what investors were
told at the point of sale; whether some investors were put into
those securities without their approval; how Wall Street banks and
brokers made their money; and whether banks tipped off favored institutional
investors before the banks withdrew their support for the market,
so that those investors could escape the market’s implosion,
according to people familiar with the matter.
Wall
Street Defenses: In civil litigation, lawyers say, Wall Street’s
best defense is the economy. “If the banks had good faith belief
that the securities would be liquid and only because of the credit
crunch that changed, that would be a major defense,” says Irving
Pollack, a former SEC commissioner now at Fulbright.
For
lawsuits seeking class-action status, the bar is high for establishing
a “pattern and practice” of misrepresentation. “You’d
have to see email [from an executive] that said, ‘Make sure
our brokers say it’s like a money-market fund,’”
says Trace Schmeltz of Dewey.
A
basic issue in private claims will be what investors were told,
both in legal documents and by salespeople, about the market’s
risks. Offering documents, which need to be shown only to a the
security’s original buyer, generally include caveats, so a
legal claim over disclosure may be tough. And from the get-go, Wall
Street has been adamant that it is not required to make a market
or to support auctions.
Plaintiff
Allegations: Some plaintiffs allege they were never shown offering
documents and were guaranteed liquidity. In one arbitration claim,
filed by ASTAR Air Cargo Inc., the private cargo airline alleged
Merrill Lynch promised it would buy the debt between auctions. (Merrill
denies having made such a promise. Click
here for documents.)
There
is no shortage of potentially sympathetic plaintiffs. Richard Walden,
who runs a charity called Operation USA, says he had to lay off
two employees and close an office in Cambodia after the charity’s
nearly $1.5 million in auction-rate securities became frozen and
left him unable to get needed cash. The charity is considering joining
a recently-filed potential class-action lawsuit as a named plaintiff
against UBS AG, his organization’s broker. (A UBS spokeswoman
said the firm doesn’t comment on individual clients and said
the firm has offered customers loans against their securities if
they need cash immediately.)
Municipalities
as Plaintiffs: William Doyle, a municipal finance lawyer at
Orrick, says he expects some municipal and state-government issuers,
who have been hurt by failed auctions, will sue Wall Street regardless
of their chances of success because of political pressure.
If
any auction rate investors have stories to share, or any lawyers
can give us insight into this legal mess, email me at amir.efrati@wsj.com.
Comments
by WSJ (Wall Street Journal) readers can be found at WSJ
Law Blog
+++++++++++
May
12
Major
piece of Dog-Do-Do from Allianz
Allianz
Global Investors U.S. Retail
May 12, 2008
Dear Auction-Rate Preferred Shareholder:
Following many years of successful auctions, 2008’s disruptions
in the market for auction rate preferred securities have substantially
reduced liquidity. These disruptions are unprecedented.
We want to update you on our view of this situation and how we are
moving to address your investment in these securities.
Three principles are guiding our response to this problem.
First, the credit quality of the funds' preferred shares is very
high. We expect this fact ultimately may be a driving factor behind
a solution to this problem.
Second, any step we take must take into account the interests of
all common as well as auction-rate preferred shareholders in these
funds.
Third, any solution we put into place must minimize the possibility
of unintended consequences—especially the risk of a solution
creating more problems for our investors than it solves.
Because of these principles we have been disciplined and measured
in our efforts to address this very real challenge. We are working
hard with the funds' sub-advisers — PIMCO and Nicholas-Applegate
— as well as others in the industry to find a solution to this
problem.
We have examined a number of short-term solutions, but concluded
they ultimately will not serve the overall interests of shareholders.
Specifically, a shift in the funds’ financing facilities would
increase the future risk of short-term financing being
withdrawn or re-priced at inopportune moments, thereby damaging
the interests of some shareholders. Accordingly, we continue to
explore the possibilities of more sustainable longer term solutions.
We are committed to finding solutions which serve the interests
of all of our fund shareholders. We remain focused on achieving
that and will keep you informed as our efforts proceed.
Sincerely,
Allianz Global Investors U.S. Retail LLC
+++++++++++++++++
May
10 from timesunion.com
(Albany, New York)
Plug
Power suing UBS for nearly $63 million
by
Larry Rulison, Business writer
COLONIE
-- Plug Power Inc. is suing UBS Financial Services Inc. for $62.8
million, claiming the brokerage firm improperly invested that sum
in so-called auction rate securities, now battered by the subprime
mortgage mess.
On Thursday, the Latham-based fuel-cell manufacturer announced it
was taking a $2.8 million charge to account for the drop in value
of the investments, which are bonds sold through periodic auction.
That
was the same day the company filed suit against UBS in U.S. District
Court in Albany. UBS has been the company's broker since 2005.
In
February, after the subprime mortgage meltdown, the $300 billion
market for auction rate securities, also known as ARS, dried up,
leaving Plug and others unable to liquidate their holdings.
The
auction rate securities UBS bought for Plug were backed by federally
insured student loans, and Plug said in the lawsuit that student
loan-backed ARS are the hardest to sell, with discounts of 25 percent
or more.
"Throughout
the fall of 2007, other brokers and investment advisers began advising
clients to liquidate their ARS holdings, in light of the failed
auctions and increased liquidity risks," the lawsuit states.
"UBS did not notify Plug Power of these risks."
A
UBS spokesman did not return a phone call or e-mail for comment.
This
week, UBS settled with 20 municipalities in Massachusetts that invested
in ARS, and New York Attorney General Andrew Cuomo also is investigating
the company.
Plug
said its chief financial officer, Gerry Anderson, called UBS in
October with concerns over the investments. Plug alleges the broker
told Anderson the securities "were safe and liquid."
Plug
warned investors in March that it held $92.8 million in ARS and
there was "increased liquidity risk" because of market
disruption.
Plug
spokesman Eoin Connolly said Friday he believes the company was
able to convert a portion of that to cash -- resulting in the current
$60 million in holdings. He said the suit was filed to give the
company options for recovering the money.
"It
could resolve itself any number of ways," he said.
As
of March 31, Plug had $146.8 million in cash, cash equivalents and
available-for-sale securities, among which $60 million was invested
in ARS.
During
a conference call Thursday, analysts asked officials how the company
would manage with a significant portion of its cash position tied
up in ARS.
Plug
is still spending about $10 million a quarter on research and development
on fuel-cell systems designed for both commercial and home power
markets, but its operations have yet to break even. It lost $20
million in the first quarter.
"We
still are confident that we will have appropriate liquidity to continue
to drive this business to market adoption and grow it profitably,"
Anderson said.
Larry
Rulison can be reached at 454-5504 or by e-mail at lrulison@timesunion.com.
+++++++++++++++++
May
8 from InvestmentFraud.pro
UBS
Settles Auction Rate Cases With Clients!
UBS
agrees to pay $37 million back to investors taken by the firm's
auction rate securities. This comes on the heels of the Mass. Attorney
General putting a great deal of pressure on the firm. UBS did not
just decide to do the right thing out of the goodness of their heart.
Nothing less than the AGs office putting its full weight on the
firm did the trick. For individual investors, nothing less than
a FINRA arbitration claim will get the firm to do the same thing
for individual investors.
Broker
(UBS) to return $37m to towns
Wall Street firm settles with AG
By Beth Healy, Globe Staff May 8, 2008
A
major Wall Street firm agreed to return $37 million to 17 cities
and towns in the state, as well as to the Massachusetts Turnpike
Authority, after it allegedly misled them into buying investments
they thought were as safe as cash.
UBS
Financial Services Inc. reached an agreement with Attorney General
Martha Coakley after she found that the brokerage had not fully
disclosed the risks of the investments, known as auction-rate securities.
Cities were unable to get their hands on their money when the market
for these investments evaporated almost overnight.
Winchester,
which had invested more than any other town, will receive $6.8 million
in the settlement. The turnpike will receive $4.4 million, and the
city of Holyoke and its retirement system will get $3.2 million.
"There
have been a lot of new financial products," Coakley said. "There's
been a heavy push by brokers to sell them, and a rush by cities
and towns to take advantage of what appeared to be a burgeoning
market."
The
settlement was the first admission by UBS or any US brokerage that
something may have been amiss in the sales of municipal debt securities.
The market for these securities relied on weekly and monthly auctions
run by brokerage firms. But starting in February the auctions attracted
only sellers and no buyers, so the market failed.
UBS
spokeswoman Karina Byrne characterized the settlement as a one-time
event, based on a Massachusetts law that requires towns and cities
to keep cash in only highly liquid accounts so they are readily
accessible. She said the agreement followed the attorney general's
finding that these securities were "not permissible" in
municipal accounts.
"UBS
is pleased this matter has been resolved," Byrne said. The
firm is still under investigation by state and federal regulators
for how it sold such investments to individuals and companies.
In Barnstable, which invested the second-largest amount in the state
at $6.1 million, director of finance Mark Milne said the town first
realized it had a problem in February, when it tried to sell the
bonds.
"We
had tried to liquidate some of the money from this investment and
put it someplace else, and were told that we couldn't," Milne
said in an interview. The town needed the funds to pay bills coming
due, he said, and had to cash out other investments instead.
The
bonds accounted for about 6 percent of Barnstable's cash account,
Milne said. Not only was Barnstable treasurer Debra Blanchette told
she could withdraw the funds at any time, Milne said, but, "she
wasn't even told they were auction-rate securities."
Auction-rate
securities were part of a wave of arcane debt products that investment
firms sold heavily in the boom period before last summer's subprime
mortgage meltdown. With interest rates low, firms offered these
municipal bonds as a safe alternative to cash that paid a slightly
better yield. Investors were supposed to be able to get out of these
securities on a weekly or monthly basis.
But
there was a catch many investors didn't foresee: The securities
relied on constant investor demand at auctions. In February, spooked
investors stopped participating in the auctions altogether, leaving
sellers such as towns and public agencies unable to sell their securities.
The
result was that investors in this $330 billion auction-rate market
were stuck holding bonds they couldn't sell. They weren't losing
money, per se, but they could not access their money. UBS is now
buying back the bonds - something it and other brokers refused to
do when the market collapsed.
The
attorney general's action sprang from a case this year, in which
Merrill Lynch & Co. agreed to repay the city of Springfield
for $14 million in another type of debt that brokers were selling
to municipalities, CDOs, or collateralized debt obligations.
As with auction-rate bonds, CDOs were promoted as "cash-like"
but investors were unable to get their money out when the market
for mortgage-related debt froze.
Holyoke's
mayor, Michael J. Sullivan, called news of the UBS settlement "manna
from heaven."
Under
the agreement, UBS will buy back $3.2 million in auction-rate bonds
from the Western Massachusetts city and its retirement system. Sullivan
said the city had been advised by an investment consultant to buy
the securities, a move he said he believed was an "honest error."
Holyoke had not been in any immediate financial risk, Sullivan said,
but he added, "In the long term, we might have had some exposure
to those investments evaporating."
UBS
is hoping this matter is closed. This week, the firm said it's
leaving the municipal finance business. But this may be just
the beginning of the fallout from the collapse of auction-rate markets.
Secretary
of State William F. Galvin is investigating whether UBS and other
firms may have inappropriately sold these securities to individual
investors and businesses. In March, Galvin, who oversees the state
Securities Division, issued subpoenas to UBS, Merrill Lynch, and
Bank of America Investment Services Inc.
Specifically,
the division is examining whether investors were properly informed
of the risks in these securities, and whether they were appropriate
for the people who bought them. It's also looking into the role
the investment banks may have played in causing the auctions to
fail. UBS declined to comment on the investigation.
The
Securities and Exchange Commission also is investigating the auction-rate
markets.
|
May
8
from today's Wall Street Journal
MUMBAI,
India -- Merrill Lynch & Co. Chief Executive John Thain
said he expects auction-rate securities held by the investment
bank's clients to be fully refinanced within one year by
the issuers, giving customers access to their cash.
"So
far, the securities held by customers in our system, about
23% of the total has already been refinanced, and so I expect,
over the next 12 months or so, we will see the securities
get [fully] refinanced by the issuers and the customers get
their money back," Mr. Thain said at a news conference
in Mumbai (the new name for Bombay).
|
 |
|
Auction-Rate
Securities
A Really, Truly Terrible Investment
by Liz Moyer, 05.08.08, 2:50 PM ET from Forbes.com
There
are bad investments, and then there are really, really
bad investments.
In
the $330 billion world of auction-rate securities, put
bonds backed by education loans in that latter category.
Not only are investors stuck with about $80 billion
of the unsellable bonds, many of them are now getting
paid zero interest for their troubles.
Regulators
and issuers are scrambling to find a way out for thousands
of investors, but this will typically mean that investors
who want to sell will have to do so at a loss.
Late
Wednesday, the Missouri Higher Education Loan Authority
told investors in some $3 billion of its outstanding
auction-rate bonds that it would buy back $30 million
or so at a discount, through a secondary trading market
set up in February by Restricted Stock Partners. It
is the first issuer of student-loan-backed auction rates
to step into the secondary market.
"Mohela,"
as the state's lending authority is known, won't say
what that discount will be, but Barry Silbert, the president
of New York-based Restricted Stock Partners says other
bonds backed by student loans have sold at discounts
of 20% to 25% or more.
In
April, JPMorgan Chase told investors in three student-loan-backed
bonds that it would buy back $1.1 billion at par. Other
banks, including UBS, have told investors it would mark
down their auction-rate holdings.
Auction-rate
securities are another one of those obscure and increasingly
toxic securities products that have gotten caught up
in the credit-market turmoil. They are long-term bonds,
the rates for which reset at periodic auctions, usually
at intervals of seven to 35 days. They allow issuers,
like municipal agencies and student lenders, to get
better borrowing terms for long-term debt. For investors,
they had behaved pretty much like cash--until this year.
But,
of course, they aren't cash. When the credit markets
seized up, investors started shying away from fixed
income, and the investment banks that cooked up the
products and sold them to investors refused to step
in and buy, allowing those auctions to fail. That left
investors unable to sell their holdings.
It
was an unhappy circumstance for the issuers, too. According
to the terms of the bonds, the interest rates would
reset at much higher penalty rates in the event of an
auction failure, then fluctuate in subsequent auctions.
Municipal
agencies like the Port Authority of New York and New
Jersey make up the bulk of auction-rate issuers, about
$185 billion worth. For many, the higher penalty rates
(for the Port Authority, rates reset to 20% from 4%
after a failed auction in February), threatened to derail
infrastructure projects, and many issuers have refinanced
into more traditional fixed-rate bonds.
At
least the investors in bonds backed by municipal debt
get paid the high penalty rate for the inconvenience
of having illiquid holdings. Investors in student-loan-backed
auction-rate securities are seeing the initial reset
rates plummet to zero because of the technical way these
bonds are structured. That means they are holding 30-year
bonds paying no interest. The 30-year Treasury, by comparison,
pays 4.59%.
For
example, $5 billion of auction-rate securities issued
by Pennsylvania Higher Education Assistance Agency,
one of the biggest in the market, recently reset to
zero.
The
investors in these securities include thousands of ordinary
people who thought they were buying money-market securities,
according to Karen Tyler, the state securities regulator
in North Dakota and president of the North American
Securities Administrators Association.
Instead,
these investors are stuck and can't sell without taking
a loss. And many have locked up funds they had set aside
for mortgage down payments or living expenses, small-business
payrolls, and, in the case of farmers, spring planting
funds, Tyler said.
Eleven
states, the Securities and Exchange Commission, and
the New York Attorney General's Office are investigating
how investment banks marketed and sold auction-rate
securities. Hundreds of complaints have poured in to
state regulators.
Merrill
Lynch and Goldman Sachs have said they had received
requests for information from various governmental agencies
regarding auction-rate securities, including the recent
failure of auctions, and are cooperating.
Massachusetts
state regulators subpoenaed Merrill, UBS and Bank of
America in March in regards to their auction-rate activities.
The
solution may be that regulators force the banks to return
the money to investors, which is why the task force
is looking into how the products were presented and
sold. "If it was represented that they were as
good as cash, then investment banks need to pay cash
for them," Tyler said. "The investment banks
need to make the liquidity event happen."
|
May
7
"It
wasn't an auction. And it wasn't preferred." - Peter
Sidel, investor
"The issuers know if they don't fix this mess, they
won't stay in business."
This
week's contacts to harass:
1. Tim Hurd is the partner at Madison Dearborn responsible
for Nuveen. He needs to understand that if Nuveen doesn't
fix this mess, his $6 billion investment in Nuveen will be
valueless. Ditto for his job and his career. His direct phone
number is 312-895-1170.
2.
Bill Adams. He created the first Nuveen closed-end fund.
He is responsible at Nuveen for fixing this mess. He is EVP.
His direct phone number is 312-917-7711. Tell him to redeem
your ARPS or you'll never ever do business with Nuveen again.
My
friend has recently spoken to Mr. Adams. My friend's email
of May 8:
"Bill
Adams reiterated what we already know. The redemption is
delayed by the coordinating of the different facets of the
VRDPs. SEC, Put Provider and lining up MM funds who will
purchase. He said he owns shares of ARPs along with family
members and friends and can't go anywhere (socially) without
someone asking him when they will be redeemed. I spoke to
him about different aspects of ARPS that I have recently
researched and wanted confirmation for. Both Hurd and Adams
are concerned about their Nuveen reputation and ability
to bring new products to market if this is not resolved.
We spoke about 20 minutes."
|
May 7
How
can we sell our ARPS?
by
Harry Newton
There
seem to be four ways of getting cash for our locked-up ARPS.
1.
Wait for redemption. I remain semi-optimistic that most of us
will eventually get our full money back. We should not fret that
we don't hear much from many of the issuers. Blame the lawyers for
the silence.
2.
Sell them privately to someone else. Your broker should be able
to oblige. There are people who actually want to buy these things.
Let's face it: Most yield more than you can get in money market
funds and in most other places.
3.
Sell them through Restricted
Securities Trading Network
(see below). They deal directly with retail investors, like you
and I.
4. Sell them through Southern
Trust Securities Holdings Corp. These guys are new to this
site. They're a retail broker who will open an account for you,
and then try to sell your securities where the best market is --
which at this stage looks like Fieldstone Securities (see below).
Robert Escobio is the chairman, CEO and head trader. I spoke with
him. He said he'd be happy to help an investor. But he was really
looking for a long-term relationship with a new investor -- not
one that involved selling the ARPS, taking the cash and fleeing.
I said I understood his concern and explained that my readers were
looking for someone to trust. They're in Florida, 305-446-4800.
You can also speak with Victor Casado and I believe Isabelle Campos,
whom I haven't spoken with.
Now
you should be aware that most brokers are reluctant to sell your
ARPS at anything below par, because they believe selling them will
open them up to serious legal liabiltity. And they will be forced
to make your losses up to you. If you sell for 90 cents on the dollar,
they will have to pay you the 10 cents you lost. Personally I think
they will be forced to pay you the money -- but the circumstances
of your selling are important. I'll address these at another time
when I find out more. Meantime I know it's scaring the brokers and
forcing them to tell their clients (i.e. you and me) a lot of lies
-- like there's no market for ARPS. There is. There is. Trust me.
Read the letter on the right.
May
6, 2008
A few readers have actually asked. Who am I? What do
I look like? Last week I saw this T-shirt in a shop window and I
thought, "I deserve this." Fortunately, I could still
afford the T-shirt, despite my $3.5 million in locked-up Nuveen
ARPS. Shall I send the $30 T-shirt bill to Nuveen? -- Harry Newton
photo
by Muriel Fullam
Early
May 5
The
following piece appeared in the prestigious Sunday New York Times
Business section. Gretchen Morgenson is an important financial journalist,
who obviously was in a big hurry when she wrote this nonsense. She
quotes Silbert of Restricted Securities Network, but she doesn't
quote anyone from Fieldstone Capital, who is offering more for ARPS.
She makes no mention of the pressures that the brokers are, in fact,
putting on the issuers, or the fact that many issuers know that
if they don't redeem their ARPS at par, they'll be out of business.
Nor does she attempt to outline the complexity of redemption and
the progress actually being made. I bet Ms. Morgenson never called
Bill Adams of Nuveen either. He's the boss of the biggest issuer.
His phone number is above. She certainly never called me and clearly
has never bothered to read this site. Frankly, for sloppy financial
journalism, Ms. Morgenson takes the cake. The sad part is I've always
been one of her biggest fans. -- Harry Newton.
May
4
Fair
Game
How to Clear a Road to Redemption
By GRETCHEN MORGENSON of The New York Times
IT
is Day 79 in the hostage crisis otherwise known as the auction-rate
securities market. Some $300 billion worth of investors’ funds
— advertised as being easy as pie to cash in — are still
locked up. And the brokerage firms that got investors into this
mess are doing little to help.
But
investors trapped in these securities are not the only victims of
this debacle; taxpayers are, too. That’s because municipal
issuers of auction-rate notes — towns, school districts, hospitals,
highway authorities and others — are being asked to pay up
to redeem and restructure the debt.
Even
as investors and taxpayers are hurt by this frozen market, Wall
Street is making money from it. In fact, the auction-rate securities
mess is another illustration of damaging conflicts of interest at
the nation’s big brokerage firms.
Auction-rate
securities are debt obligations issued by municipalities, nonprofit
entities and closed-end mutual funds. Interest rates on the securities
are set by periodic auctions, based on investor demand. The market
froze in February when buyers disappeared, and brokerage firms refused
to step in.
Naturally,
investment bankers who agreed to operate these auctions were paid
for their services: 0.25 percent of the security’s total issue
for each year of its life. Unnaturally, big firms still earn these
fees even though 70 percent of the weekly auctions of these securities
are failing.
The
firms also rake in banking fees when municipal issuers redeem the
securities. They haul in another round of revenue when they help
issuers unwind derivative contracts that are often intertwined with
the securities. These derivatives were designed to reduce costs
for the issuers by hedging their interest rate risks. Thanks to
the decline in interest rates, however, they can be frightfully
expensive to unspool.
By
my arithmetic, that’s Wall Street 3, Investors/Issuers 0.
Sure,
investors get interest on their money — but nowhere near enough
to compensate for being stuck in their holdings.
Issuers
of $78 billion in auction-rate securities have announced plans to
redeem the paper. Almost three-quarters of that involves municipal
notes, many with extra-high penalty rates of interest that must
be paid to holders when an auction fails. These rates encourage
redemption.
But
investors in the remaining issues are not so fortunate. They are
receiving no offers to redeem their securities, at least in part
because the penalty rates on this paper are ridiculously low —
120 percent of the London Interbank Offered Rate, or now around
3.5 percent. So issuers have little incentive to redeem.
Investors
desperate to sell can tap the Restricted Securities Trading Network,
a secondary market recently set up by Restricted Stock Partners
in New York. The action in the market is small but revealing.
Barry
Silbert, the network’s founder, said that about 10 trades occur
daily, with an average size of $350,000. He said municipal issues
trade at discounts of 2 percent to 10 percent, while closed-end
fund shares trade at a 15 percent haircut. Student loan securities
are the hardest to sell: their discounts are 25 percent or more.
Joseph
S. Fichera, chief executive of Saber Partners, said discounts like
these present opportunities for municipal issuers to buy back the
securities at a savings while also letting investors exit if they
choose. This would provide the liquidity that some people crave.
For
example, the Metropolitan Transportation Authority in New York recently
said it had $1.3 billion in failed auction securities outstanding
after a buyback. If it repurchased 15 percent at a discount of 8
percent, it would save $16 million. Imagine what a hospital or university,
short of cash, could do with such a windfall.
Issuers
would also benefit by renegotiating contracts to eliminate payments
for unsold securities and failed auctions. This would align Wall
Street’s incentives with its customers’ needs, Mr. Fichera
said. Since February, New York State would have saved $1 million
if it had not had to pay for failed auctions on its securities,
he estimated.
After
redeeming some debt, issuers could reap additional savings by refinancing
the rest at current market rates.
For
now, however, most Wall Street firms are advising their municipal
issuer clients to buy back their securities at par. This is where
the potential conflicts come in: discounted prices on these securities
pose problems for investment banks that sold them to investors as
cash.
If
an investment bank advised an auction-rate note issuer to redeem
at a discount, for example, that bank’s customers who decided
to sell would record a loss and have a claim for damages in an arbitration
case. (Until an investor sells, he technically has no loss.)
Encouraging
issuers to redeem at discounted prices could also force the firm
to mark down similar securities on its own books. While the market
is frozen, firms can avoid these markdowns.
“The
firms hold a lot of this themselves,” Mr. Silbert said, “and
they are trying to minimize the damage to their balance sheets.”
Wall
Street should stop with this me-first routine. Pronto. It should
stop billing issuers for failed auctions and should recommend that
they redeem securities at fair value in the marketplace.
Failing
that, issuers should work to fix the situation. “Governments
need to be as vigorous in representing their clients, the citizens,
as Wall Street is in representing its own interests,” Mr. Fichera
said. “The market will only produce efficient and fair results
if this happens.”
For
securities left outstanding, issuers should help thaw the market
by opening their auctions to more potential buyers; in recent years,
issuers have been happy with just one brokerage firm involved. The
results of the auctions should also be transparent instead of shrouded
in secrecy — showing how many bidders there are and at what
prices. If investors knew that one auction had four bidders and
another had 400, it would be pretty clear which security was riskier.
“Transparency
in the conduct of the auction is absolutely necessary to restore
investor confidence and get the bidding going again,” Mr. Fichera
said. “That way, investors can be informed about the risks
they are taking and compensated for them.”
April
30 afternoon
Getting
Stranger and Stranger
by Harry Newton
If
you go to your broker and say "Sell my ARPS," many will
say "We can't. There's no market for them." It seems that
the brokers, who sold you your ARPS because they were "as safe
as cash," are now afraid that, if they sell them for you at
a discount, they will be hit with a "deficiency claim."
Let's
say your broker now sells your ARPS at 90 cents on the dollar, the
theory is that will sue him under a deficiency claim for the 10
cents on the dollar he lost for you.
Well,
we know you can sell your ARPS on something called the Restricted
Securities Trading Network (see below). But they deal directly with
retail investors, like you and I. hence your chance of winning a
deficiency claim is slim.
But
there also, it turns out, are organizations that will also sell
your ARPS. But they won't deal with you directly. They deal with
your broker. They're an "instititional trading house."
One
of these brokers is called Fieldstone
Capital. I spoke to a nice man from Fieldstone today. He
told his firm had already sold $40 million plus of ARPS and presently
had an order in from a buyer for another $25 million plus of ARPS.
He said that a seller net out at 90 cents on the dollar. That means
you'd lose only 10 cents on the dollar. If you're interested in
selling, tell your broker to call Fieldstone Capital on 212-626-1400
and ask for a trader.
For
my current thinking on what to now, keep reading.
April
30
Sell
now or wait? (update 3)
by
Harry Newton
I
just had a nice chat with Barry Silbert, 32, CEO and founder (in
2005) of Restricted
Securities Trading Network (RSTN). Of late, he has been
selling ARPS owned by private investors (like you and me). The average
money received is 85.6%. In other words sellers have been
taking a 14.4% average haircut off par. His average transaction
size is $300,000. He tells me his buyers are institutions who seem
to have built elaborate pricing models and often bid precise numbers,
like $19,537 for a $25,000 ARPS.
Some
of my readers have asked me if I'm a shill (PR front) for RSTN.
I'm not. They've never paid me a nickel. And based on what I've
heard from Barry, read on his web site and heard from his customers,
he seems 100% legit. I'm impressed. He must be doing something right.
He has 40 employees and all the trappings of a serious trading operation
-- a trading desk, an operations team, a research team. He's even
regulated and accredited by FINRA which means you can't get into
his web site until you fill out some simple bits of paper.
Go
into his web site, you'll find around 160 ARPS collections logged
for sale. "Generally speaking," says Barry, "if you
give us an ARPS to sell, we have it sold, sealed, delivered and
the cash money forwarded to you within five days."
He
charges the seller (i.e. you) 1% for his services. That seems
reasonable to me when you begin to understand how much BS he has
to go through. Don't believe me? Read this document called Bidding
Rights Procedures.
The
$64 question is now, "Should I sell my ARPS now and take
the discount or should I wait? I'm not your financial adviser.
But here's my thinking. You have three choices:
1.
Wait for full par redemption. No one is making book on how long
that might be. Figure 24 months and you won't be disappointed. Waiting
isn't bad since you're getting paid more than you can get
in most money market funds. Right now Nuveen is paying me 3.595%
on my NUVEEN triple tax-free ARPS. I can't get that anywhere else.
Personally I don't need the money. And if you read my other site
InSearchOfThePerfectInvestment.com,
you'll know that I'm pretty negative on places "to put
my money to work," like the stockmarket, hedge funds or real
estate (commercial or residential). So I'm not selling for now.
2.
Sell your auction securities at a 15% discount. There are two
benefits: You won't have to read this boring column any more. You
can get on with your life. Maybe you're got a quick surefire way
to make back the loss. I haven't. But you may. If I knew anything
about investing I wouldn't be stuck in these ARPS. I would have
an intelligent financial adviser/broker (if there is such an animal)
and I wouldn't be in these cursed Nuveen ARPS. There is one silver
lining. The wife and I can't spend the money -- if ARPS can still
be called money! I should point out that selling today at a 15%
discount is possible today. But it may not be possible
tomorrow -- if something untoward happens and zillions of
ARPS owners suddenly put their holdings up for sale, i.e. "rush
for the door." I don't quite know what this scenario might
be. But it clearly could happen. I'm guessing that offering prices
would drop dramatically. And perhaps, at that point, we might not
be able to sell any of our ARPS.
3.
Take a loan from your friendly broker. As I've written a million
times, I wouldn't take a term loan. But a loan that comes due the
day my ARPS are redeemed at par isn't a bad deal. And a loan that
pays what you're earning on your ARPS, or less, is OK. The only
downer to this is that you'll have to talk to your broker. There's
a hell of lot of us that don't ever want to see his cherubic face
again. After all, they don't call them "broker" for nothing.
Whatever
you do, make sure you keep the pressure up. Keep sending the letters
and emails. Keep calling anyone you can reach. Be polite, but firm.
You've been wronged. You will never deal with your broker or the
issuer again. This is securities fraud, and all that.
I
continue to believe that the progress we are seeing -- there have
been many redemptions at par so far -- are a direct result of the
pressures all of us are applying. Keep up the good work.
April
23, 2008 13:31 EDT
Nuveen,
BlackRock Fund Investors
May Get Relief (Update1)
By
Christopher Condon
April
23 (Bloomberg) -- Nuveen Investments Inc., the largest U.S. closed-end
fund manager, and BlackRock Inc. may soon have a new way to finance
buybacks of securities that investors were stuck with when credit
markets seized up.
The
U.S. Securities and Exchange Commission probably will issue a no-action
letter "sooner rather than later'' approving a new type of
preferred stock that closed-end funds are seeking to sell, Douglas
Scheidt, an associate director in the agency's investment management
division in Washington, said in an interview.
Fund
managers plan to use the product to help finance redemptions of
most of the $64.3 billion of outstanding preferred stock they issued
to leverage investments and boost returns. Holders of the existing
securities, known as auction- rate preferreds, were angered when
trading froze in February. The new shares will be structured so
that money-market mutual funds, which invest $3.48 trillion, could
buy them.
"I
think this is a pivotal step,'' said Cecilia Gondor, an analyst
at Thomas J. Herzfeld Advisors Inc. in Miami, who specializes in
closed-end fund research. ``There are a few hurdles remaining, but
this should pave the way towards implementing a workable solution
for investors who have now been waiting for several months.''
So
far, more than 40 funds have announced plans to buy back about $11
billion of preferred shares, using bank loans, reverse repurchase
agreements and tender-option bonds. Boston-based Eaton Vance Corp.,
the second-largest U.S. manager of closed-end funds, said today
that three of its tax-exempt funds will buy back $580 million in
preferred shares.
The
preferred being reviewed by the SEC may speed up redemptions. The
shares will carry a put option, or right to sell the instrument
at any time. That will open the product to money funds, which
are prohibited from buying any security with a maturity of longer
than 13 months, and may ease liquidity concerns.
Refinancing
Struggle
Closed-end
funds raise a fixed amount of money from shareholders, unlike mutual
funds, which continually sell and redeem shares. They have struggled
to replace auction-rate preferred stock with new financing without
raising costs and reducing returns for common shareholders. New
options have posed a host of regulatory, market and tax-related
hurdles.
Auction-rate
securities allowed closed-end funds to raise long-term debt at short-term
rates. Once sold, they would change in auctions arranged by broker
every 7, 14 or 35 days. Institutions such as municipalities, hospitals
and universities were the biggest borrowers, with about $165 billion
in debt outstanding when the market stopped working. Student-loan
backed bonds accounted for about another $86 billion.
Auctions
Fail
The
interest-bearing securities were a popular alternative to money-market
funds for investors until the periodic auctions began to fail out
of concern that bond insurers would be downgraded. Wall Street firms,
saddled with more than $290 billion in asset writedowns and credit
losses, declined to step in to soak up the extra supply, as they
had sometimes done in the past.
SEC
approval of the new shares, known as variable-rate demand preferred,
would still leave fund companies with the larger obstacle of lining
up put providers, or financial institutions like banks, insurance
companies and broker-dealers willing to buy or find buyers when
holders want to sell.
It's
too soon to know whether enough put providers will come forward,
said Steven Baffico, head of closed-end funds at New York-based
BlackRock, the third-largest U.S. closed-end fund manager.
"We're
seeing a fairly pronounced shift with respect to risk management
to a more conservative posture,'' he said. "We're dealing with
pressures larger and more systemic than merely the auction-rate
market.''
Anne
Kritzmire, head of closed-end funds at Chicago-based Nuveen, declined
to comment.
Low
Reset Rates
Most
buyers of auction-rate municipal debt were rewarded with interest
rates that reset to as high as 22 percent when auctions failed.
That attracted new investors and pushed issuers to buy back many
of their bonds.
By
contrast, closed-end preferred shares carry penalty rates as low
as 3 percent, angering existing investors and giving fund managers
little incentive to redeem them.
Some
versions of the new securities may offer higher maximum interest
rates than existing preferred shares, adding a market-driven mechanism
for drawing in liquidity, according to Karrie McMillan, general
counsel for the Investment Company Institute, a Washington D.C.-based
trade group.
In
addition, put providers would also hold the right to sell the shares
back to the issuing fund or the fund's adviser "after holding
them for some period of time,'' McMillan said.
Debbie
Cunningham, chief investment officer at Federated Investors Inc.,
said it was too early to tell whether she would invest in the new
product.
"I'm
hoping by the beginning of May there will be more substantive information
to review,'' she said in an e-mail.
Pittsburgh-based
Federated is the fourth largest U.S. manager of money-market funds,
with $225 million in assets.
To
contact the reporter on this story: Christopher Condon in Boston
at ccondon4@bloomberg.net
+++++
Sunday
evening April 20
A
Progress Report (update
2)
by Harry Newton
Keeping
this web site up to date is a lot of work. I hope you fellow sufferers
appreciate my work.
Where
do we all stand? I still have $3.5 million of ARPS -- all Nuveen
tax-frees. I'm receiving my interest. No problem there. I could
probably sell them privately or on the Restricted Securities
Trading Network (see on the right). But I'd take a 12% loss.
At present, I don't believe that's necessary because I do have a
modicum of faith that Nuveen will redeem my ARPS (hopefully within
the next year) at full value.
Until
then, my broker (like most brokers) will lend me cash money against
my ARPS. But the loan may come due before my ARPS are redeemed.
Then I'd be forced to scrounge for the money elsewhere (difficult)
or sell my ARPS at a forced sale and take a loss.
Fortunately
I'm not a corporation and not forced to mark the value of my ARPS
on my balance down to what they're sellable today for. The only
"shareholder" I have is my wife and she's always more
upbeat about these things than I am.
As
this thing has evolved, I can understand why Goldman Sachs, Citigroup
and others stepped away from the auctions, letting them fail. They
simply didn't want more securities they couldn't sell (except at
a loss) on their balance sheets.
The
under-reported part of all this is the pressure the clients (like
you and I) have put on our brokers and they, in turn, have put on
the issuers, like Nuveen, BlackRock, Eaton Vance, etc. My relationship
with my broker will never be the same again. By putting me into
these junky ARPS, he's lost a lot of my trust. And I believe thousands
of clients are telling their brokers the same thing -- perhaps in
stronger words. Maybe they're telling their brokers that they intend
never to give them one penny's worth of business until their ARPS
become liquid and they can sell them.
I
believe that many brokers are saying the same thing to the issuers.
"Stay out of our offices. Don't even think of having
us sell any of your new financial products until you get our clients
our of this ARPS mess." (And you should encourage your
broker to say this to his issuers.)
It's
clear that some of the issuers are feeling this pressure more than
others. And it's also clear that we ought to be continuing the pressure,
reminding our brokers and our issuers every day of how we feel.
We
also ought to be applying pressure via the courts, the regulatory
authorities, the Attorneys-General of the states we live in, etc.
Oringally
I wrote, "Legally, we don't have much of a leg to stand on.
But morally, our legs are solid. We all got sold a bill of goods.
So, the answer now is Pressure. Pressure. Pressure."
Ove
the weekend, I received this email from a man whose family has over
$50 million stuck in ARPS:
We
appreciate all your effort to keep people informed and taking
appropriate action. In terms of the legal side, I actually think
the overall legal case against the banks/brokers is quite strong.
I respectfully disagree with the statement on your recent posting
that said legally we don't have much to stand on.. See the quote
below from former SEC Commission attorney (in the Bloomberg article
following). Also, most of the attorneys that handle arbitration
we speak to say these are cases with clarity that they usually
do not have in their cases. To go from "cash" all the
way to "illiquid" is an easy story to tell for them.
The cases they work on usually don't have that clarity. I am also
very happy to see the Martin Act invoked by Attorney-General Andrew
Cuomo as it carries with it broad powers including possible criminal
charges. I am hoping this leverage helps level the playing field
against these brokers etc. It appears to have done so in the past.
Since
legal actions take this, I believe that our pressures as ARPS holders
are critical. We need to write to our state Attorneys-General telling
them of the bill of goods we were sold. We also need to continue
the pressures on our brokers and insist that they bring pressure
on the issuers.
"OK,
Harry, I understand the pressure, but will be work?"
The
answer is absolutely YES. Each of the issuers have at least a dozen
viable ways of getting us our money at par. Why they're not getting
us our money faster is the sixty four dollar question. I suspect
the slowness is a combination of three factors:
1.
Lawyers wanting to protect their clients and their fees, i.e. the
lawyers' fees.
2.
The newness of it all. ARPS have to be converted into securities
money market funds will be allowed to buy, etc.
3.
The fact that capital markets are almost as locked as our ARPS.
We have a major credit crunch going on. Banks and finance companies
are not lending. They're scared. Bankers are not known for their
risk-taking. Too many got burned in the sub-prime / CDO etc. disaster
and that isn't finished. Finding the billions needed to redeem the
$60 billion of ARPS is not easy in a credit crunch.
The
end conclusion: I'm optimistic. I'm keeping up the pressure. I'm
keeping my legal options open. And I'm keeping myself up-to-date.
Which means writing this column. Let me have your thoughts and stories.
|
April
21
Auction-rate securities
a struggle for Nuveen
Firm works to liquefy $15 billion worth of shares issued to boost fund
yields
By Brooke Southall at InvestmentNews
Nuveen
Investments LLC is working to liquefy $15 billion of preferred auction-rate
securities issued by 100 of its closed-end funds.
The market
for the preferred securities, which were sold to individual investors
as a higher-yielding alternative to money market funds, has been frozen
for weeks as broker-dealers have ceased to conduct the auctions that determine
the securities' rate of interest.
The Chicago-based
closed-end-fund manager said that it is also working hard to explain to
investors why they may have to wait months to receive cash for their securities
as a solution is hammered out.
Nuveen
said that it has held three conference calls with anxious financial advisers
since February and is handling about 1,000 phone calls a day to keep them
apprised of the liquidity crisis, according to Anne Kritzmire, a managing
director of the firm and head of its closed-end-fund business.
"People
are losing sleep here too," she said.
The preferred-auction-rate
problem has become a massive headache for Nuveen and BlackRock Inc. of
New York, the two giants in closed-end municipal bond funds, said
Cecilia Gordon, executive vice president of Thomas J. Herzfeld Advisors
Inc. of Miami, which follows closed-end funds.
"This
[mode of leverage] worked so well for so long that it became the favored
way for municipal bond funds to leverage themselves," she said.
Preferred
auction-rate securities were issued by the closed-end municipal bond funds
to help enhance performance. Proceeds from the sale of the preferred securities,
which were paying relatively low interest rates when issued, were reinvested
by the funds into higher-yielding municipal bonds to boost performance
to fund shareowners.
The preferred
shares were in-tended to be liquid investments, but large investment-banking
firms, which had conducted the auctions to determine the securities' interest
rate, have stopped conducting the auctions because of fears over the creditworthiness
of their counterparties.
The market
for the preferred shares has come to a standstill, leaving their holders
in limbo.
Last Tuesday,
BlackRock announced plans to cash out holders of its municipal funds'
preferred shares by raising $1 billion through the sale of tender option
bonds and $900 million through credit lines and reverse purchase agreements.
Nuveen has
no specific plan to refinance the $11 billion held in the preferred shares
of its muni bond funds, but it is telling advisers that it is trying to
create a preferred money market fund for the purpose.
"It's
a concept in the design phase, but we feel good enough about it to let
advisers know about it, Ms. Kritzmire said. "But [the liquidity problem]
ain't over till it's over."
On April
1, Nuveen announced a refinancing effort that would raise $714 million
to provide about 70% of the liquidity needed to holders of four closed-end
equity funds: Nuveen Multi-Strategy Income and Growth Fund (JPC), Nuveen
Real Estate Income Fund (JRS), Nuveen Tax-Advantaged Total Return Strategy
Fund (JTA) and Nuveen Tax-Advantaged Dividend Growth Fund (JFP).
"This
is a massive problem," said Greg Phelps, principal with Red Rock
Private Wealth Consulting LLC in Las Vegas, whose clients are big holders
of the frozen Nuveen assets and who listened to the most recent conference
call April 3. "There were some really grumpy advisers [on the teleconference].
They were saying they need the liquidity for clients at tax time. 'How
do I pay my taxes?' 'I sell stocks at a loss.'"
Red Rock
manages $45 million.
While Nuveen
and investors in its funds and their securities are in a terrible bind,
the company did nothing wrong, said Steve Winks, principal with SrConsultant.com
of Richmond, Va.
"They're
impeccable," he said. "You can't find anything more reliable
than Nuveen. It's not Nuveen's fault [that the auctions are failing];
it's the fault of the [securities'] underwriters."
Because
of the actions of these underwriters, Nuveen will no longer rely on them
to create leverage in its closed-end funds, said Maria Schwieder, spokeswoman
for Nuveen.
"I
don't think there's any turning back to the old auction-style fund,"
she said.
Instead,
Nuveen will achieve leverage in its closed-end funds by borrowing from
banks, she said.
While refinancing
the preferred shares of the 13 funds that hold taxable bonds may unfreeze
them, the process won't work for the preferred shares of Nuveen's 87 municipal
bond funds, which account for $11.1 billion of the $15.4 billion of securities
that are affected by auction failures since March 12.
Since bank
borrowing will be more expensive than issuing preferred shares, there
will be little benefit from the leverage and yields on the closed-end
fund itself will decline, Ms. Kritzmire said.
Meanwhile,
because of the freeze, "my allocation is now out of whack,"
Mr. Phelps said. "It's a real mess."
E-mail Brooke
Southall at bsouthall@investmentnews.com.
April
20 from
The Los Angeles Times
States
ramp up probes of auction-rate debt mess
Good news
for investors trapped in so-called auction-rate securities: State regulators
are feeling your pain.
Andrewcuomo
The North American Securities Administrators Assn. today said regulators
in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire,
New Jersey, Texas and Washington were coordinating their probes of the
$330-billion market. And late in the day New York Atty. Gen. Andrew Cuomo
was reported to have subpoenaed 18 banks and brokerages about their involvement
in the securities.
Auction-rate
securities are a form of debt issued by many municipalities and closed-end
mutual funds in recent years. They are, in effect, long-term bonds masquerading
as short-term debt. The interest rate they pay typically is reset at weekly
or monthly auctions.
Brokers
often pitched the securities as equivalent to money market funds, but
with higher yields. As the credit crunch worsened this year, however,
many investors have pulled back from complex debt issues. As auction-rate
issues have failed to attract new buyers at their weekly or monthly rate
resets, most current owners of the securities have been told they’re
stuck with them.
That has
left thousands of investors unable to get their cash back, because brokerages
have refused to buy the securities from their clients, and only a small
number of municipal and fund issuers of the debt so far have been willing
or able to retire the securities via refinancing. To say investors are
infuriated is putting it mildly.
NASAA said
the state probes centered on sales practices and supervisory issues related
to auction-rate issues. "Our focus is to determine what conduct took
place at the point of sale -- what was potentially misrepresented and
omitted -- and our goal is securing for investors access to their cash
as requested," said Karen Tyler, NASAA president and securities commissioner
of North Dakota.
"If
the product was represented to be a cash equivalent going in, it must
be treated as a cash equivalent coming out," she said.
April
18
Auction-Bond
Probes Widen as Cuomo Subpoenas 18 Firms (Update4)
By Michael
McDonald
April 18
(Bloomberg) -- Regulators are widening their probes into the collapse
of the auction-rate securities market as states from New York to Washington
scrutinize how Wall Street peddled the bonds to investors and issuers.
New York
Attorney General Andrew Cuomo subpoenaed 18 banks and securities firms
including UBS AG and Merrill Lynch & Co. in an investigation that
could lead to criminal charges, a person familiar with the probe said
yesterday. Officials from nine other states formed a task force to determine
whether brokers misrepresented the debt as an alternative to money-market
investments when they sold it to individuals.
"To
have subpoenas and the threat of criminal investigations raised suggests
that somebody has made up their mind that there really are abuses there,''
said Donald Langevoort, a former U.S. Securities and Exchange Commission
attorney who now teaches securities law at Georgetown University in Washington.
"It certainly suggests something more than regulatory curiosity.''
Officials
are increasing their scrutiny after the $330 billion auction-rate market
seized up in February amid the fallout from the subprime mortgage slump,
leaving some issuers paying rates as high as 20 percent and investors
frozen in the debt. The SEC's inspections office sent letters to the biggest
sellers of auction-rate securities this month seeking the names of customers
who purchased the notes and the identities of brokers who sold them, according
to information obtained by Bloomberg News.
Investor
Complaints
"We're
all getting complaints on a daily basis from retail investors and they
all have the same the story: they were told by their brokers these were
safe as cash and they're not,'' said Bryan Lantagne, the securities division
director for Massachusetts Secretary of State William Galvin and head
of the task force.
In New York,
Cuomo is also asking for information about how bankers persuaded borrowers
to issue the bonds and how the securities firms decided when to stop bidding
in mid-February, the person familiar with the probe said. Dealers had
routinely bought unwanted bonds at auctions to prevent failures for two
decades.
The subpoenas
were issued under the Martin Act, the person familiar with the probe said,
giving New York investigators the ability to file criminal charges. The
banks Cuomo subpoenaed include Merrill, UBS and JPMorgan Chase & Co.,
the person said.
Kris Kagel,
a spokesman for Zurich-based UBS, and Tasha Pelio for New York-based JPMorgan
declined to comment, while Mark Herr, a spokesman for New York-based Merrill,
said the company doesn't comment on regulatory matters.
Stock-Probe
Echoes
Auction-rate
securities are long-term bonds whose interest resets every seven, 28 or
35 days at bidding run by a dealer. They were sold by municipalities,
student loan corporations and closed-end funds, most of whom insured the
debt against default. Dealers collect fees of about 0.25 percentage point.
Unlike Treasuries
or stocks, there is no daily source of information about auction-rate
bonds. Issuers have relied on Wall Street dealers to be buyers of last
resort when bidders couldn't be found, though the banks weren't obligated
to do so.
Since the
first of the securities were sold in 1984 for American Express Co., the
market has expanded as the bonds offered a higher-yielding alternative
to money funds.
Past
Investigations
The probe
is the third in the market. New York-based Lehman Brothers Holdings Inc.
was fined $850,000 in 1995 by the SEC for manipulating auctions conducted
for American Express. Almost two years ago, 15 securities firms paid the
SEC $13 million to settle claims of bid-rigging. The banks neither admitted
nor denied wrongdoing. The SEC also imposed new rules on the market after
the settlement.
"They
believe they've seen smoke and somebody's complained to them,'' said Thomas
Curran, a lawyer at Ganfer & Shore LLP in New York, regarding the
latest probe. "Now they're going to see if there's fire behind the
smoke.''
The SEC
requires dealers to disclose that they may use insider knowledge to place
bids, though they don't have to say how frequently they bid or how much.
Dealers also aren't obligated to disclose rates on auction debt when the
securities trade.
Demand for
auction debt waned this year as investors grew skittish of purchasing
securities backed by insurers whose own creditworthiness is under pressure
because of subprime-related losses. As buyers backed away, dealers who
ran auctions refused to purchase unwanted securities, resulting in thousands
of failures.
Penalty
Rates
When an
auction fails, rates are set at a penalty level spelled out in bond documents
and investors who wanted to sell are left holding the securities. More
than 60 percent of public auctions held each day since Feb. 13 have failed,
according to Bloomberg data.
The average
rate on seven-day securities jumped as high as 6.89 percent on Feb. 20
from 3.65 percent on average last year. It has since declined to 5.14
percent.
"I
don't think anyone ever imagined that these auctions would fail,'' said
Jorge Irizarry, president of the Government Development Bank of Puerto
Rico, whose interest costs rose to as high as 12 percent on failed auction
debt.
Puerto Rico
is planning to convert all of its $643 million in auction bonds to other
securities by month-end, joining states, cities, hospitals and colleges
who have converted or are planning to replace at least $43.1 billion of
the securities by next month, according to data compiled by Bloomberg.
Never
Again
Citigroup
Inc., the biggest underwriter of municipal auction debt from 2000 to 2007,
this week predicted the market will "cease to exist.''
"Obviously
we would never go into the auction-rate market again,'' said David Verinder,
chief financial officer at Sarasota Memorial Hospital in Sarasota, Florida,
which recently converted $165 million in auction debt.
Citigroup
today said it took $1.5 billion of writedowns on auction debt in the first
quarter as it posted its second straight quarterly loss. UBS last month
cut the value of auction securities held by its customers by about 5 percent.
Galvin's
office in Massachusetts subpoenaed information from UBS, Merrill and Bank
of America Corp. regarding the sale of the securities to investors in
the state.
In addition
to Massachusetts, the state task force includes Florida, Georgia, Illinois,
Missouri, New Hampshire, New Jersey, Texas and Washington, according to
the North American Securities Administrators Association. Other states
are prepared to participate in the task force, Lantagne said.
Federal
Regulators
The SEC
said last week it is working with the Financial Industry Regulatory Authority
to examine firms' disclosures to clients who purchased the bonds.
Besides
Citigroup, UBS, Merrill, JPMorgan, and Bank of America were among the
10 biggest underwriters of auction-rate debt from 2000 to 2007. The other
five are Lehman, Bear Stearns Cos., Goldman Sachs Group Inc., Morgan Stanley
and RBC Dain Rauscher.
Spokespeople
at Lehman, Bear Stearns, Goldman, Morgan Stanley and Citigroup declined
to comment. Chris Nietupski, a spokesman for RBC Dain Rauscher, didn't
return a call seeking comment, nor did Shirley Norton of Charlotte, North
Carolina- based Bank of America.
To contact
the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.
April 18
Auction
Rate Agony
By Rich Duprey,
The Motley Fool
"It's
just like cash." Investors may have heard that phrase from their
investment advisors or financial planners, but as they're coming to find
out, "just like" cash is still regrettably far from actual cash.
Palm (Nasdaq:
PALM) and MetroPCS (NYSE: PCS) have been burned in recent weeks by their
holdings in auction rate securities (ARS). These investments supposedly
offered better rates than Treasury bills and money market accounts, and
could be accessed just as readily. Chasing yields to get higher returns,
these companies suddenly found that they couldn't get their money out
when the credit markets seized. Just as fool's gold duped Gold Rush-era
miners, ARS have tripped up modern day investors with their "fool's
cash."
ARS?
Aargh!
Auction-rate securities, as their name suggests, have their interest rates
set at auction every few weeks. Until February, there had been a fairly
robust market for such securities; if the occasional auction failed --
meaning no one was buying the paper -- the investment houses themselves
would buy them. That all changed as credit became more dear. Now, when
the auctions failed, the investment houses refused to buy them, either.
Money that was supposed to be "just like cash" became worthless,
at least in the near term, since the holders of these securities no longer
were able to access those funds.
Like a bank
that shuts its windows during a run, the credit markets slammed the door
to investors who wanted their money back.
The damage
done
Palm's $25 million writedown on ARS holdings inflated its third-quarter
loss from $32 million to $57 million. MetroPCS took an $83 million loss
on its own auction rate securities in its fourth quarter. Other companies
are evaluating their own ARS situations.
Large corporations
like these will probably get their money back, since the bonds underlying
the securities typically have long-term maturities. Intuit (Nasdaq: INTU),
for example, isn't taking any writedowns (as of late March), confident
that the bonds carry top risk ratings, and that the auctions will eventually
open. Bed Bath & Beyond (Nasdaq: BBBY), per its latest conference
call, is taking only a minor charge for the auction rate securities it
holds.
The same
long-term outlook can't be said for individual investors who were put
into these investments by advisors and planners. They believed that ARS
were just like cash, but unlike a multimillion-dollar corporation, they
don't have the same ability to wait out the credit crunch. Many of these
people don't need the cash now -- they needed it yesterday.
Winners
and losers
Some companies that sold their clients these investments have likely damaged
their reputations. And when the thaw does occur, there will be a real
run on cash from their assets under management. Firms like Nuveen Investments,
BlackRock (NYSE: BLK), and Eaton Vance, for example, have some $40 billion
tied up in ARS, all in all. Firms like Charles Schwab (Nasdaq: SCHW),
which has practically nothing invested in the debt, might expect to benefit
at those less fortunate companies' expense.
While many
individuals relied upon their planners' advice to guide them, the same
can't be said of Palm, Bed Bath & Beyond, and Monster Worldwide (Nasdaq:
MNST). They should have seen this coming, but they left their money in
place anyway. Now they find their expansion plans hindered, because they
can't amass the resources to fund that growth.
Like the
signs posted behind some registers at mom-and-pop stores note: "In
God we trust; all others pay cash."
Further
Foolishness that never loses value:
April 18
from the May 2008 issue of SmartMoney magazine
The
"Other Cash Crisis"
Wall Street
has turned a plain-vanilla product into a nightmare for investors.
by
James B. Stewart
have
a simple message for Wall Street: Do the right thing. I say this both
as a client and as a shareholder, and as someone who has recommended the
stocks of big investment banks on many occasions. In
owning and recommending these shares, I am primarily concerned with integrity
-- trust in the foundation on which financial institutions rest. But recent
events have shaken my confidence.
Like millions of other investors, I parked my cash in something that was
sold to me as a money market fund. It appears on my account statement
under the heading "other cash." I've owned shares for years,
withdrawing cash as needed. There are several varieties of these cash
alternatives. In my case they were called auction rate preferred shares
(ARPS), which are shares in a closed-end mutual fund that owns various
kinds of triple-A-rated bonds. There was little or no risk to the principal,
because rates were set at regular auctions. There's never been a default
on an interest payment. For 20 years the auctions continued without incident.
Then in February the auctions failed. Goldman Sachs and Citigroup stopped
bidding and every other major Wall Street firm following their lead. Liquidity
evaporated.
The
main point of a money-market fund or cash alternative is ready access
to cash. In my case and that of many investors, that access vanished.
The assets were frozen, unredeemable. When I called a Merill Lynch broker
to ask whether the failed auctions had any effect on my account, I was
told I was stuck. The only relief Merrill offered was a margin loan against
my assets. In other words, I would have to pay interest to get to my own
money -- which is infuriating, simple on principle.
For
many the situation is much word. Since first writing of my plights on
SmartMoney.com, I've heard from dozens of worried investors. Some don't
know how they'll pay their taxes. Others have canceled home purchases.
Business owners say they can't meet their payrolls. ARPS and similar securities
constitute an $80 billion market; many people owned them without even
realizing it. And it could get worse: As credit woes spread concerns are
mounting that the more ubiquitous money-market unds could face a similar
freeze.
Wall
Street's silence has been deafening. ARPS investors tell me they're heard
no explanation from their brokers. Their statements still carry the shares
at face value, as though nothing happened.
So
I called Goldman Sachs, the firm whose withdrawal from the market helped
trigger the squeeze. I explained that I was a Goldman shareholder as well
as a journalist, that I had recommended Goldman stock and had long admired
the firm for its professionalism and integrity. I wanted to understand
the firm's point of view. Had Goldman notified its clients? Was it helping
clients in need? Was it working to solve this crisis? A spokesman for
Goldman called the next day. "I'm sorry we won't be able to help
you." I was incredulous. The firm had no comment at all? I also called
Morgan Stanley, in part because I had hear from a disproportionate number
(of) disgruntled Morgan Stanley clients. Its spokesperson was slightly
more forthcoming, but he, too, said the company couldn't do much to offer
relief to clients.
A
few firms deserve credit for redeeming their clients' shares. Scotland's
Aberdeen Asset Management redeemed $30 million in ARPS; Eaton Vance redeemed
$1.6 billion. Nuveen Securities, one of the largest issuers, said it was
working to redeem its $15.4 billion in ARPS and hoped to begin by the
end of March. Stranded investors should keep the pressure on the firms
and brokers who sold them these products.
There
are at least a few smaller firms that saw the risks emerging and urged
clients to avoid ARPS. One is SVB Financial Group, based in Santa Clara,
Calif, which serves primarily corporate clients.. In a prescient comment
last August, the firm warned of liquidity risks in the auction market.
Head portfolio manager Joe Morgan told me he took clients our of ARPS
four years ago and has avoid them since. Another laurel goes to LCM Capital
Management in Chicago, a money management firm that has been warning its
clients about risks in nearly all cash-alternative vehicles. Managing
partners, John Nowicki and Gary Wozny told me they moved their clients
out of all non-Treasury money market funds last year after subprime-mortgage
issues first surfaced.
The
ARPS crisis should have a solution, which should also help stave off panic
in markets for other supposedly liquid securities. Despite tremors in
the municipal bond market, the underlying securities are sound. There
have been any defaults; interest is still being paid. The problem is liquidity
and liquidity is a function of confidence. If I were Treasury Secretary
Hank Paulson, I'd be reading the riot act to Goldman, Citigroup, Merrill
and the others who abandoned the auctions they creeated. If these firms
took billions in faltering CDOs and SIVs onto their balance sheets, why
not this triple-A-rated paper? In addition, a government backstop may
be necessary -- not a bailout, but a promise to step in if bonds default.
Once liquidity is restored, there should be no loss to any of the participants,
including the investors now stuck with securities they can't sell.
What's
important is that something be done -- fast. I believe the firms themselves
would like to do right by their clients, but they need to emerge from
their moated fortresses with explanations and solutions. This is an opportunity
to demonstrate courage, leadership and confidence in the financial system
-- and win back the loyalty of a generation of customers. Trust once lost,
is very difficult to restore.
April
18
Someday
Maybe We'll All Need
'Family Office' Bankers
by Joe Mysak of Bloomberg
April
18 (Bloomberg) -- Alexandra Lebenthal calls them the "Lost Affluent.''
As chief
executive of the new Lebenthal & Co., she is trademarking the term
to describe "the $2 million to $20 million investor who isn't well
served at the large brokerage houses and is too small for the ultra-affluent
private banks.''
Just how
ill-served that investor is became clear earlier this year as big brokerages
stopped supporting the auction-rate securities market they created.
The auctions
failed when the firms stopped bidding, forcing bond issuers to pay higher
interest rates and leaving thousands of investors unable to sell their
securities.
The auction-rate
market will soon cease to exist, analyst Prashant Bhatia wrote in Citigroup
Inc.'s North American Investment Daily research note on Tuesday.
The analyst
estimated that the earnings impact on dealers and asset managers would
be very small. "Potential reputational impact could be material if
issues are not quickly resolved,'' he cautioned. ``Basically, clients
could stop using the services of their brokerage and/or asset management
firms as a result of a loss of trust.''
That's what
I've been hearing every week from readers who have anywhere from $50,000
to several million dollars that, in effect, is frozen in their brokerage
accounts. They had relied on brokers to invest their money in a safe cash-equivalent.
Now they find themselves locked into an investment that is anything but.
Skipping
Fine Print
These people
didn't read the fine print. They didn't read the prospectus, nor even
the promotional brochures which spelled out that auctions might fail --
though they rarely described what might happen next. The brochures, of
course, never brought up what might happen in the sort of catastrophic,
never-ending failure we have today.
These investors
instead relied on their brokers, and now rue the day. They thought their
money would command a certain level of attention and respect and service.
Evidently,
they were wrong. It looks like the brokers that sold them this stuff also
didn't read the documents that spelled out the risks of auction-rate securities.
Still, the
"Lost Affluent''? You've got to be kidding. Is that like the "Lost
Generation''?
I originally
visited Alex Lebenthal because I thought the story of how she bought back
her name was a pretty good one. I've also known her father, Jim, since
1981 and thought it might be nice to stop by for a chat.
Unretiring
Lebenthals
The family
sold Lebenthal & Co., a municipal bond specialist founded in 1925,
to Mony Group Inc. in 2001. Merrill Lynch & Co. bought Mony's Advest
brokerage unit in 2005 and then retired the Lebenthal name.
The Lebenthals
didn't want to stay retired. In 2006, Alex and her father started Alexandra
& James, a "multiple-family office'' to cater to the needs of
the "Lost Affluent.'' (Really rich people don't do mundane things
like write checks or put stamps on bills. They have people do that for
them in "family offices.'')
Lebenthal
& Co. reopened its doors as a broker-dealer in March after the family
paid Merrill $1,000 to get the name back.
The more
mail I got from auction-rate securities holders, the more I wanted to
know about this "family office'' business. For most people, a "family
office'' is located just off the rec room, right?
How Many
Wealthy?
I asked
Alex about how big this group of the "Lost Affluent'' was. She said
that, according to the Family Office Exchange, a Chicago-based advisory
firm to such firms and their consultants, there are 1.3 million families
with wealth of $10 million to $25 million. That's money they can invest,
not including residences and such.
Ruth Easterling
of the Family Office Exchange said they didn't have data on the "lower-end
market segment,'' those with between $2 million and $10 million to invest.
I bet it's a lot bigger than anyone thinks.
The Internal
Revenue Service says there are almost 3 million taxpayers with adjusted
gross incomes of between $200,000 and $500,000. I bet we're talking about
a multiple of that 3 million figure if we talk about people having accumulated
wealth of between $2 million and $10 million. Six million? Ten million?
Twenty million?
Alex Lebenthal
has 50 clients so far in her "multiple family office'' who pay annual
advisory fees of 1 percent on the first $5 million of market value under
management, and hourly fees of between $90 and $360 for services ranging
from bookkeeping and bill-paying to managing medical claims.
As for the
holders of auction-rate securities who have experienced what amounts to
a bank failure, though it may yet prove temporary: Investors have made
clear to me that once they get the money from their brokers, they're gone.
All this
makes me wonder how many Wall Street securities firms will still have
individual investor customers in three years.
(Joe Mysak
is a Bloomberg News columnist. The opinions expressed are his own.) To
contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net.
April
17
Cuomo
Subpoenas Banks in Auction Probe,
Person Says (Update1)
By
Michael Quint and Michael McDonald
April 17
(Bloomberg) -- New York Attorney General Andrew Cuomo's office issued
subpoenas to 18 banks and securities firms as part of a criminal probe
into the marketing of auction-rate bonds to investors and issuers, a person
familiar with the investigation said.
The subpoenas
were issued under the Martin Act, which gives New York investigators broad
powers. John Milgram, a spokesman for Cuomo's office, declined to comment.
Securities regulators in nine other states led by Massachusetts separately
today said they formed a task force as they investigate the auction market.
"We're
all getting complaints on a daily basis from retail investors and they
all have the same the story: they were told by their brokers these were
safe as cash and they're not,'' said Bryan Lantagne, the securities division
director for Massachusetts Secretary of State William Galvin and head
of the task force.
Regulatory
scrutiny of Wall Street has been growing since the $330 billion auction-rate
market collapsed in February, leaving some issuers paying higher penalty
rates and investors unable to sell their securities. The Securities and
Exchange Commission last week said it is working with the Financial Industry
Regulatory Authority, which oversees brokerages, to examine firms' disclosures
to clients who purchased the bonds.
The Massachusetts
Secretary of State's office said on March 28 that it subpoenaed information
from UBS AG, Merrill Lynch & Co. and Bank of America Corp. regarding
the sale of the securities to investors in the state. A number of individuals
have also filed lawsuits against Wall Street banks that sold the bonds.
Auction-rate
securities are long-term bonds sold by municipalities, student loan corporations
and closed-end funds with interest rates that are reset on a weekly or
monthly basis. Much of the debt was guaranteed by bond insurance companies
that also backed subprime mortgage-related securities.
Demand for
the debt fell earlier this year after AAA rated bond insurers were downgraded
because of their subprime guarantees. Wall Street banks running the auctions
stopped stepping in to buy the bonds in February when there weren't enough
bidders, permitting thousands of failures that triggered rates as high
as 22 percent.
Cuomo is
also asking for information about how bankers persuaded borrowers to issue
the bonds and how the banks came to decide when to stop bidding in mid-February,
the person familiar with the probe said. The banks Cuomo subpoenaed include
Merrill Lynch & Co., UBS and JPMorgan Chase & Co., the person
said.
Kris Kagel,
a spokesman for Zurich-based UBS, declined to comment while Mark Herr,
a spokesman for New York-based Merrill, said the company doesn't comment
on regulatory matters. A phone call to JPMorgan spokesman Brian Marchiony
wasn't immediately returned.
In addition
to Massachusetts, the nine-member task force includes regulators in Florida,
Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas and Washington,
according to a news release from the North American Securities Administrators
Association. Other states are prepared to participate in the task force,
Lantagne said.
"If
the product was represented as a cash equivalent going in, it must be
treated as a cash equivalent coming out,'' Karen Tyler, the securities
commissioner in North Dakota and president of the North American Securities
Administrators Association, said in a statement.
To contact
the reporter on this story: Michael Quint in Albany, New York, at mquint@bloomberg.net;
Michael McDonald in Boston at mmcdonald10@bloomberg.net.
April
16, 6:52 PM
Black
Rock conference call Replay 888-348-4629 id # 858559. This call concerns
redeeming some securities.
BlackRock:
Template For
Money-Market-Eligible Preferred Shares
By
Daisy Maxey
A Dow Jones Newswires Column
NEW YORK
(Dow Jones)--Money manager BlackRock Inc. (BLK) said Wednesday that a
2002 no-action letter from the Securities and Exchange Commission set
forth the criteria for a product that could help solve the crisis in auction-rate
preferred securities.
The letter describes the requirements needed for a product that could
transform the auction-rate preferred shares issued by closed-end funds
into money-market-eligible securities, said Steven Baffico, director
of closed-end funds at BlackRock, on a conference call to discuss the
issue.
"The
template does exist," he said, and BlackRock would have to structure
a security and demand feature to meet those requirements, he said. "It's
complicated," Baffico said, but BlackRock is working very closely
with regulators.
Closed-end funds from BlackRock and others issued preferred shares as
a way to leverage and enhance their returns. As a result of the credit
crunch, however, auctions at which the preferred shares were sold have
failed, leaving investors trapped in illiquid preferred shares.
BlackRock
said Tuesday that it intends to restructure about $1.9 billion
of the leverage used by certain of its taxable and tax-exempt closed-end
funds (see also below). The firm plans to use alternative forms of leverage,
including a combination of credit facilities, reverse repurchase agreements
and tender option bond programs that will enable certain funds to redeem
about 19% of the $9.8 billion in outstanding auction-rate preferred
shares issued by all of its closed-end funds, it said.
The money
manager also said Tuesday that it continues to explore alternative forms
of leverage for its fixed-income closed-end funds, including the development
of a put feature for the ARPS, which would make them eligible for purchase
by money market funds. This objective may be accomplished by adding the
feature to the existing structure of the ARPS or through the issuance
of a new form of preferred stock that includes a put feature.
Certainly,
Baffico said Wednesday, significant hurdles remain in the development
of such a structure, but BlackRock believes that over time such an instrument
could serve as a "more unilaterally applied solution."
BlackRock
also said Tuesday that tender option bonds (TOBs) will be used to finance
the redemption of about $1 billion of the preferred shares issued by its
tax-exempt fixed-income closed-end funds. Due to limitations on the eligibility
of bonds for TOB programs and limits on the use of TOBs by ratings agencies
and operational limitations, BlackRock anticipates that this restructuring
will affect a limited number of its funds, it said. It expects to provide
more specifics on the refinancing of its tax-exempt ARPS in early June.
Baffico
explained Wednesday that a TOB arrangement is a private contract in which
the leveraged component resides outside the fund, as do the assets that
collateralize the preferred shares. Given that "it's kind of a segregated
basket," there are more stringent collateral criteria to meet, which
restrict the number of bonds eligible, generally relating to credit quality
and insurance, he said.
BlackRock
will examine its municipal funds to see which have TOB-eligible assets,
and it may take some time to identify the tranches and percentages affected,
Baffico said.
BlackRock said Tuesday that it intends to utilize new debt financing to
finance a redemption of a portion of the ARPS issued by its five taxable
fixed-income closed-end funds, using a credit facility and reverse repurchase
agreements. The five funds are BlackRock Preferred Opportunity Trust (BPP),
BlackRock Preferred and Equity Advantage Trust (BTZ), BlackRock Preferred
and Corporate Income Strategies Fund (PSW), BlackRock Preferred Income
Strategies Fund (PSY) and BlackRock Global Floating Rate Income Trust
(BGT).
The firm
intends that the redemption proposal for the taxable fixed-income funds
will be implemented on a pro-rata basis across all series of ARPS of the
funds. The Depository Trust Company, the securities' holder of record,
determines how a partial series redemption will be allocated among each
participant broker-dealer account and each participant broker-dealer determines
how to allocate each redemption among the holders of the relevant series
of ARPS held by it, the firm said. BlackRock anticipates provide more
specifics on those refinancings, including details on scheduled redemptions,
by mid-May.
A participant
on Wednesday's call noted that some banks are stranded in auction-rate
preferred shares themselves, and asked how individual shareholders could
be sure they will be treated fairly in the redemption process.
BlackRock
is working closely with the Depository Trust Company and respective broker-dealers,
but ultimately, it's up to the methodology created by broker-dealers and
the trust company to determine how redemptions are applied, Baffico said.
BlackRock is asking the Depository Trust Company and each individual broker-dealer
to apply their methodology in a pro rata fashion, he said.
Asked if
BlackRock was facing any lawsuits as a result of the problems in the auction-rate
securities marketplace, Baffico said he was aware that lawsuits had been
filed, but declined to comment on whether BlackRock was involved in any
of the actions.
In response to a question about the possible revival of the auction process,
Baffico left little doubt.
Auctions
in the closed-end fund space continue to fail by "fairly wide margins,"
he said. Without some artificial stimulus to kickstart them or rebuild
confidence in the process, the likelihood of the auctions reviving on
their own "is fairly slim," he said.
-By Daisy Maxey, Dow Jones Newswires; 201-938-4048; daisy.maxey@dowjones.com
April
16 4:05 PM EDT
Nuveen
Announces Refinancing of
some Auction-Rate Preferred Shares
Fund
to Redeem $640 Million in ARPS
CHICAGO--(BUSINESS
WIRE)--Nuveen Multi-Strategy Income and Growth Fund 2 (NYSE: JQC) today
announced the refinancing of $640 million of its auction-rate preferred
securities (ARPS). The fund’s Board of Trustees has approved the
refinancing, which is expected to lower the relative costs of leverage
for the fund over time while also providing liquidity at par for the holders
of at least some of the fund’s ARS.
The $640
million represents approximately 66% of the fund’s $965 million of
outstanding ARPS. Securities will be redeemed on a pro rata basis by series.
Depository Trust Company (DTC), the securities’ holder of record,
determines how a partial series redemption will be allocated among each
participant broker-dealer account. Each participant broker-dealer, as
nominee for underlying beneficial owners (street name shareholders), in
turn determines how redeemed shares are allocated among its underlying
beneficial owners. The procedures used by each broker-dealer in allocating
redeemed shares among the beneficial owners may differ from each other
as well as from the procedures used by DTC.
The fund
expects to issue redemption notices within the next several days. Redemptions
will be funded with new borrowings. Due to legal requirements, JQC will
need to complete the announced partial redemptions in two stages. The
fund anticipates that the refinancing will be completed by early June.
Nuveen Investments
provides high quality investment services designed to help secure the
long-term goals of institutions and high net worth investors as well as
the consultants and financial advisors who serve them. Nuveen Investments
markets its growing range of specialized investment solutions under the
high-quality brands of NWQ, Santa Barbara, Tradewinds, Rittenhouse, Symphony
and Nuveen, including the Nuveen HydePark Group. In total, the Company
managed $164 billion in assets as of December 31, 2007.
Auction-Rate
Market Will 'Cease to Exist,'
Citi Says (Update2)
By
Martin Z. Braun
April
15 (Bloomberg) -- The $330 billion auction-rate securities market
will "cease to exist'' after it collapsed in February when Wall Street
firms stopped using their own capital to buy unwanted bonds, Citigroup
Inc. said.
While the
death of the market will only trim brokers' earnings by 1 to 2 percent,
investor anger over their inability to liquidate their holdings may be
significant if the frozen market doesn't thaw soon, Citigroup analyst
Prashant Bhatia wrote in a report. New York-based Citigroup was the top
underwriter of municipal auction-rate securities in 2006, managing $8.4
billion of sales, according to Thomson Financial.
"Basically,
clients could stop using the services of their brokerage and/or asset
management firms as a result of a loss of trust,'' Bhatia wrote.
Auction-rate
bonds allowed issuers such as local governments, hospitals, and closed-end
mutual funds to issue debt maturing in as long as 40 years at short-term
rates that reset every 7, 28 or 35 days through bidding. Investors began
abandoning the auction-rate market this year on concerns that companies
insuring the bonds wouldn't meet their obligations in case of default.
Thousands
of the auctions began failing when dealers, who had stepped in when there
weren't enough bidders, pulled back as investment banks and securities
firms worldwide took $245 billion in credit losses and writedowns.
As a result, investors weren't able to turn the securities into cash,
while some issuers were left paying penalty interest rates as high as
20 percent.
As with
structured investment vehicles, "the liquidity providers were unwilling
to provide liquidity,'' the Citigroup report said.
Brokerage
clients that hold between $100 billion to $150 billion of auction-rate
securities control more than $750 billion in assets, according to the
report. Closed-end funds have issued about $40 billion of the securities.
Banks are
letting customers borrow against their illiquid auction-rate bonds. UBS
AG, which cut the value of the auction- rate securities in its account
by about 5 percent, last week said it would allow customers to borrow
the full value of their auction debt from the Zurich-based bank
starting in May.
The auction-rate
market has shrunk by at least 15 percent, or $51 billion, as U.S. municipal
borrowers refinance to escape higher costs and closed-end funds begin
to bail out investors, according to data compiled by Bloomberg. While
the average rate for municipal debt with interest set through weekly bidding
fell to a nine-week low of 5.14 percent April 9, that's still above the
average of 3.65 percent in all of 2007.
The New
York Giants announced plans today to redeem $100 million of the $650 million
in auction-rate bonds, with interest costs as high as 22 percent, sold
to help finance a stadium for the football team under construction in
East Rutherford, New Jersey.
Nuveen Investments
Inc. and seven other fund managers said they will redeem $7.8 billion
in taxable preferred shares that have rates set through periodic dealer-run
auctions. About 70 percent of closed-end funds borrow money in an effort
to boost returns, most by selling preferred shares on the auction-rate-
securities market.
The collapse
of the auction-rate market will raise the cost of leverage for closed-end
funds, Citigroup said. It will also benefit firms such as Federated Investors
Inc.,BlackRock Inc., and Charles Schwab Corp. that have large money-market
funds.
"Plain
and simple, the money fund turned out to be a superior product and as
the ARS crisis is resolved, we expect inflows into money funds,'' Citigroup
said.
To contact
the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net.
April
15, 2008
Auction-Rate
Problems Accumulated,
Unnoticed, Before Failure
By Ian Salisbury and Jaime Levy Pessin
NEW
YORK (Dow Jones)--The collapse of the auction-rate securities market
in February struck financial advisors and individual investors as an utter
surprise.
But problems
in the market had been slowly unfolding several months prior.
A disturbance
appeared in a small corner of the market as early as last summer, triggering
a lawsuit. As the credit crisis began to spread beyond subprime issues
to affect the broader debt market, wariness about auction-rate securities
grew in the fall, forcing dealers to step in more frequently and support
the auctions.
By November, yields paid on some auction-rate securities were skyrocketing.
In early December, a Citigroup Inc. official acknowledged market concerns
about the auction process in an interview with a trade publication. Later
in the month the rating service Fitch Inc. said some student loan issuers
faced the risk of failed auctions.
It was difficult for investors, their advisors and analysts to foresee
the coming tsunami of auction failures in part because auctions had failed
only rarely in the past. It seemed unlikely that such a sweeping crisis
could occur - especially because the first auction-related problems seemed
limited to the subprime mess.
But as a result, investors often bought the securities, having no inkling
of the accumulating problems, mere weeks or even days before the market
finally seized up.
"Safe as CDs" is how Gene DeLong, an oil field contractor in
George West, Texas, says a broker with Citigroup's Smith Barney unit described
auction-rate securities. DeLong first bought the securities two years
ago. But he says his most recent and largest purchase -
$125,000 - was in January. Other investors say they relied on similar
claims from their brokers:
Leslie Globman, a retired high school teacher in Hartsdale, N.Y., says
she bought $100,000 of auction-rate securities through Oppenheimer &
Co. on Jan. 24. Arthur Gales, a semi-retired accountant in Long Beach,
N.Y., says he now has $2.8 million stuck in the investments after his
new UBS AG (UBS) broker recommended buying them Feb. 4.
Oppenheimer, a unit of Oppenheimer Holdings Inc. (OPY), says it takes
customer complaints seriously.
Citigroup and UBS declined to address investor comments.
In August,
auctions began to fail for about $6 billion of auction-rate securities
backed by complex investments - such as mortgage-backed securities - that
were tarnished by the subprime crisis. Worries about the credit of subprime
loans eventually dried up liquidity for these types of auction-rate securities.
Firms that sold these securities, typically to institutions rather than
individuals, included Merrill Lynch & Co. (MER), Deutsche Bank AG
(DB) and others. By October, Merrill had been sued by MetroPCS Communications
Inc. (PCS), a Dallas wireless phone service provider
that accused it of ignoring instructions to place $134 million of the
firm's cash reserves in safe, liquid investments. The suit was reported
in The Wall Street Journal.
Merrill Lynch spokesman Mark Herr said the company disputes MetroPCS'
allegations. He said in an email, the firm "did not see this case
as an early warning sign" of failure in auction securities not linked
to subprime. He said, "Hindsight isn't 20/20 in situations like this;
it's always 20/10. The inarguable fact is that for the 20 years preceding
this February's auction failures, auctions virtually never failed and
the February failures were unprecedented, brought on by an unprecedented
and unpredictable dislocation in the credit markets."
Deutsche
Bank declined to comment on auction-rates.
The focus of the credit markets at that time was on subprime problems,
and the broader auction market continued on unaffected.
By November,
problems spread beyond subprime. Prompted by doubts about bond insurers
such as Ambac Financial Group Inc. (ABK) and MBIA Inc. (MBI), jitters
had spread to the market for auction-rate securities issued by municipal
entities, which were frequently held by individual investors.
The rates issuers had to pay to borrow in this market rose sharply. In
Wisconsin, soaring rates in early November caused the state to "formulate
plans" to redeem some auction-rate securities and issue less expensive
forms of debt, says Frank Hoadley, the state's capital finance director.
In early December, Rob Novembre, a Citigroup managing director, was paraphrased
in the Bond Buyer, a trade publication, as saying that investors were
skittish about the auction process due to earlier failed auctions.
"We don't know if it will be like this forever or if this is just
a kneejerk reaction to what is going on with the general fears of liquidity
and credit in all markets," he told the Bond Buyer.
Citigroup
said Novembre's comments referred specifically to auctionrate securities
linked to more complex investments such as those backed by pools of mortgages.
Wall Street firms began reacting to problems in the auction-rate market
around that time, according to Matt Fabian, managing director at consulting
firm Municipal Market Advisors.
"Dealers stepped up in December," he says, committing more of
their own capital to help the market function. "Dealers continued
to do that into the first quarter, but their inventories can only house
so many bonds. Once they exhausted their balance sheets, auctions began
to fail."
Financial advisors and their clients appeared unaware of the worries.
DeLong, the Texas oil field contractor, says he asked his Smith Barney
broker in January whether he was still comfortable with auction-rate securities.
The broker reassured him that the investments
were safe, he says.
In December and January, ratings agency Fitch published two separate reports
about auction-rate securities issued by student loan authorities and closed-end
funds, types often held by individuals. Broad credit market problems had
created a "disruption in the
auction-rate market," Fitch analysts wrote Dec. 19 in the first report.
As a result, "a number of issuers of U.S. student loan (asset-backed
securities) have been faced with the possibility of failed auctions."
On Jan.
31, following downgrades of several bond insurers, another set of Fitch
analysts reviewed auction-rate preferred shares issued by closed-end funds,
regarded as among the safest auction securities. Fitch's analysts said
they wouldn't take immediate "rating actions" but would "continue
to closely monitor" the "liquidity and pricing trends"
of the securities.
On Feb. 8, Merrill Lynch published a research note calling an early closed-end
fund auction failure that had occurred in late January an "aberration,"
and touting auction-rate securities issued by closed-end funds as "'the
conservative's conservative investment' in the auction market."
The report
began, "The recent noise around failed auctions is certainly not
a doomsday crisis but we will not say it is 'nothing' either." It
concluded: "The reports of the imminent demise of the auction market
seem to be greatly exaggerated, again." Widespread failures in the
auction markets began days later, leaving investors who own the securities
in the lurch.
Some investors are now pursuing lawsuits against brokerage firms. Regulators,
including the Securities and Exchange Commission, are also looking into
the issue.
The "loss of trust" stemming from the auction-rate debacle could
lead clients to desert their brokerage firms, said Citigroup's Prashant
A. Bhatia in a research note published Monday.
Gales, who first bought auction-rate securities from UBS on Feb. 4, says
he is now searching for a full-time job because he can't access money
he would otherwise use to fund his retirement. DeLong tabled plans to
build a wheelchair-accessible home for his
wife until he can get his money out. Although some of his auction-rate
securities were redeemed last week, he says he's nervous about meeting
his payroll for his contracting business.
Globman,
the retired teacher, says, "What really upset me" is that her
broker told her not to see the "glass half-empty" because she
didn't immediately need the money. "What if you went to the bank,"
she asks, "said, 'I want to take out $500,' and they said you can't?"
-By Ian Salisbury, Dow Jones Newswires; 201-938-5219; ian.salisbury@dowjones.com
April
15
Calamos
Updates Status on Refinancing Efforts
for Outstanding Auction Rate Preferred Securities
NAPERVILLE,
Ill., April 15 /PRNewswire/ -- Calamos Investments said it intends to
announce refinancing arrangements as it reaches agreements with specific
lenders. These announcements will come based on the successful completion
of the lenders' due diligence work and Calamos taking the appropriate
steps to ensure that all closed-end fund shareholders are well served
by the terms of these agreements.
"The
scope of the illiquidity problem associated with these failed auctions
is global and quite complex," said John P. Calamos, Sr., Chairman,
CEO and Co-Chief Investment Officer. "We have moved forward in a
measured way to ensure that all shareholders in our closed end funds are
well served by the terms of these agreements.
"After
consulting with the funds' Board of Trustees, we immediately began seeking
alternative forms of financing," Calamos said. "From the outset,
our commitment, while we understand the critical nature of the situation
the preferred shareholders are in, is to pursue refinancing that provides
liquidity to preferred shareholders while preserving the benefits of leverage
to common shareholders in our closed end funds."
As soon
as agreements on refinancings have been reached, Calamos will make announcements.
At this point, Calamos is constrained from providing additional information
as due diligence continues. "We want to assure our valued clients
that we intend to keep you and the broader public informed of developments
as soon as we are allowed to publicly disclose specifics," Calamos
said.
Calamos
Investments is a diversified investment firm offering equity, fixed-income,
convertible and alternative investment strategies, among others. The firm
serves institutions and individuals via separately managed accounts and
a family of open-end and closed-end funds, providing a risk-managed approach
to capital appreciation and income-producing strategies. For more information,
visit http://www.calamos.com/.
Van
Kampen Senior Income Trust Announces
Refinancing of Auction-Rate Preferred Securities
CHICAGO--(BUSINESS
WIRE)--Van Kampen Senior Income Trust (NYSE: VVR) has announced its intention
to redeem a portion of its auction-rate preferred securities (ARPS). The
Board of Trustees has approved refinancing the Trust’s leverage through
its existing credit line, which will provide liquidity at par for the
holders of a portion of the Trust’s ARPS.
The
Trust will be redeeming approximately $350 million of the $700 million
ARPS outstanding (approximately 50%) on a pro rata basis by series.
The Depository Trust Company (DTC), the securities’ holder of record,
will determine how partial series redemptions will be allocated among
each participant broker-dealer account.
Each participant
broker-dealer, as nominee for underlying beneficial owners (street name
shareholders), in turn will determine how redeemed shares are to be allocated
among its underlying beneficial owners. The procedures used by different
broker-dealers to allocate redeemed shares among beneficial owners may
differ from each other as well as from the procedures used by DTC.
The Trust
is expected to issue a redemption notice within the next several days.
The Trust anticipates that the redemption and refinancing for the ARPS
will be completed by May 30, 2008.
Van Kampen
Asset Management, the Trust's investment adviser, is a wholly owned subsidiary
of Van Kampen Investments Inc. (“Van Kampen”). Van Kampen is
one of the nation’s largest investment management companies, with
approximately $107 billion in assets under management or supervision,
as of February 29, 2008. With roots in money management dating back to
1927, Van Kampen has helped nearly four generations of investors achieve
their financial goals. For more information, visit Van Kampen’s website
at www.vankampen.com.
Copyright
©2008 Van Kampen Funds Inc. All Rights Reserved. Member FINRA/SIPC.
April
15, 2008, 3:23PM
BlackRock
to buy out $1.9 billion
in
auction-rate preferred shares
©
2008 The Associated Press
NEW YORK
— BlackRock Inc. expects to buy out $1.9 billion of its funds' auction-rate
preferred shares -- a type of investment stung by illiquidity -- to protect
its clients, the investment manager said Tuesday.
The investment
manager plans to borrow money through credit lines, repurchase agreements
and tender-option bonds to finance the deal.
BlackRock's
stock has fallen more than 9 percent in the past three weeks, in part
because of scary headlines about auction-rate securities.
BlackRock,
which manages $1.357 trillion in investments, runs a number of funds that
utilize auction-rate securities to enhance returns.
Here is
how they work: An investment fund will sell a special class of stock offering
a regular dividend, determined regularly at an auction. The fund tries
to make more off the money it raises by selling the stock than it loses
in paying the dividend.
The problem
is, if nobody bids for the preferred stock at the auction -- which is
precisely what has been happening -- the dividend is reset to a very high
number. That means the fund will lose money by paying the dividend because
it will be higher than what the fund can generate by investing the money.
BlackRock
plans to "restructure" $1.9 billion -- or about 19
percent -- of the $9.8 billion in auction-rate preferred shares it
has issued.
The company
runs five taxable fixed-income closed-end funds that have issued these
securities -- BlackRock Preferred Opportunity Trust, BlackRock Preferred
and Equity Advantage Trust, BlackRock Preferred and Corporate Income Strategies
Fund, BlackRock Preferred Income Strategies Fund, and BlackRock Global
Floating Rate Income Trust.
Except for
the Global Floating Rate Income Trust fund, BlackRock will redeem half
of each fund's auction-rate securities, totaling $685 million, at par
value. The company will redeem about three-quarters of the Global Floating
Rate Income Trust fund's auction-rate securities for about $185 million.
The company
will use credit lines and reverse repurchase agreements to finance these
redemptions.
BlackRock
will also try to raise $1 billion by selling tender-option bonds to redeem
auction-rate preferred shares.
The company
is doing this to shelter its funds from having to pay high dividends to
preferred shareholders, at the expense of common shareholders in the funds.
April 9, 2008
Clough
Global Funds Announces Intent to Redeem Auction Market Preferred Shares
Denver,
Colorado- Today, Clough Global Allocation Fund (AMEX: GLV), Clough Global
Equity Fund (AMEX: GLQ), and Clough Global Opportunities (AMEX: GLO) (each
a “Fund”
and collectively, the “Funds”) are pleased to announce that
they intend to redeem all outstanding shares of Auction Market Preferred
Shares (the “AMPS”) at par, as set forth below, in their entirety
pursuant to their terms. Each Fund has obtained overnight collateralized
financing from a financial institution to provide new funding to redeem
the AMPS and provide up to 33% leverage to the Funds going forward. Each
of the Fund’s Board of Trustees has approved the refinancing which
is expected to lower the costs of leverage for the Funds.
Series
and CUSIP Number Total Liquidation Preference Redemption Date
GLV Series W28 (Cusip: 18913Y202) $95,000,000 May 22, 2008
GLQ Series M28 (Cusip: 18914C209) $100,000,000 April 29, 2008
GLQ Series F7 (Cusip: 18914C308) $75,000,000 May 5, 2008
GLO Series M7 (Cusip: 18914E205) $90,000,000 April 29, 2008
GLO Series W7 (Cusip: 18914E304) $90,000,000 May 1, 2008
GLO Series F7 (Cusip: 18914E403) $90,000,000 May 5, 2008
GLO Series T28 (Cusip: 18914E502) $90,000,000 May 7, 2008
GLO Series Th28 (Cusip: 18914E601) $90,000,000 May 23, 2008
Notice was sent today to the Funds’ paying agent and the recordholders
of the AMPS to
commence the process. Each Fund’s obligation to redeem the AMPS shares
is subject to having sufficient funds available to it from its borrowing
arrangement to fund the redemption.
More information on the Funds can be found at www.cloughglobal.com or
by calling 877-256-8445.
TAX
ADVISORY
You
will not receive any monies from your stuck ARPS in time to pay
your April 15 taxes. The ONLY way to get money to pay Uncle Sam
is to bully your broker into giving you a "margin" loan
against your ARPS. Such loan should become due and payable the
day your ARPS are redeemed or sold, and become cash.
You
should not take a "term" loan from your broker since
you could really get screwed. Let's imagine you take a 6-month
term loan for 70% of the par value of your ARPS. Let's say in
six months, your broker wants his money back, but your ARPS is
still locked. He'll sell your ARPS for 70%. You'll instantly lose
30%. Sorry about that!
P.S.
I am not qualified to give financial advice, nor probably any
advice. But I am becoming the world's leading expert (for what
that's worth) on auction rate preferreds. If you disagree with
me, or have something more to add, please email me --
By
the way I'm not colorblind. My use of hideous colors on this web
site is to get your attention, not to win any graphic design contests.
|
Saturday
April 12, 2008
I've added
a page called "Class Action Suits"
which links (surprise, surprise) all the suits filed so far. You can also
read them. If you hear of more suits, please let me know. The link is
on the left.
|
Monday,
April 15
A
New Reason for Brokers to Switch Firms
By KRISTEN MCNAMARA
April 15, 2008; Page D4, Wall Street Journal
Turmoil
in the auction-rate securities market may give unhappy financial
advisers one more reason to consider moving to another brokerage
firm.
Brokers
with clients furious that their money is locked up in these investment
products may try to pin the blame on their firm -- "I was told
this was a safe, liquid product" -- and encourage clients to
depart with them for greener pastures, some industry recruiters
say. But brokers who are the targets of investor anger would have
a hard time moving clients and assets with them, and changing firms
wouldn't give investors access to their money.
Recruiters
say the problems stemming from auction-rate securities could give
brokers considering a move an additional push. "It's one facet
of many that would make financial advisers consider exploring opportunities,"
says Mickey Wasserman of executive-recruitment firm Michael Wasserman
& Associates Inc.
The
large transition packages brokerage firms are offering top moneymakers
remain a primary driver of broker moves.
Other
factors include the massive write-downs financial service firms
have taken because of U.S. subprime mortgage exposure, falling share
prices that have reduced the net worth of brokers holding company
stock, and the near-collapse of former behemoth Bear Stearns Cos.,
which rattled brokers throughout the industry.
Brokers
are unlikely to find nirvana at another large brokerage firm as
Wall Street firms, to varying degrees, are facing similar issues.
But the chance to collect a tidy sum while continuing to run one's
business is appealing to some brokers.
"Institutional
loyalty is largely gone," says Danny Sarch, president of recruiting
firm Leitner Sarch Consultants. Brokers, he says, now think: "I
better get mine; I better get a check and take care of myself. My
shareholders are the ones I go home to every day."
Recruiters
make a living moving brokers between firms, of course.
Brokers
who generated sizable fees and commissions last year but are concerned
their production could flatten amid today's difficult market and
economic conditions might seek a deal with another firm sooner than
later, says Carri Degenhardt-Burke, of search firm Degenhardt Consulting.
She
and other recruiters say brokers have become more receptive to their
calls in recent months and want to hear about the large transition
packages brokerage firms are offering.
Brokerage
firms have offered top advisers at competing firms as much as 150%
of the fees and commissions they generated over the past 12 months
in upfront cash, with the possibility of collecting even more for
meeting certain asset and production goals over several years.
Rick
Peterson, president of recruiting firm Rick Peterson & Associates,
says he has seen more broker interest in moving during the past
few months than he has seen in his nearly three decades in the recruiting
business. "This is the largest volume of calls we've ever received,"
he says.
Auction-rate
securities are debt investments issued by municipalities, student-loan
agencies and closed-end funds. The securities' interest rates are
reset at auction every seven to 35 days.
In
February, amid widespread credit concerns, large investment banks
that previously committed their own capital to keep the auction
process running smoothly refused to continue. Auctions failed, and
auction-rate holders couldn't cash out their holdings.
UBS
AG said in late March it would lower the value of auction-rate securities
held by clients, jolting investors who believed they were holding
a cash-like investment.
Brokerage
firms, mutual-fund companies and regulators met informally last
week to discuss options for restoring liquidity in this market.
State and federal regulators are looking into how these securities
were sold to investors. Additionally, investors have filed lawsuits
against large brokerage firms, alleging deceptive marketing of these
securities.
Sold
in increments of at least $25,000, auction-rate securities were
meant for institutional investors and relatively wealthy individuals.
Sunday
April 13, 2008
This
is an ultra-depressing article. After I read it, I sent the author
the following email:
I
am stuck in ARPS. I have started a web site -- www.AuctionRatePreferreds.org
as a central point of information on ARPS. In your latest piece,
"It's a long, Cold Cashless Siege," you forgot
the huge pressures that investors are bringing on brokers and
brokers in turn are bringing on the issuers. The investors are
saying "we don't deal with you ever again." And the
brokers are saying to the issuers (Nuveen, BlackRock, etc.) we
will never sell your products again if you don't get our customers
out of this mess.
It's
a Long, Cold, Cashless Siege
By GRETCHEN MORGENSON of the New York Times
Sunday
April 13, 2008
CRAIG
JOFFE, an investor who owns a laser surgery business in Minneapolis,
says that a couple of years ago he was looking for a safe place
to put most of his life savings. So he said that on the advice of
his broker, he invested 90 percent of his wealth in something he
thought was just as conservative, reliable and liquid as cash: three
auction-rate securities.
In fact, he says, his broker at UBS put so much of his money into
just one of those securities, issued by John Hancock, that he now
holds more than 5 percent of the shares outstanding.
"They were sold to me as cash equivalents," Mr. Joffe
said. "In the fourth quarter of last year, I very explicitly
said to my broker, 'Do I have any market risk in these securities?'
and he said no. I'm usually a thorough guy, but my radar wasn't
up at all."
It wasn't until two months ago - when the cash-out window of the
$330 billion auction-rate securities market slammed shut - that
warning signs began flashing across the radar screens of many people
like Mr. Joffe. With the market now frozen, investors like Mr. Joffe
are in limbo, and many are having to report losses, if only on paper.
Institutional investors are also feeling the pain.
Some of the big underwriters - UBS is one - are marking down the
value of auction rate securities in their clients' accounts, and
companies are also writing down the value of their holdings. Last
week, Palm Inc. recorded a $25 million write-down related to auction-rate
securities it cannot sell. Others are sure to follow, analysts say.
But even though Wall Street heavyweights and major corporations
have been stung, many of them also appear to have bailed out of
the market well ahead of individuals. At the end of 2006, institutional
investors held about 80 percent of all auction-rate securities issues,
according to Treasury Strategies, a consulting firm in Chicago.
At the end of last year that portion had fallen to just 30 percent.
"A number of corporations understood there was a rising threat
to their securities; there had been failures and warnings,"
Anthony Carfang, chief executive of Treasury Strategies, said in
a conference call late last month.
As big holders of these securities accelerated their selling late
last year, Wall Street firms overseeing the auctions would have
come under greater pressure to find buyers to make the auctions
succeed. It is unclear whether they turned to individual clients
to fill this void.
UBS officials declined to discuss this issue or the specifics of
Mr. Joffe's case.
Only a handful of the issuers - municipalities, student loan companies
or closed-end funds - have offered to redeem the securities. And
brokerage firms in charge of the periodic auctions that determined
the securities' interest rates say the auctions have simply stalled
because of a lack of buyers.
Thomas Martin, head of America's Watchdog, a consumer protection
advocacy group, says he has heard from more than 1,000 investors
who cannot get the money out of these securities. He said they ranged
from young people with $25,000 at stake to others with $1 million
invested.
"The majority of people have $200,000 to $300,000 invested,
but it's their life savings, and they were told this was the same
as a money market or C.D.," Mr. Martin said. "I must have
50 or 60 people that were buying houses that were supposed to close
in March and their earnest money is at risk of forfeiture because
they relied on the liquidity in these things."
While Mr. Joffe is still receiving interest payments on his securities,
he is unable to retrieve his principal.
A UBS spokesman said that to help clients in need of liquidity,
the firm had just begun a program to let them borrow 100 percent
of the par value of their securities at a modest interest rate.
A John Hancock spokeswoman said the company was actively pursuing
solutions to the liquidity crisis.
NOW that the initial shock of the auction-rate freeze has worn off,
investors are pleading with issuers to buy back the securities and
suing the brokers who, they said, told them they were the equivalent
of cash.
Regulators are also nosing around Wall Street, asking whether the
firms disclosed all the risks of these securities to the investors
who bought them.
Investors
should prepare for a long and dispiriting siege, experts who know
the structure of these securities say. Although many of the assets
and issuers backing these securities are solid, or "money good"
in Wall Street parlance, the mechanics of the auction-rate securities
market as well as the continuing credit squeeze give issuers and
brokers little incentive to help the investors.
For example, even as investors wait in exasperation for the return
of their money, Wall Street firms continue to earn the same fees
for running the auctions - typically 0.25 percent of the amount
of shares or notes outstanding on an annual basis - even though
few auctions are succeeding.
Because the so-called penalty rates - what issuers must pay to investors
when auctions fail - are relatively low, often only a bit higher
than a short-term benchmark like Libor, the London Interbank Offered
Rate, issuers don't want to redeem them early. Considering that
the investors have no access to their money, the low penalty rates
they are receiving only add to their distress.
Many individual investors say their brokers put them into these
securities for the first time in the second half of 2007 - just
as big companies were aggressively dumping their stakes.
Investors were not provided with prospectuses outlining the risks
in these securities because they are considered secondary market
issues. Unlike primary issues, like initial public offerings, secondary
issues do not require the delivery of offering circulars.
Auction-rate securities, invented in the 1980s, are debt obligations
whose interest rates are set at auctions every 7 to 35 days. The
bonds typically have maturities of 30 years, but the preferred shares
have no maturity date.
The first issue was of preferred shares in American Express; other
financial institutions soon followed because the shares were considered
equity capital and bolstered their balance sheets. Industrial companies
also issued them because they were a relatively cheap source of
capital.
In 1989, a big auction failed because a company that issued the
securities, MBank, defaulted. Later, the Federal Reserve changed
the capital requirements, barring banks from listing auction-rate
preferred securities as highly rated equity on a balance sheet because
they could be redeemed and weren't really permanent capital. Most
corporations stopped issuing the securities in the early 1990s.
Closed-end funds soon took them up, issuing auction-rate preferred
shares to generate higher returns for their common stockholders.
They now account for $65 billion of the market. Student-loan companies
also issue auction-rate securities to finance their lending, and
the collapse of the auctions may make it hard for some students
to get loans.
Municipalities flocked to the auction-rate market for low-cost money.
New issues peaked in 2004, according to Thomson Financial, when
$44 billion was raised. Auction-rate securities morphed from a product
sold mainly to corporations to one marketed heavily to individual
investors; minimum investments were dropped to $25,000.
The top underwriters in the municipal part of the market were Citigroup,
UBS, Merrill Lynch and Morgan Stanley. Many of these firms' customers
wound up owning the securities and are now up in arms.
The market worked relatively smoothly until mid-February this year,
when the credit crisis made big brokerage firms reluctant to put
up precious capital to keep the auctions going. Investors could
no longer sell their securities - and cannot to this day.
Dwight Grant is a managing director at Duff & Phelps, a financial
advisory firm that helps corporate clients assign values to their
auction-rate holdings. (It is unrelated to the closed-end fund company
of the same name.)
"I talked to a very senior person at a large financial institution
who inferred that she believed this could last quite a long time,"
Mr. Grant said. "There is a very difficult calculus in the
process with respect to capital and reserves of the underwriters.
To maintain auctions they were going to have to commit substantial
reserves. It is not obvious when they are going to reallocate capital
to this market."
Indeed, experts say that calling these securities auction-oriented
is something of a misnomer because real auctions - during which
buyers and sellers meet and an interest rate is set based upon their
interest - weren't taking place in recent years. Instead, the Wall
Street firms in charge of the auctions smoothed the process by bidding
with their own capital rather than rustling up thousands of buyers
to meet up with sellers every week or so.
Given this market's size, it became harder for Wall Street to arrange
true auctions regularly. Last Wednesday, for example, some 545 auctions
were scheduled covering $27.2 billion of securities. Conducting
that many auctions - one for each security whose interest rate expires
that day - would be an enormous undertaking for the handful of underwriters
in the arena.
"Auction securities became a managed bidding system, not a
true investor auction," said Joseph S. Fichera, chief executive
of Saber Partners, a financial advisory firm. "The investor
never knew how many investors there were, how often the brokerage
firms were stepping in to make the system work, nor that the broker's
support could stop all of a sudden.
"If we had transparency in the system, investors could have
judged the ability to sell in the individual auctions and bid accordingly,"
he added.
Sure enough, back in May 2006, liquidity problems associated with
auction-rate notes emerged when the Securities and Exchange Commission
brought a case against 14 big brokerage firms that sold them. The
commission accused the firms - including Bear Stearns, J. P. Morgan
Securities, Goldman Sachs and Lehman Brothers - of favoring some
customers over others and manipulating the auctions by adding capital
to smooth out the process.
Such arrangements, while easing the bidding process, hid the potential
for this market to freeze up, the regulators said. In announcing
a settlement, the S.E.C. said that "investors may not have
been aware of the liquidity and credit risks associated" with
the securities. The firms paid $13 million to settle the matter,
neither admitting nor denying the allegations.
Today, investors say they had no idea that their securities could
be tied up indefinitely if the big brokerage firms couldn't find
buyers. The Financial Industry Regulatory Authority, which polices
much of Wall Street, is asking firms about sales practices and risk
disclosures.
How Wall Street is paid for these auctions is central to understanding
why the firms have little interest in resolving the problem of failed
auctions. The firms earn money at least twice: First, when the notes
or shares are underwritten, they receive 1.5 percent of the amount
of money raised, in the form of a fee. Then they receive 0.25 percent
annually for conducting the auctions - a total of $825 million this
year, based on the size of the market.
But they receive these auction fees even when the auctions fail,
so the firms have no incentive to help revive this market.
On auction-rate notes backed by municipalities, Wall Street firms
sometimes earn a third fee by selling an interest-rate swap alongside
the note. These swaps help lower the interest rates that municipalities
pay on the securities but can add considerably to the complexity
of unwinding them when auctions fail.
Auction-rate securities have been popular among both individual
investors and corporations looking for higher yields on their cash
because they typically pay up to one percentage point more than
money market funds. As of July 1, 2007, corporations owned $170
billion of these securities, or just over half of the total outstanding,
according to Treasury Strategies.
But through the second half of 2007, corporate investors were dumping
their stakes, Treasury Strategies said. During these months, corporations
cut their holdings to $98 billion.
At the same time, many individual investors were being persuaded
by their brokers to buy auction-rate securities for the first time.
Jacob H. Zamansky, a lawyer in New York, says he has 50 cases involving
individuals stuck in auction-rate securities who say they weren't
told of the risks. Of those, he said, 80 percent were put into the
securities in the second half of 2007.
"THESE securities really worked very well for a relatively
long period of time," said Mr. Grant at Duff & Phelps.
"It's possible that people were lulled into a sense of false
security because if something works well for 20 years you might
not be as attentive to the terms of the contract."
Lewis D. Lowenfels, a securities lawyer at Tolins & Lowenfels
in New York, represents several investors who are stranded in auction-rate
securities. "If the evidence shows that large corporate clients
were being advised to unload these securities at the same time that
the investing public was being counseled to purchase the same securities,"
he said, "one begins to slip over the line from questions of
due diligence and suitability into the realm of securities fraud."
|
Thursday,
April 10, 2008 11:43 AM
DowJones NewsWires
DJ
COMPLIANCE WATCH:
Auction Rates Upset Bank-Broker Clients
By Jaime
Levy Pessin
NEW
YORK (Dow Jones)--Paul Zuccarini walked into his local Bank of America
(BAC) branch in Sewall's Point, Fla., looking for a certificate of deposit
to buy for a retirement account.
He walked
out with nearly half of his nest egg in auction-rate securities, and assurances
that he'd have quick access to his funds should he need them.
Now, because
the auctions that set the interest rates on his securities have failed,
Zuccarini, a 66-year-old retiree, can't touch that money.
Since 1999,
when Congress repealed the Glass-Steagall Act -- which separated banking
and brokerage operations -- more firms have been trying to squeeze the
most from the relationships between their business lines. Many banks now
station stockbrokers in their branches, hoping to catch some crossover
customers. They're also allowing brokers to call bank clients directly
to offer them brokerage products.
But regulators
and investors' advocates have raised concerns about the setup being confusing
to customers, who may not realize that brokerage products are different
from - and not as protected as -- bank products.
With reports
of investors buying auction-rate securities in bank branches, and now
being stuck without immediate access to their money, concerns about bank
branches that house brokers could escalate.
"This
situation is the perfect example of what the problem is with having that
mix," said Stuart Meissner, an investors' attorney in New York who
said he's heard from around 10 people who bought auction-rate securities
either after they were steered to brokerage desks in bank branches or
received cold calls from brokers affiliated with their banks.
"Those
people are shocked as to what happened," he said.
A Bank
of America spokesman said the company follows regulations governing the
sale of non-deposit investment products in banks. He said the firm is
committed to "best serving our clients."
Auction-rate
securities are bonds issued by cities, student-loan agencies and closed-end
funds that have interest rates reset by auction every seven to 35 days.
About $330 billion of auction-rate securities are now held by both institutional
and individual investors.
In February,
the auctions that reset the rates failed, leaving hundreds -- or more
-- investors with assets tied up in securities they can't sell.
Scott Silver,
an investors' lawyer in Coral Springs, Fla., said he has a 70-year-old
client who went to a Wachovia Corp. (WB) bank branch last summer branch
to open a savings account or buy a CD. Instead, Silver said, a broker
with Wachovia Securities who was based in the branch sold her $175,000
in auction-rate securities -- all of her savings. Silver said the broker
pitched them as equivalent to a money-market account. Now the woman can't
access money she needs to pay her taxes, he said.
"To
her, (if) she's sitting in the bank, she's dealing with the bank,"
Silver said. "People don't appreciate the difference between the
bank side and the brokerage side."
Wachovia
Securities spokeswoman Teresa Dougherty said the firm is "working
diligently on solutions to this industrywide problem, seeking to return
liquidity to our clients as quickly as possible." She said the firm
is offering margin loans to allow clients to regain some liquidity.
When Zuccarini
entered the Bank of America branch around August 2007, he said, he had
already cashed out of his retirement plans at another firm because he
was skittish about having his money tied up in stocks. His goal, he said,
was to buy CDs that he could put into an individual retirement account.
When Zuccarini
explained to the bank manager that he needed to open an IRA to house the
CDs, she directed him to a financial advisor, who quickly drove over from
a nearby branch, he recalled.
Zuccarini
said the financial advisor told him that a CD wouldn't give him quick
access to his money, and that she could get him better liquidity and a
slightly higher interest rate with another product.
In addition
to following the appropriate regulations, Bank of America spokesman Matthew
Card said, the company evaluates "the investment needs of our clients
on an individual basis, guided by their financial goals and risk tolerance."
Zuccarini
said the financial advisor made it clear that the product he was buying
wouldn't be FDIC-insured. But he said she also told him he would have
good access to the funds and he would not lose his principal. He said
she told him there were no risks involved.
"If
she had said anything at all about how it was possible you could lose
your principal, I wouldn't have done it," Zuccarini said.
Zuccarini
said his account statements indicate his principal is still there -- unlike
UBS AG (UBS), Bank of America has not written down the value of the auction-rate
securities in customer accounts.
Bank of
America's Card said the company is, along with the rest of the industry,
"evaluating statement pricing in relation to these securities."
But even
if his principal remains intact, the practical effect is that Zuccarini
can't get to his money, which, the last time he checked, was earning less
than 5% interest.
Zuccarini
doesn't have an immediate need for the cash, he said. But he had only
wanted to keep the money out of the stock market for a short time. He'd
planned to reinvest once the market stabilized.
"It's
not like I'm going to starve to death if I don't get the money,"
said Zuccarini, who is currently living off his Social Security checks.
But the bank "isn't living up to their end of the deal, and God knows
what's going to happen to the money."
(Jaime
Levy Pessin covers compliance and regulatory issues affecting financial
advisors.)
-By Jaime
Levy Pessin; Dow Jones Newswires, 201-938-4546; jpessin@dowjones.com
TALK BACK:
We invite readers to send us comments on this or other financial news
topics. Please email us at TalkbackAmericas@dowjones.com.
Readers should include their full names, work or home addresses and telephone
numbers for verification purposes. We reserve the right to edit and publish
your comments along with your name; we reserve the right not to publish
reader comments.
(END) Dow
Jones Newswires
URGENT
REQUEST FOR HELP
I
believe we have a serious case to involve treasury secretary Paulson
and fed chairman Bernanke in coming to our aid. Our case rests
upon the damage that our $360 billion+ in locked funds
is doing to the economy. We are not buying houses, expanding or
buying businesses. We are also skimping on medical expenses and
other expenditures that could boost the economy.
I need your stories. What have you not bought or invested
in because of your locked auction rate funds? Please send me your
story. You must be prepared to stand up, be public and give your
name and contact information. Send your story to me:
|
|
LOCKOUT
LOCKOUT LOCKOUT LOCKOUT
Best
strategy:
Ask your brokerage firm and all its brokers to lock out all sales
representatives of all the issuers/marketers -- Nuveen, BlackRock,
Van Kampen, etc. -- until they give us all our money back. See below.
|
Congratulations
to Danny Ludeman
of Wachovia Securities
|
Danny
Ludeman, president and CEO of Wachovia Securities
|
Mr.
Ludeman has apparently sent a letter to 25 issuers of
ARPS -- all the ones that Wachovia Securities, a brokerage
firm, deals with and whose securities it sells.
In
his letter he said that if the issuers (like Nuveen, BlackRock,
Van Kampen) didn't clean the mess up quickly -- i.e. provide
liquidity to ARPS owners-- then his firm would consider
never doing business with these firms again. Which means
he wouldn't have his brokers sell their
securities ever again.
|
|
April
9 Reuters
Goldman
says regulators
probe auction-rate matters
By Joseph A. Giannone
NEW YORK, April 9 (Reuters) - Goldman Sachs Group Inc disclosed on
Wednesday that it has received requests for information from "various
governmental agencies and self-regulatory organizations" relating
to auction products and the recent failure of such auctions.
Goldman,
which disclosed the matter in its 10-Q filing, said it is cooperating
with the requests. A spokesman declined to comment.
It
is the first time Goldman has been linked to the widening probes.
Wall
Street banks have been under fire as the credit crunch spread to auction-rate
securities, a $330 billion market of securities that have been sold
to wealthy individuals as highly liquid, cash-like instruments. With
debt markets breaking down, many investors have found themselves stuck
with securities that suddenly they cannot sell.
The
U.S. Securities and Exchange Commission and, according to Monday's
Wall Street Journal, the Financial Industry Regulatory Authority are
looking into the market. In particular, investigators want to learn
what promises brokers made to investors who purchased auction-rate
products.
A
spokesman from FINRA told Reuters Wednesday that the nongovernmental
regulator sent surveys to a number of firms earlier this month about
how the securities are marketed and sold, and it could decide to take
enforcement action based on the information. He said the survey was
separate from any reported investigation.
On
Tuesday, FINRA announced it is also seeking more details on customer
complaints in the market.
Two
weeks ago, Massachusetts' top securities regulator said his office
sent subpoenas to UBS, Merrill Lynch and Bank of America Investment
Services to determine whether they told investors about the potential
risks of these investments.
Also
last month, two clients filed lawsuits against Citigroup , complaining
that the big bank did not disclose the risks of investing in these
securities.
Auction-rate
securities are long-term bonds that behave like short-term debt and
have long been popular with conservative investors because they are
tax-exempt. States, cities and other agencies issue these securities,
whose interest rates reset frequently.
In
February, the auctions failed to attract buyers and investment banks
stopped supporting them. (Additional reporting by Lisa Lambert in
Washington; Editing by Brian Moss)
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
April
8 Barron's
ADC Telecom To Take Another Hit
On Auction Securities
ADC
Telecom (ADCT) disclosed in an SEC filing today that the company will
take an impairment charge of between $12 million and $22 million on its
holdings of auction-rate securities. ADC holds $169.8 million in par value
of auction-rate securities; at the end of the company’s fiscal first
quarter ended February 1, fair value on those holdings was $90.2 million,
after $79.6 million in previous writedowns. The company said it would
provide the specific amount of the latest write-down when it announces
second quarter results.
April
8 StarTribune.com Minneapolis
ADC writes down more losses
ADC Telecommunications
Inc. of Eden Prairie, the networking-equipment maker that has lost money
on its investments in auction-rate securities, said Tuesday that the
financial hit from those bonds has continued to grow.
ADC will
write down the value of the investments by $12 million to $20 million
for its second quarter ending May 2, up from an earlier estimate of
$7 million, ADC said Tuesday in a regulatory filing. That's after taking
a $50 million write-down in the first quarter.
The market
for auction-rate securities saw record failures after some banks stopped
committing their capital when there were too few bidders. The lack of
demand left investors unable to sell their holdings and get their money
back.
Other
Twin Cities companies have been stuck with the unsellable securities
as well. Restore Medical Inc. of Roseville said last month that it holds
$4.2 million of the securities. That's more than a third of its assets,
putting the company at risk of running out of cash.
Lawson
Software Inc. of St. Paul wrote down the value of its auction-rate securities
by $8.1 million in its third quarter ended Feb. 29, after a $5 million
write-down the previous quarter.
And last
week, Best Buy Co. Inc. of Richfield reported "persistent failed
auctions" of $417 million in auction-rate securities. The company
said it is evaluating the worth of these securities and expects to conclude
that analysis no later than April 30.
++++++++++++++++++++++
April
8 Page D3 Wall Street Journal
Auction-Rate
Securities Probed
By JAIME LEVY PESSIN
As scores
of investors complain they were misled into buying now-illiquid auction-rate
securities, the Securities and Exchange Commission and the Financial
Industry Regulatory Authority are starting to look into how brokers
sold the products.
In a survey
sent in recent weeks to financial companies, Finra seeks a breakdown
of total auction-rate-securities holdings by customer type, how auction-rate
securities are classified on customer statements, and how firms marketed
the products. The regulator also asks how many customer complaints about
auction-rate securities the firms have received since Oct. 1. A copy
of the survey was reviewed by The Wall Street Journal.
Finra
also recently started a "sweep" investigation into the topic.
A sweep investigation is a broad look at industry practices; it doesn't
necessarily mean enforcement action will take place.
SEC spokesman
John Heine said the agency is working with Finra to look into "representations
made to investors when they purchased auction-rate securities."
Finra
officials couldn't be reached for comment Monday. Last week, Finra said
it could neither confirm nor deny whether it was looking into sales
practices for auction-rate securities.
Massachusetts
securities regulators also are concerned about sales practices. Last
month they subpoenaed three large brokerage houses -- UBS AG, Merrill
Lynch & Co. and Bank of America Corp. -- for documents and testimony
on how they sold auction-rate securities to retail investors.
Merrill
Lynch and UBS declined to comment about the subpoenas. UBS is among
the companies that received Finra's sweep letter. Bank of America declined
to comment.
Auction-rate
securities are bonds issued by cities, student-loan agencies and closed-end
funds that have interest rates reset by auction every seven to 35 days.
The recent
credit crisis led to the failure of hundreds of auctions, leaving investors
with assets tied up in securities they can't sell.
Brokers
had pitched auction-rate securities as liquid, super-safe investments
with interest rates slightly superior to those of conventional money-market
funds. Now investors are asking why they weren't warned about the possibility
of failed auctions.
Write
to Jaime Levy Pessin at jaime.pessin@dowjones.com
+++++++++++++++++++++++++++++++++
About
this site: I'm
updating this site as I get new information. Hence you should visit often.
I run the latest news on the top of the column, pushing the older stuff
down. The links on the left are useful. Much older stuff is still archived
on my other site, InSearchOfThePerfectInvestment.
For a full update on auction rate preferred shares (ARPS), you should
read this entire site. The key takeaways are simple:
1. The issuers
/ marketers of ARPS -- Nuveen, BlackRock, Van Kampen, etc. -- believe
they are under no legal obligation to produce liquidity for their ARPS
holders. Also management of these firms have major incentives to do nothing,
since their management fees derive directly from the assets they manage.
The more they manage the better. The more captive those monies are, the
better.
2. Ethically
and legally, these issuers / marketers are actually in a very weak position.
All their marketing literature referred to ARPS securities as "cash
equivalent" monies. All their literature talks about their ARPS securities
being accessible via regular (7-day, 30-day, etc.) auctions.
3. The most
cost-effective way at present for ARPS to get at their money is to apply
maximum pressure on the issuers / marketers. These companies need to get
pounded into their tiny brains the one thought -- the viability of their
firm -- depends on them getting liquidity to ARPS holders, i.e. allowing
ARPS holders to sell them for cash.
To apply
maximum pressure, the best idea is for the brokers -- the issuers'
sales agent -- to lock them out of their offices. Every brokerage
office must put a sign on their door -- "Peddlers from ARPS issuers
-- Nuveen, Van Kampen, BlackRock -- are not welcome."
In short, all of us need to stop doing business with these guys. Tell
all your friends that the issuers have leprosy and are bad people. Or
whatever words you want to use.
And you
and I, as owners of these ARPS issuers, need to extract promises from
every broker and from every brokerage office in the country that they
will indeed lock out all sales reps from Nuveen, Van Kampen, BlackRock
(include your own).
Additional
pressure needs to be applied by you and I by contacting every securities
regulator in the country, including all local Attorneys-General. At some
stage, we'll need to take ads in the financial press saying "Why
You Should Never Do Business with Nuveen, BlackRock, Van Kampen..."
If you have
an idea to bring pressure, let me know. This whole mess is only going
to solved by all of us bringing heavy and unrelenting pressure
on the issuers / marketers and their agents, the stockbrokers and the
brokerage firms.
Harry Newton.
Monday
April 7, 2008, 9:20 AM EDT
Harry's
latest thinking
The
lawyers and Failed Auctions. Everyone who owns failed auction
securities is pissed at their brokers and their issuers/marketers (Nuveen,
BlackRock , etc.). The story is standard: The brokers dumped their client's
money into (typically) auction rate preferreds without asking their clients
and in contravention of their client's specific instructions for their
money to be put into safe money market, liquid securities.
We, the
clients, are now even more annoyed because the issuers are being excessively
cagey about their intentions (or not) and their actions (or not) to get
cash money back to the stuck ARPS holders, i.e. us.
I can't
justify the issuers' caginess -- how they hold "touchy feely"
conference calls, but don't say anything concrete -- like when investors
are likely to get their money back. That caginess sends me right up a
wall with anger.
On Friday,
a dear friend who spent his life on Wall Street explained to me that the
whole mess was being managed by lawyers, who are advising their clients,
the issuers:
+ Don't
say anything, because whatever you say will come back to haunt you. Think
law suits. Many have already been filed.
+ Don't say anything until it's a done deal. Capital markets are presently
locked. Hence, finding a solution -- either refinancing or reclassification
-- is likely to take time. And all predictions of timing are likely to
be wrong. Hence, don't say anything.
I believe
all of us will get our cash money back out of this at par, i.e. what we
put into it. I believe it will take as long as 12-24 months. If you need
to get at your money before then, you'll probably have to borrow against
your ARPS. But don't take a term loan. Try to take a loan that
comes due the day you get your cash money back. I believe it's
too early to participate in law suits. But it's not too early to
keep up the pressure of letter writing, and pressure on local regulators
and down at the SEC. Meantime, make sure your brokers and their firms
are keeping issuer salespeople out of their offices and telling the salespeople
they're not welcome until they get the money back to the auction
rate preferred (ARPS) holders, i.e. the brokers' clients.
++++++++++++++++
April
8, 2008
CHICAGO
- (Business Wire) Nuveen Real Estate Income Fund (AMEX: JRS) today called
for redemption at par outstanding shares of its auction-rate preferred
shares (ARPS). The fund’s Board of Trustees has approved the redemption,
which is part of a refinancing expected to lower the relative costs of
leverage for the fund over time while also providing liquidity at par
for the holders of at least some of Nuveen Real Estate Income Fund’s
ARPS.
JRS is initially
redeeming $80 million of its $222 million ARPS. As previously announced,
this represents the first of two planned stages approximately a month
apart which together are expected to total $150 million. The table below
lists the total number of shares, par amounts and scheduled redemption
dates for the first stage of redemptions:
|
Series
|
Cusip
#
|
Total
Shares
Redeemed
|
Total
Amount
Redeemed
|
Redemption
Date
|
| M |
67071B207
|
616
|
$15,400,000
|
April
29, 2008
|
| T |
67071B306
|
616
|
$15,400,000
|
April
30, 2008
|
| W |
67071B405
|
616
|
$15,400,000
|
May
1, 2008
|
| TH |
67071B603
|
736
|
$18,400,000
|
April
25, 2008
|
| F |
67071B504
|
616
|
$15,400,000
|
April
28, 2008
|
The ARPS
in the Nuveen Real Estate Income Fund being redeemed will be replaced
with new borrowings. With respect to the partial redemption for JRS, The
Depository Trust Company (DTC), the securities’ holder of record,
determines how a partial series redemption will be allocated among each
participant broker-dealer account. Each participant broker-dealer, as
nominee for underlying beneficial owners (street name shareholders), in
turn determines how redeemed shares are allocated among its underlying
beneficial owners. The procedures used by different broker-dealers to
allocate redeemed shares among beneficial owners may differ from each
other as well as from the procedures used by DTC.
For Nuveen's
official press release.
April
7, 2008 4:14 PM EDT
Another
"Do-Nothing" statement --
this time from Van Kampen
CHICAGO--(BUSINESS
WIRE)--Van Kampen is closely monitoring the situation relating to the
lack of liquidity of closed end fund preferred shares, which enable
the funds to use leverage to acquire assets. While the prospectus under
which these shares were sold disclosed and contemplated a potential
loss of liquidity, we realize that this market imbalance has created
challenges for preferred stockholders and their financial advisors.
We have
been evaluating all potential solutions that will enable preferred shareholders
to achieve liquidity and maintain leverage for the benefit of the common
shareholders. Specifically, we are examining options that would make
preferred shares eligible for purchase by money market funds, as well
as exploring the viability arranging for debt financing that would enable
our taxable funds to redeem at least a portion of their preferred shares.
We are working closely with the Investment Company Institute to monitor
industry developments, and have met with regulators to discuss possible
avenues of relief that might increase our flexibility in this regard.
This is,
however, a complex issue that will take some time to resolve. Whatever
steps we take must account for the interests of both common stockholders
as well as holders of the preferred stock, and navigate among many regulatory
and tax requirements. At this time, we can provide no definitive assurance
regarding the form and timing of a solution. We do, however, realize
that a swift remedy to this situation is in everyone’s best interest,
and we assure you that we are dedicating significant resources to finding
a solution.
Van Kampen
Asset Management, the Funds' investment adviser, is a wholly owned subsidiary
of Van Kampen Investments Inc. (“Van Kampen”). Van Kampen
is one of the nation’s largest investment management companies,
with approximately $107 billion in assets under management or supervision,
as of February 29, 2008. With roots in money management dating back
to 1927, Van Kampen has helped nearly four generations of investors
achieve their financial goals. For more information, visit Van Kampen’s
website at www.vankampen.com.
Monday
April 7, 2008
Cohen & Steers is working hard
NEW
YORK, April 7, 2008, 2008 /PRNewswire-FirstCall via COMTEX/ -- Cohen &
Steers Capital Management, Inc. responded today to news that some broker/dealers
have recently decided to reduce the value of the auction market preferred
securities (AMPS) held in their clients' accounts. This action, the broker/dealers
have said, reflects the current illiquidity in the AMPS market.
As we have previously announced, the credit quality of the AMPS issued
by our closed-end funds is unchanged; they continue to be rated Aaa by
Moody's Investor Services and AAA by Standard & Poor's. To maintain
these ratings, which are not supported by any credit enhancements, our
funds must meet the 2:1 asset coverage tests required by the Investment
Company Act of 1940, as well as those of the ratings agencies. There can
be no assurance, however, that continued illiquidity or changes in market
conditions will not adversely affect the funds in the future.
Since the AMPS market stalled earlier this year, senior personnel of Cohen
& Steers have been investigating alternative methods of financing
for our closed-end funds that have issued AMPS, including lines of credit,
commercial paper and new forms of preferred stock that could replace the
existing AMPS.
We are also working with the Investment Company Institute and the SEC,
among others, to evaluate ways to provide liquidity to our funds' AMPS
holders. Cohen & Steers' management views this issue as a top priority
and is focusing its resources on developing a viable long-term solution.
We are working to resolve this as quickly as possible, and we will keep
our funds' shareholders fully informed of our progress. For more information
and periodic updates, please visit www.cohenandsteers.com.
Friday, April 4, 2008
Nuveen holds another
Touchy-Feely Conference Call
If you own
Nuveen ARPS in tax-free municipal funds, figure another 9-12 months before
you might get your money back. This isn't what Nuveen said on today's
conference call. In fact, Nuveen management didn't say anything, except:
1. Nuveen
people were working hard. Things are complicated. They understand the
need for urgency, etc. Blah. Blah. Blah.
2. They couldn't deleverage their funds since this would reduce the returns
for the common shareholders. "The issue of common shareholders
is a central issue," they said. Translation: Nuveen management
gets paid on the total assets it manages. If they deleveraged by redeeming
their ARPS, their assets would be less and so would their fees.
3. No significant regulatory approvals are needed to replace the ARPS
with a new form of preferred stock -- Variable Rate Demand Preferred (VRDP).
The idea is that this new stock would appeal to money market funds, which
can't (for some reason) buy ARPS today. Since money markets are big, being
able to put their money into these new solid investments would be attractive.
In the dictionary,
a VRDP is defined as "A debt instrument that represents borrowed
funds that are payable on demand and accrue interest based on a prevailing
money market rate, such as the prime rate."
In their conference call, Nuveen management declined to explain how a
VRDP would work, or who would pay off a VRDP, should you or I (a new-VRDP/old
ARPS owner) ask for our money.
4. Nuveen has secured some money and is doing redemptions on the ARPS
in their taxable funds first. Then they'll tackle the tax-free funds,
but that "could take considerably longer than the 2-3 months"
for the taxable funds. (There's far more money in the tax-free funds.
And the rules are different, though I don't know how different, or in
what respects.)
You
can listen to a replay of the conference call on your computer:
Click
here.
You can also read
their April 1, 2008 press release in which they said they were beginning
to refinance auction rate securities in four taxable closed end funds.
Click
here.
Harry's takeaways
from today's Nuveen conference call:
First understand that all my $3.5 million of ARPS are in Nuveen ARPS.
As to Nuveen's conference calls and press releases, I'm in two minds.
First,
I feel Nuveen is treating me like a child who's told he can't watch TV.
When he asks "Why?" Daddy says "because I say so."
Nuveen
is treating me like child. I ask "Why?" and I get no explanation
why this whole process of getting me my money back is taking so long.
Nuveen tells me it's working in my best interests; it's working hard;
life is complicated and the people who will ultimately buy my VRDP-changed
ARPS and give me cash are sensitive souls, whose identity can't be revealed
and whose thought processes are convoluted and mysterious. But I should
retain my faith.
If
I piss Nuveen off by saying, "Heh, guys, you're not being fair
with a bunch of people (now called ARPS holders) you lied to,"
I run the risk of never getting my money.
Heck, these guys hold the upper hand. They can say "Screw you,
buddy (i.e. me), you're in for life. We'll pay you your interest, meager
though it is, but you'll never get your principal out of us. Ha. Ha. Read
the prospectus. Sue us."
But
so far, they're mouthing the right words. They say they're working to
get me my money. And maybe they are. Just it would be so nice if Nuveen
management treated me (and its other customers) like real people and told
us exactly what is going on, and why the whole process is taking so long...
Or as they just mouthing the words, in the hope that we'll all go away?
Dear
Nuveen management,
Let
me assure you, we aren't going away. We want our money back. We're even
prepared to wait for it -- if you treat us like you would like to be treated
yourself:
1.
Tell us what you're doing.
2. Tell us what hurdles you need to be overcome.
3. Tell us what milestones need to be met.
4. Give us a timetable.
5. Treat us like real thinking people.
And,
by the way, all this Nuveen dilly-dallying around is giving me and others
like me plenty of time to compose our full-page ads:
--
draft Wall Street Journal advertisement--
Why
You Should Never
EVER Do Business With Nuveen
Number
1 reason: They lie to their customers.
Number
2 reason: They are ruining their customers' finances by forcing
many to lose deposits on homes they can't close on, to not finance
their business's cash needs and, for some, to declare bankruptcy.
Number
3 reason: There is no reason why Nuveen customers should make
lawyers even more rich by forcing us customers to sue Nuveen.
|
If you think
I'm being harsh, know two things:
1. It's
been over eight weeks since the first auctions started failing.
2. Read Nuveen's own words in their own marketing literature (I don't
make this stuff up)
And finally,
next time you're on a conference call and get to be one of the privileged
few to ask a question, please don't start your question by complimenting
Nuveen management for holding a conference call. Every time you do that
I know you're somehow in Nuveen's pocket and you make me physically sick.
If you own
Nuveen ARPS, please email me your story. Tell me what hardships Nuveen
management's dragging their feet is causing you.
|
Best
idea from a broker who wishes to remain anonymous, for
now:
Lock
the issuers out
We need to keep up the pressure on the issuers (Pimco and Nicholas
Applegate (Allianz), First Trust, Eaton Vance, Evergreen, Calamos,
Cohen & Steers, Claymore, Nuveen, Blackrock, etc.). The
branch office I work in has 30 advisors, many of whom own failed
auction rates.
Our managers are not allowing any wholesalers from these companies,
or any company which has issued auction rates, in to our office
to sell any of their products. All of Wall Street needs these
companies out of their offices. We need to make them feel unwelcome.
Unless we hit their bottom line, otherwise won't have any incentive
to cash us out. And they will continue to drag their feet.
Please get any broker you speak with to have their office do
the same. As for all the clients, they need to call their brokers
and tell them to lock these companies out of their offices.
You should mention in your column that all firms need to be
locking these companies out.
|
|
Thursday,
April 3, 2008
UBS
is the absolute worst
I
gauge villains by the amount of hate ARPS emails I get. So far,
UBS is top of the list -- by far. Everyone is bitching about their
miserable treatment from UBS. It seems there must have been an edict
somewhere up on high in UBS to push ARPs -- irrespective. The UBS
stories I hear have a very similar ring. Client tells his UBS broker
he wants the safest, most liquid haven for his money. UBS broker
ignores client's instructions and dumps unsuspecting client into
ARPS.
When
ARPS prove no longer liquid, UBS says "tough."
One
ARPS holder emailed me, "I asked my UBS broker what UBS was
doing to put pressure on the issuers and this was his his response:
"UBS
is putting as much pressure as possible but they also have clients
that hold the other side (common shares) of these funds so they
can't force anything that would hurt them."
Somewhere
in UBS there are some real incriminating memos. Does anyone have
them? Is there an honest UBS broker out there who'll tell the real
truth?
Email
me --
By
the way, one of UBS's brokers told me that UBS was a "regulatory
cesspool."
April
4, 2008 Today's Wall Street Journal carries this delicious
UBS story
Former
UBS Executive
Pushes to Break Up Bank
A
former president of UBS AG is pushing for a breakup of the Swiss
banking giant in the wake of its $38 billion in write-downs over
the past six months.
The
surprise attack from Luqman Arnold, chairman of London investment
firm Olivant Advisers Ltd., promises to increase acrimony inside
UBS. It is unlikely his proposals will be officially considered
at the April 23 shareholders' meeting, but his ideas could accelerate
the bank's own changes.
The
fight also marks a rematch with the bank that forced him out in
2001 after a bitter dispute over how much power he would have.
Among Mr. Arnold's proposals: UBS should legally separate its
investment bank from its private-client bank and ultimately sell
the investment bank; it should sell its asset-management business
to raise money; and it should remove the chairman it named Tuesday,
according to a letter Mr. Arnold has prepared for the UBS board.
UBS
has been under pressure from other shareholders to split off its
investment bank. They blame the division for moving the traditionally
conservative bank into trading complex mortgage securities that
wiped out profits for 2007 and the first quarter of this year.
Indeed,
wealthy clients in UBS's home market have been pulling money
out of the private-banking unit because they are worried about
the bank's losses, said Raoul Weil, chief executive of the
private bank. He made his remarks in an interview before Mr. Arnold
sent his demands. Mr. Weil said private-bank advisers had been
calling clients to reassure them, telling them of the steps taken
Tuesday to boost capital by 15 billion Swiss francs (about $15
billion), among other steps.
"It's
hard to make a case to someone wealthy that you can manage their
money well when you've just lost" some $38 billion, said
Dirk Hoffmann-Becking, an analyst at Bernstein Research in London.
Smaller Swiss rivals Julius Baer Holding AG and Vontobel Holding
AG have said they have gained private-banking clients as UBS struggles.
Mr.
Arnold's firm accumulated a 0.7% stake in UBS, worth about $470
million, before sending the letter to UBS Vice Chairman Sergio
Marchionne. In the letter, Mr. Arnold says UBS "needs to
act with urgency...as we remain cautious about the prospects for
the U.S. housing market and the outlook for credit markets."
Activist
investors like financier Carl Icahn acquire stakes in companies
and then attempt to force them to make changes to improve stock
performance. Activists can stir up broader investor support and
force companies to consider outright sales or divestitures of
ailing units. ...
UBS
has a 20% to 30% market share of all business with private clients
in Switzerland, which includes private banking. Assets from wealthy
clients in its home market totaled 281 billion francs at the end
of last year, with 2.134 trillion francs managed outside Switzerland.
Mr.
Arnold, however, writes that the bank's business of catering to
wealthy clients will be tarnished by its subprime problems. "We
are not convinced that the 'one-bank' integrated business model
that has served UBS well in the past will survive the damage inflicted
by the proprietary-trading losses and write-downs," he said.
UBS
believes a 15 billion franc rights issue -- the sale of stock
to existing investors -- will provide enough capital for the bank
when added to 13 billion francs raised from Middle Eastern and
Asian investors. But Mr. Arnold said in his letter that the fund
raising may not be enough. ...
|
April
3, 2008
The
Auction-Rate Lockout
Values Tossed Around As Individual Investors Can't Get at Their Cash
from the Wall
Street Journal
When
John Carney, a 68-year-old New York attorney, received his Merrill Lynch
& Co. brokerage statement this month, it showed he held $550,000
in short-term securities safely at their full value.
Tracey
Young, a 53-year-old mother of two who helps manage family funds through
a UBS AG account, got a different assessment. The $3 million in short-term
securities she held had been marked down by $170,000. "I am in
a panic," she says.
Behind
this tale of two statements is a big dilemma on Wall Street. Many firms
like Merrill Lynch and UBS have placed their customers in short-term
investments known as auction-rate securities that are supposed to be
safe and as liquid as cash.
|
•
Good News: Banks and mutual-fund companies are working on
valuing auction-rate holdings and finding alternative debt given
the frozen "auction-rate debt" market.
• Bad News: It remains unclear how such securities
should be marked down and debate is raging over how to deal with
the matter.
• What's Next: Clients could continue to see their
holdings valued and redeemed in a variety of ways.
|
The promise
of liquidity dried up weeks ago, leaving investors stuck with securities
they can't sell. With the arrival of brokerage statements, the promise
of safety, at least for customers of some brokers, has disappeared,
too, as brokers mark down the value of these securities.
Last week,
UBS said it was marking down an undisclosed amount of the value of auction-rate
securities held by its customers. Other banks, including Merrill, aren't
marking down their values. In both cases, banks are scrambling furiously
to fix the frozen market.
Some brokerage
firms are offering clients loans backed by their holdings to meet immediate
cash needs, as UBS and Merrill offered to Ms. Young and Mr. Carney.
A solution
can't come soon enough for Ms. Young. She says she needs money to pay
for her son's college. She says she also has bills piling up because
her husband has tongue cancer and her uncle has Alzheimer's.
The stakes
are big and serve as another example of the challenge Wall Street firms
are having valuing assets during the credit-market crunch -- in this
case the assets of their bread-and-butter clients. Numerous class-action
suits and arbitration claims already have been filed by customers who
are furious that they can't access their funds since the market collapsed
in February.
The auction-rate
securities market is populated by a variety of players with competing
interests -- investment banks, closed-end funds, municipalities, student-loan
issuers and individuals among them -- which has made it hard to come
up with quick solutions to the problems.
Until
recently, these securities could be bought at weekly or monthly auctions
supervised by large Wall Street firms. The system had worked for years,
but seized up when the big banks, concerned about other credit-market
exposure, stopped committing their own money to make sure auctions ran
smoothly.
Brokerage-firm
clients buy auction-rate securities that are issued by mutual-fund companies,
student-loan companies, nonprofit entities, schools, museums and municipalities
to raise cash. In all, it is a $330 billion market.
Many in
the industry say it will take months to fully fix the mess. An executive
at one firm said because there is no secondary market in which to sell
these securities, it is almost impossible to put a realistic price on
them.
Investors
needing funds are caught in the middle. Merrill, Citigroup Inc. and
Morgan Stanley are among the firms that haven't marked down customer
portfolios.
On Tuesday,
Merrill sent a note to its 17,000 financial advisers, saying its "primary
focus throughout this crisis" is to work with other industry participants
to get their clients out of these now illiquid securities at par.
While
Merrill clients will see their holdings marked at full value in statements,
they have been told that there is no market for these securities, and
that Merrill has marked down the value of similar securities it holds
in its own accounts. They have also been informed that different firms
may be treating this same matter differently. Other firms have sent
similar notices.
UBS and
Goldman Sachs Group Inc. are among the firms that have decided to mark
down the value of these securities on client statements. Although there
is no evident market for these securities, firms have used internal
models to estimate a price. Markdowns vary, but most are between 3%
and 5%.
"This
is a very painful issue for clients," said Marten Hoekstra, UBS's
head of wealth management. The Swiss bank has also marked down by $800
million the value of nearly $11 billion of auction-rate securities it
holds in its own trading book.
Of the
$330 billion market for these securities, closed-end funds issued about
$65 billion of the total; firms like Eaton Vance Corp., BlackRock Inc.,
Legg Mason Inc. and Nuveen Investments were among the primary sellers.
When the market seized up, brokerage firms, fund companies and regulators
began talking to see if there was a way to refinance these securities
and get owners of the securities out at full value.
One idea
is for banks, for a fee, to provide financial backing to make the investments
more liquid and secure. The problem is banks are reluctant to make such
guarantees these days. The approach would also likely require the cooperation
of regulators and the Internal Revenue Service, because there could
be complex tax implications.
On Tuesday,
Nuveen said it would refinance nearly $715 million in auction-rate securities
issued in relation to four taxable funds, repaying some investors in
those securities at full value. It hopes to complete a refinancing of
all its taxable funds within four to six months.
Eaton
Vance began $1.6 billion in redemptions this week, and hopes to deal
with the remaining two-thirds of its auction-rate securities outstanding
in coming months.
++++++++++++++++++++++++++++++++++++++
April
2, 2008
Buyers
Be Where
Auction-rate
securities are hitting businesses large and small in the wallet and on
the balance sheet. The big question: If no one will buy them, what are
they worth?
by Alan Rappeport, CFO.com
The headlines blared the news globally last week: Swiss bank UBS was writing
down between 5 percent and 20 percent of its $5.9 billion exposure to
the failing market for auction-rate securities. But for Bill Freeman's
small copy-machine company in Irvine, Calif., the $200,000 in those securities
that UBS holds for him are an even bigger problem.
Those funds
are frozen, and most likely worth much less now, at least for accounting
purposes. And without some relief, Freeman may have to draw operating
capital from his 25-employee company, Century Business Services, just
to pay his taxes this year.
Like Freeman,
may smaller holders of auction-rate securities did not even realize they
were making a risky investment in the ARS market; auction-rates were marketed
like savings accounts with slightly better interest rates. Auction-rate
securities are long-term bonds and preferred stocks that resemble short-term
instruments because their interest rates are reset periodically —
usually every 7, 28, 35, or 49 days. The rate is reset by a modified Dutch-auction
process, and because investors are supposed to be able to buy and sell
the securities so frequently they are generally regarded as equivalent
to cash.
"They
told me it's not a credit problem, it's a liquidity problem," Freeman
tells CFO.com. "If I can't make the payment on my Honda and try to
explain that it's just a liquidity problem, I'd be walking."
These days,
as the credit crisis has spread to some of the most arcane markets, auction-rate
securities are nearly impossible to cash in, and holders are feeling their
cash flows constrained. Freeman has another $550,000 locked up in auction-rates
with Wells Fargo, which offered him an $80 credit on his checking account
to switch his money from a savings account into securities that he was
told would take a few days longer to liquidate. Freeman is frightened
that big banks can just write-down his portfolio with little notice.
"I
don't know what basis they have for doing it," Freeman says. "There's
no secondary market for these things."
In an effort
to find a market where a failing one exists, firms with electronic trading
networks are now attempting to offer secondary markets for auction-rate
securities that cannot be sold at auction. The UBS write-down comes as
investors file lawsuits and regulators begin investigations into how securities
that were billed "as good as cash" when issued now unredeemable.
One of the problems that banks, companies and anyone holding auction-rate
securities now face is how to account for what they are holding. In effect,
what value does an asset have if nobody wants it?
"This
is a security where people are losing money," says Barry Silbert,
CEO of Restricted Securities Trading Network (RSTN), which began allowing
trading of auction-rates last month. "When all the dealers stopped
supporting the auctions, we got calls from people who knew we had this
secondary market for illiquid securities."
The market
is slowly growing, says Silbert, and has about 150 auction-rate securities
for sale with about 100 secondary market buyers watching or placing bids.
Silbert will not say how many transactions have taken place so far, but
notes that the average discount on the transactions has ranged between
5 percent and 30 percent.
The Financial
Industry Regulatory Authority, or FINRA, said Monday that holders of auction-rate
securities may want to consider the secondary markets, although they are
likely to receive less than par. Another use of the secondary market is
valuation. Pluris Valuation has been working with RSTN to take data from
transactions on its electronic market and calculate the current "fair
value" of the security.
"We're
getting an awful lot of panicked calls from people who are not sure how
to value these," says Espen Robak, president of Pluris. "They
want to know how much they're going to have to write down for accounting
and reporting purposes."
One problem
with such methods, and with such markets, is that liquidity remains thin.
Silbert notes that the offers have declined this week as a result of
the continuing bad news from UBS. John Craft, of the Muni Center,
a municipal bond exchange, says that his firm's foray into a secondary
market for auction-rates has also been slow-going so far.
Secondary
markets may struggle to take off, as those who can afford to hold on to
their securities will likely wait until the auction market comes unblocked
or their bonds age to maturity. For those needing cash right way, taking
a big discount could turn out to be a solution as bad as the problem.
"In
the long run it's an outstanding idea," Anthony Carfang, of Treasury
Strategies, a consultancy, says of the potential for secondary markets.
"But in the short run I don't think large swaths of corporate America
are going to want to revalue the entire $300 billion auction-rate securities
market based on a secondary market."
Carfang
says that the fundamental problem with the current market situation is
that the wrong types of investors are holding these securities. "These
same securities buried in a pension plan or bond fund or insurance company
portfolio would be great," he says. The key is to get them into the
correct hands so that demand ensues and the market revives itself.
"There's
no market because nobody wants to buy them," says Harry Newton, an
investment guru who has started the blog AuctionRatePreferreds.org for
rants from angry auction-rate investors. "Everyone's bristling at
UBS. They said they've got formulas to value these things, yet they won't
buy them back."
Now Newton,
who has $4.5 million locked up in auction-rates, is getting dozens of
E-mails a day from angry victims like Bill Freeman, a businessman who
is so cautious with his money that he paid for his home without a mortgage.
"That was rainy day money, and with the economy right now, it's starting
to sprinkle," says Freeman.
It may be
small comfort that the precipitation appears to be just as heavy, or heavier,
at the top. Days after announcing its auction-rate write-down, UBS revealed
that it will write down $11.9 billion in debt securities and that Marcel
Ospel, the bank's chairman, would resign.
++++++++++++++++++
April
1, 2008 released via Business Wire
BlackRock
Addresses Third Party Pricing of Closed-End Fund Auction Rate Preferred
Shares
BlackRock, Inc. (NYSE:BLK) today announced that it has learned that as
a result of the recent illiquidity in the auction rate preferred shares
(ARPS) market certain broker dealers recently made the decision to value
ARPS below par on client statements. Any such change in valuation is at
the discretion of the broker dealer and does not affect the credit
quality of the ARPS issued by BlackRock's closed-end funds or their ability
to pay dividends. The ARPS issued by BlackRock's closed-end funds continue
to meet the asset coverage requirements imposed by the Investment Company
Act of 1940 and the ratings agencies. All ARPS issued by BlackRock's closed-end
funds also retain their triple-A rating. There can be no assurance, however,
that the failed auctions or changes in market conditions will not adversely
affect the funds in the future.
As
stated in a previous press release, BlackRock continues to actively explore
potential solutions for its fund shareholders affected by the lack of
liquidity in the auction rate preferred share market. The firm recognizes
the urgency of the matter and continues to work with all major industry
participants. We are deeply engaged in evaluating several different potential
solutions and our Closed-End Fund Board of Trustees is fully supportive
of our efforts. Implementation of any potential solution is subject to
market risk and factors that may be beyond BlackRock's control.
BlackRock
will continue to provide periodic updates to market participants and shareholders
via press releases and on its website at www.blackrock.com.
BlackRock
is one of the world's largest publicly traded investment management firms.
At December 31, 2007, BlackRock's AUM was $1.357 trillion. The firm manages
assets on behalf of institutions and individuals worldwide through a variety
of equity, fixed income, cash management and alternative investment products.
In addition, a growing number of institutional investors use BlackRock
Solutions investment system, risk management and financial advisory services.
Headquartered in New York City, as of December 31, 2007, the firm has
approximately 5,500 employees in 19 countries and a major presence in
key global markets, including the U.S., Europe, Asia, Australia and the
Middle East. For additional information, please visit the Company's website
at www.blackrock.com.
++++++++++++++++++++
 Webcast. from March 31,
2008
Hosted by
Sallie Krawcheck, Chairman and CEO of Citi Global Wealth Management
Featured
speakers:
Jeff Applegate, Chief Investment Officer, Citi Global Wealth Management
George Friedlander, Senior Fixed Income Strategist, Citi Global Wealth
Management
Dennis Emanuel, Senior Analyst Closed-End Funds, Citi Global Wealth Management
Harry's
summary of the webcast:
They explained how auction securities worked and why the auctions failed.
Nothing new.
They said they were concerned about our hardship. Thank you.
If we needed money they would lend us money.
This is a liquidity problem, not a credit problem, they said. Nothing
on the credit side has changed. It's still good.
Citi is working with issuers and regulators to come up with solution.
There is
no single solution for the entire ARPs industry. Some solutions may take
more than a year.
The conference
call lasted 20 minutes. They did not open the floor to questions.
Nor did they say why. This is the first conference call I’ve ever
been on which didn’t open the floor to questions. I guess they were
embarrassed.
In short,
another touchy-feely conference call, with nothing of consequence.
You can
listen to the Citi smith barney conference
call.
++++++++++++++++++++
Tuesday,
April 1, 2008 -- This is important.
Nuveeen
Announce Refinancing of Auction-Rate Securities
First Phase to Redeem $714 Million in ARS,
Update Also Provided on Other Funds,
Conference Call Scheduled for April 3
CHICAGO,
April 1, 2008 – Four taxable closed-end funds sponsored by Nuveen
Investments today announced the refinancing of $714 million of their
auction-rate securities (ARS), including auction-rate preferred shares
(ARPS) and auction-rate notes (ARN). The four funds are Nuveen Multi-Strategy
Income and Growth Fund (NYSE: JPC); Nuveen Real Estate Income Fund
(AMEX: JRS); Nuveen Tax-Advantaged Total Return Strategy Fund (NYSE:
JTA); and Nuveen Tax-Advantaged Dividend Growth Fund (NYSE: JTD).
Each fund’s Board of Trustees has approved the refinancing, which
is expected to lower the relative costs of leverage for each fund
over time while also providing liquidity at par for the holders of
at least some of each fund’s ARS....
For
the entire 7-page Nuveen
Press Release.
++++++++++++++++++++++
March
31, 2008: 12:01 PM EDT:
CNNMoney.com Fortune posted this piece today to
Money.cnn.com
Wake
up Wall Street. Joe Investor is hurting too
Big brokerage firms aren't the only ones socked by the freeze in
an arcane investment known as auction-rate securities. Everyday investors
are wheezing too.
By Katie Benner, writer-reporter
NEW YORK
(Fortune) -- UBS brokerage customers who own supposedly liquid investments
known as auction-rate securities have had the value of their investments
marked down by the Swiss bank, increasing fears that people with money
frozen in this market will not get their principal back.
Auction-rate
securities are long-term bonds that hospitals, cities and corporations
sell at weekly or monthly auctions, which is the reason that many investors,
until now, have treated them like cash investments. But those auctions
began to fail in February as the credit crisis deepened and big buyers
of auction-rate securities, among them Goldman Sachs (GS, Fortune 500),
UBS and Merrill (MER, Fortune 500), found themselves too cash-strapped
to step in and buy unsold bonds. Without any buyers, the auction-rate
securities market came to a standstill.
As a result,
more than $300 billion is now frozen in auction-rate securities products,
with no way of knowing if or when the majority of auctions will resume.
Anywhere from $30 billion to $60 billion could be money from individual
investors, according to several fund managers.
Throughout
the debacle, brokers and asset managers who sold auction-rate securities
have claimed that this is merely a liquidity problem. They have reassured
investors that the securities will keep their full value and simply
pay higher interest rates while the assets are frozen.
But the
Wall Street Journal reported on Friday that the UBS markdowns will range
from a few percentage points to more than 20%, and that they reflect
the estimated drop in value of the bonds now that there are no buyers.
The bonds will be marked back to face value if the auction-rate securities
market rebounds, but the move by UBS (UBS) has increased worries that
these securities may be worthless.
"We
are working with clients, on a case-by-case basis, to address their
immediate liquidity needs, offering such solutions as margin loans and
lines of credit at preferred lending rates," says Karina Byrne,
a UBS spokeswoman.
Even
before UBS marked down portfolios last Friday, there were rumblings
that the auction rate market had been fundamentally changed by the liquidity
crisis.
"It
is difficult to conceive of a scenario where the auction rate market
returns to its historical behavioral patterns. The auction market must
now be redefined, both in terms of relative pricing (we'll venture that
yields would be higher than in the past) and the investment objectives
of its holders," says a report issued in early March by Samson
Capital Advisors.
Yields
would rise to pay investors for the fact that auction-rate securities
will never again be considered as liquid or as safe as cash. The introduction
of risk and higher yields would also mean that prices for these bonds
would drop.
In a positive
sign for investors, the market for auction-rate municipal bonds has
revived in recent weeks. The attractive yields these muni bonds are
paying, some as high as 15%, have attracted buyers like hedge funds.
These bonds make up about half of the auction-rate market.
Some auction-rate
bonds with a maturity date also have a chance of holding their original
value. Investor money may be tied up for the life of a bond, in many
cases 30 years, but that bond will eventually be paid in full.
Unfortunately,
many retail investors hold auction-rate preferred shares in closed-end
funds that don't have a maturity date so there is no exit. These funds
account for about $65 billion of the auction-rate market and the money
in these products is tied up until the fund itself is liquidated or
the auctions start running.
Barry
Silbert, chief executive ofa company that has created a secondary market
for the bonds, agrees that a lot of the non-muni market will lose value.
"Of
the $300 billion-plus market, between 10% and 30% of it will never trade
at par again and I'm leaning more toward 30%," says Silbert, who
runs the Restricted Securities Trading Network.
Selling
at a loss on the secondary market is not good for investors; but those
who need cash immediately will have to sell at a loss in order to get
at their funds. Some desperate investors who need money to pay bills
and taxes have filed class-action lawsuits against the brokers who sold
them these securities.
Asset
managers are scrambling to repair the damage that auction-rate problems
have done to their reputations. Eaton Vance has already liquidated some
holdings, at a loss, in order to return money to investors. Big names
like Nuveen, which has about 30% of the auction-rate market for preferred
closed-end funds, and Legg Mason are also working hard to calm investors,
though they are reluctant to liquidate funds.
Legg Mason
said Friday that it was trying to restore liquidity to shareholders
of auction-rate preferred securities issued by its seven LMP and Western
Asset branded closed-end funds. Collectively, these funds have issued
about $672 million in auction-rate preferred securities.
As for
investors who say that managers guaranteed a cash-like investment and
are obligated to give them their money back, John Calamos, co-chief
investment officer at Calamos Investments, has little sympathy. He says
investors should have read the prospectus and known the risks.
However,
Calamos admits that even he was blindsided when banks let the auctions
fail.
"They
dropped a bomb on us by letting the auctions fail. It is unprecedented,"
says Calamos. Much like the investors, he believed the auction-rate
market would function smoothly, despite the fact that the big banks
were not legally obligated to keep the auctions running smoothly.
"Making
markets is what these banks do. Why do these institutions exist if they're
not there to serve their clients?" asks Calamos.
For now,
asset managers are the ones dealing with angry investors. "While
I blame my broker, I realize that the answer at this point lies with
the fund companies," says Joseph Lanzisera, who has money frozen
in several closed-end funds. "They have my money and the ability
to refinance or liquidate fund assets to help me."
|
Monday
March 31, 2008
Two
more class action suits were filed by Girard Gibbs llp. This time
against Morgan
Stanley and JPMorgan.
|
Monday,
March 31, 2008
UBS -- even bigger idiots:
After arbitarily reducing the value of its clients
ARPs by up to 20%, UBS sends this press
release out. (I don't make this stuff up. -- Harry Newton)
Houston,
March 31, 2008 -- UBS Financial Services Inc. announced today that it
has opened this year's first Private Wealth Management office in Houston,
Texas dedicated to serving the specialized needs of the Firm's clients
with assets greater than $10 million. With this latest office, UBS has
eight dedicated Private Wealth Management offices across the U.S.
The office is located at 4400 Post Oak Parkway and is part of a series
of planned offices nationwide that offer a comprehensive suite of brokerage,
trust and private banking services.
The Houston office is composed of a staff of Private Wealth Advisors,
Private Wealth Management Consultants, and related service personnel.
Private Wealth Advisors have completed the Firm's rigorous internal
accreditation program that focuses on a range of sophisticated wealth
management strategies.
Through their Private Wealth Advisors, clients will be able to draw
upon the expertise of resident Consultants in such diverse disciplines
as trust and estate planning strategies, lending services, charitable
giving, investment management, alternative investments and structured
products.
"We are very pleased to open our latest Private Wealth Management
office in Houston, our first in the Southwestern United States,"
said John Straus, Head of Private Wealth Management and Chairman of
the Private Bank. "This office will enable us to enhance the services
we offer our ultra high net worth clients in the region and is a logical
expansion for our Private Wealth Management offering."
The new office will be managed by John T. McCauley, Managing Director.
UBS Financial Services Inc. is a subsidiary of UBS AG.
UBS is one of the world's leading financial firms, serving a discerning
international client base. Its business, global in scale, is focused
on growth. As an integrated firm, UBS creates added value for clients
by drawing on the combined resources and expertise of all its businesses.
UBS is the leading global wealth manager, a leading global investment
banking and securities firm, and one of the largest global asset managers.
In Switzerland, UBS is the market leader in retail and commercial banking.
UBS is present in all major financial centers worldwide. It has offices
in 50 countries, with about 38% of its employees working in the Americas,
33% in Switzerland, 17% in the rest of Europe and 12% in Asia Pacific.
UBS's financial businesses employ more than 80,000 people around the
world. Its shares are listed on the SWX Swiss Exchange (SWX), the New
York Stock Exchange (NYSE) and the Tokyo Stock Exchange (TSE).
|
Sunday,
March 30, 2008
My present position:
1.
The brokers will probably never give us our money back, though it
would be a great PR coup if one actually did.
2. The issuers will eventually redeem our ARPs -- if and only IF
we bring sufficient pressure on them. They need to understand that
no one will ever do business with them again if they abandon
the thousands of investors who bought their ARPs on their
assurances that these ARPs were equivalent to cash.
3.
The issuers have the capacity to redeem our ARPs. A few have already
announced ways. Most are dilly-dallying, as their lawyers freak
them out.
4.
Pressure on the issuers needs to come from the brokers, from you
and I, from the regulatory authorities, from the courts and
from the press. At some point we'll have to start taking ads in
the Wall Street Journal saying "Why You Should Never
Do Business with .... ."
5.
We can all put pressure on our brokers by threatening them with
an SEC complaint. According to one reader who emailed me, "The
last thing a broker wants is a blemish on their SEC account for
inappropriate advice with clients, as new clients will not work
with someone who has a soiled SEC record. A soiled SEC record limits
a broker's ability to transfer to new firms and pick up new clients.
... I know in my case I was clear with my broker I wanted no risk.
He never took a customer profile of me as required by the SEC when
working with a new customer and should be done on an annual basis
to see if things with their customer has changed. Also he never
sent me a prospectus."
6.
UBS can no more justify marking down the value of the ARPs it sold
its investors than it can justify having lied to its investors about
ARPs being "cash equivalents." See below.
7.
Everyone needs to write, email, phone, boycott, picket their brokers'
offices and their issuers' offices.
8.
You cannot stay in the shadows and expect other people to take on
your burden. You are not going to appear stupid by going
public and telling your story. We're in this together. Stand up
and tell your story.
9.
The best news is the regulators are finally getting in on the act.
On Friday, March 28, William F. Galvin, secretary of the commonwealth
of Massachusetts, sent subpoenas to Merrill Lynch, UBS and Bank
of America Investment Services seeking information related to their
sales of auction-rate securities. “The inquiry is seeking to
determine whether investors were properly informed of the risks
that their investments might become illiquid,” Mr. Galvin said
in a statement.
It's time for you and I to contact our equivalent regulators in
our state, tell them we were not informed of the risks that
our investment might become illiquid" and ask them to get involved.
|
March
30, 2008, The
New York Times.
The author, Gretchen Morgenson, is one of America's most celebrated and
respected financial reporters. She wrote in Sunday's Times:
Fair
Game
If You Can’t Sell, Good Luck
WHERE’S my bailout?
That’s
what thousands of individual investors, stuck with auction-rate securities
that brokers had told them were “as good as cash,” might have
wondered as they watched the Federal Reserve take on $29 billion of
malodorous assets from the balance sheet of Bear Stearns.
Everybody
knows, though, that only big guys get bailouts. Long-suffering small
investors, unable to sell these supposedly liquid securities, have to
look elsewhere for satisfaction.
Unfortunately,
satisfaction is elusive for these investors. They have two choices:
They can hope that the issuer of the auction-rate security will buy
it back. Or they can sue the brokers who sold the securities, in many
cases making verbal promises that they could be cashed in weekly. Such
suits cost money that many investors do not have.
And so
they sit and wait with no access to their money.
Let’s
revisit the facts of this mess. Auction-rate securities are debt obligations
of an issuer, a municipality or a closed-end fund, say, whose interest
rates are set at regular auctions, typically occurring every seven days.
These securities were invented in the late 1980s and worked fairly well
until this year, when the auctions began to fail amid the credit crisis,
and investors could no longer sell their securities.
While
a majority of the $330 billion auction-rate securities market consists
of debt obligations issued by municipalities and nonprofit institutions,
some $65 billion is in preferred shares issued by closed-end
funds. The way the preferred shares were structured puts the closed-end
fund issuer in something of a conflicted position, and is central to
the morass in which investors now find themselves.
Closed-end
funds that issue auction-rate preferred shares do so to increase the
yield that they pay to their common stockholders. Because of the amount
of leverage used, if a fund pays a 5 percent interest rate on the preferred
shares it issues and earns 8 percent on that money through brilliant
stock picking, the fund’s common stockholders would receive a yield
of 9.5 percent on their shares.
Naturally,
closed-end funds’ common shareholders love the juice that auction-rate
preferreds provide. They like the system the way it is, and closed-end
fund companies have a fiduciary duty to those shareholders.
But investors
in the preferred shares, which have no maturity dates, want out. Those
with whom I spoke say they wanted a place to stash their short-term
cash, not an investment for life. They want the closed-end fund companies
to buy back their preferred shares.
If the
companies were to retire the preferred shares, their common stockholders
would lose out on the extra income generated by the preferred share
structure. Therein lies the conflict, and the resulting state of limbo
for investors who bought the preferred shares. Many in this group are
relatively small investors who got into the stocks when the minimum
investment fell to $25,000 from $100,000 a few years back.
Investors
in the closed-end preferred shares are also steamed because the interest
rates they receive on their holdings when the auctions fail, a so-called
penalty rate, are far lower than the penalty rates — sometimes
in double digits — on many municipal auction-rate notes. Preferred
securities now yield around 4.25 percent, not enough to ease the pain
of illiquidity.
About
two weeks ago, Nuveen Investments, which has 120 closed-end funds and
$15.4 billion of auction-rate preferred shares outstanding, said it
was hoping to refinance those shares, letting existing shareholders
cash out; details of the plan were to be presented to investors by the
end of March. And Eaton Vance has arranged a plan to redeem preferred
shares issued by three of its funds.
But other
fund companies have done little to alleviate the plight of their preferred
shareholders. Lauren Kaplan, an investor in Nashville, said she is especially
disappointed in her discussions with officials at Duff & Phelps,
another big name in closed-end funds.
“They
are so aggressive about it and so unrepentant — they said ‘go
sue the person who sold you the product,’ “ Ms. Kaplan said.
“He also told me they have a responsibility to their common shareholders.”
Nathan
Partain, president of Duff & Phelps investment management, said
he did not speak to Ms. Kaplan. Nevertheless, he said: “We have
gone through a list of issues that people could raise and what we think
would be an appropriate response. We are sympathetic to them, but we
have to make sure the common shareholders are not disadvantaged.”
Mr. Partain
said Duff & Phelps, which has issued $1.2 billion in auction-rate
securities, is watching to see what other, larger firms will do to solve
the problem. About two-thirds of the money Ms. Kaplan and her husband
have set aside for retirement are in the frozen shares, she said. She
said a broker at UBS Financial Service put her in the shares even though
she told him repeatedly that safety and access to the money were paramount
issues. UBS declined to comment.
Steven
J. Klindworth of Austin, Tex., is another investor who is stuck in these
shares. He recently filed an arbitration claim against Deutsche Bank
Alex. Brown, the firm that sold him the securities — after, he
says, it refused to buy them back. Mr. Klindworth’s suit says that
by putting his assets into the risky securities, his broker had acted
contrary to his instructions.
Attached
to Mr. Klindworth’s legal filing is a transcript of a phone conversation
he had with his broker about the liquidity risks in the auction-rate
securities. “Had I known those risks, I wouldn’t have put
you into it,” the broker said, according to the transcript.
Deutsche
Bank Alex. Brown declined to comment.
INVESTORS
in these securities almost certainly relied on their brokers’ assurances
that the stocks were safe and sound. That’s because the sales were
not accompanied by prospectuses outlining the risks.
But the
brokerage firms made more on these securities than they would have made
on sales of money market funds.
“Since
there was no prospectus, the broker is under more of a duty to be sure
that the investment is suitable to the customer, that he explains the
risk and that the person understands the risk and can assume it,”
said Lewis D. Lowenfels, a securities lawyer at Tolins & Lowenfels
in New York.
Whether
cases brought by Mr. Klindworth and others will succeed will depend
on what they were told by their brokers and their level of sophistication
in investing, Mr. Lowenfels said.
Regulators
are also getting in on the act. On Friday, William F. Galvin, secretary
of the commonwealth of Massachusetts, sent subpoenas to Merrill Lynch,
UBS and Bank of America Investment Services seeking information related
to their sales of auction-rate securities. “The inquiry is seeking
to determine whether investors were properly informed of the risks that
their investments might become illiquid,” Mr. Galvin said in a
statement.
In any
case, there are a lot of unhappy clients out there — holding billions
of dollars, or so they hope, of these securities. Late Friday, UBS confirmed
that it was marking down the value of its clients’ auction-rate
preferred shares by about 3 percent. If the auctions keep failing and
the fund companies refuse to cash out the holders, brokerage firms who
profited on the sales of these “cash equivalents” are in for
a blitz of litigation.
Sunday
March 30, 2008 from SECLaw.com
Regulators
Start Auction Rate Investigations
Written
by Mark J. Astarita, Esq. on Sunday, March 30, 2008
Auction
rate securities are quickly becoming the next big retail investor problem.
I am now getting calls almost daily from investors who say that they
were sold the securities as an alternative to money market funds, and
paid higher interest, and who now cannot sell their investments, which
have become completely illiquid.
It will
be interesting to see how these cases shake out - exactly what were
investors told about these securities. One thing is certain - they were
not told that they might be completely illiquid.
But that
is where we are. Those investments that were the equivalent of money
market funds cannot be sold. To add to the problem, UBS announced that
it is going to mark down auction rate securities in its retail customer
accounts on Monday - to reflect the lack of liquidity. The markdowns
are reported to be up to 20% of the value of the security.
And now
entering the fray is the State of Massachusetts, who is asking firms
for information relating to the marketing of auction rate securities.
Hmmm,
has the SEC and FINRA heard about this? Who reviewed those materials
before they were distributed to investors?
Stay tuned,
this is going to be big.
Saturday,
March 29, 2008
The stories below say that UBS -- their brokerage arm is
called Paine Webber -- is chopping the value of some of its auction rate
securities on some of its customer brokerage accounts as of March 31,
2008 -- the end of the quarter.
No one seems
to know WHY they're doing this and their explanation is flimsy, since:
1. There
is no market for these things. You can't sell them. Hence no one knows
what they're worth. And you can't mark their value to "market."
There is no market. AND
2. Nothing
has changed. Auction rate preferreds are backed by municipal bonds
which haven't changed in value. And the backing is typically 2.8 to 3+
to one. So their asset backing has not dropped. It's still solid.
There are
various theories as to why UBS is doing this:
1. UBS is
looking to sell Paine Webber to some lucky fellow who will inherit the
ARPs headache. (I bet it won't be JPMorgan.)
2. Paine
Webber has employed some lawyers who think in their usual creative way,
which is "limit our liability." Or, see below.
3. Paine
Webber may be called up to lend money against some of its clients' ARPs.
So it wants to look more generous by offering a higher percentage of the
ARPs' value (compared with other brokers who haven't reduced the value).
4. Paine
Webber is looking for a way to fire all its investor relations and public
relations people by forcing to make a gigantic blunder and achieve serious
badwill (opposite to goodwill) in the financial press -- see below.
5. Paine
Webber is looking to become Rupert Murdoch's investment banker by giving
his organization plenty of new stuff to write about. In fact, I could
get seriously rich if I charged all the Dow Jones reporters who have been
calling me $1 a call.
Some of
this is not serious. Suffice we don't know at this point. Nothing has
changed. Paine Webber's lawyers are billing oodles of hours. That's good,
for them. A waste of money for ARPs holders.
-- Harry
Newton
From
the Wall Street Journal March
29, 2008; Page B1
UBS
Lowers Price of Security Seen as 'Cash'
Some Face Paper Losses Of More Than 20% On Auction-Rate Bonds
One of
the world's biggest brokers is about to force its clients to take a
haircut on a type of securities that investors had believed to be as
safe as cash.
UBS AG
began on Friday to lower the values of so-called auction-rate securities
held by its clients, a move that will be a jolt to customers who had
been told they were investing in a "cash alternative." The
move is yet another way that the credit crunch that began with subprime
mortgages has spread to unexpected places and upended conventional wisdom
about the financial system.
The Swiss
bank appears to be the first major firm to take this action and is expected
to inform clients via their online statements shortly. The markdowns,
which will be made using an internal computer model, will range from
a few percentage points to more than 20%, a UBS broker said.
Other
brokers are expected to follow and several are waiting for the end of
the quarter in the coming week to make the decision.
Regulators
are beginning to act. Also on Friday, Massachusetts's top securities
regulator said he subpoenaed UBS along with Merrill Lynch & Co.
and Bank of America Corp. for documents related to sales of auction-rate
market securities to individual investors. In a statement, Secretary
of State William Galvin said his office has received calls from many
people who "thought they were investing in safe, liquid investments
only to find that they had in fact purchased auction market securities
that are now frozen and they cannot get their money."
Auction-rate
securities are long-term bonds that were treated as short-term securities
because investors could sell them at auctions that took place every
few weeks, which also served to reset the interest rate the bonds paid.
Auction-rate securities generally paid higher yields than savings accounts
or money-market funds, so they became popular among investors looking
for safe places to park cash. That has meant investors' can't get their
cash, which in many cases was being stashed for immediate needs such
as tuition, home down payment or medical needs.
In recent
months, the auctions have failed, meaning not enough buyers showed up.
Investment banks that typically stepped in to support the financings
refused to do so because of their faltering balance sheets, driving
down the price for these securities.
Investors
stuck holding these securities are saying they were misled. "This
is only going to get people riled up," said Karen West of Lord's
Valley, Pa., who has several hundred thousand dollars in auction-rate
securities. Ms. West, who once worked as a financial adviser for Morgan
Stanley, said brokerages should have warned clients about the risks
of auction-rate securities.
Harry
Newton invested $4.5 million in auction-rate securities through Deutsche
Bank several months ago because he got nervous about the stock market.
He has since started a blog that serves as a bulletin board for investors
unhappy about their auction-rate investments.
He says
beside the anger at seeing the value of their supposedly safe securities
decline, investors are questioning the accuracy of the models that will
be used to price the securities. Wall Street firms often use computer
models to price securities that don't trade often.
"What's
the logic for the write-down?" he asked. "If they do not have
a market, how do they mark to market?"
Until
now, brokers have told customers who were unable to sell securities
in regularly scheduled auctions that the securities retained full value.
UBS confirmed that it will mark down the value of the securities, giving
clients paper losses on their holdings. UBS isn't offering to buy the
securities at the new prices. Beginning in April, UBS will classify
the securities as fixed-income investments rather than cash alternatives.
"This
is the right thing to do," said Marten Hoekstra, head of wealth
management at UBS for the Americas. "It's in the best interest
of clients to provide them with full transparency in their accounts.
Given current market dislocations, this is the next natural step for
any committed wealth manager."
He said
only 13% of the securities would retain their full value, though more
than two-thirds would see only small cuts in value, ranging up to 3%.
Investors holding auction-rate bonds issued by municipalities, schools
and others will have to wait for "natural buyers" to return
to the market before auctions return to normal, Mr. Hoekstra said. "We're
working closely with other market participants to restore liquidity,"
he said.
UBS wouldn't
disclose the total value of auction-rate securities held by its clients,
but Mr. Hoekstra said it was concentrated among wealthier clients. The
bank's U.S. wealth management unit oversaw about $743 billion in client
assets at the end of 2007.
Last month,
Merrill Lynch included notices in client statements saying it will report
auction-rate securities at an "estimated" market price. Merrill,
which said in the notice that it would use outside pricing services
to value the securities, did not mark down any securities on the February
client statements, and it was unclear if they would do so for the March
statements.
More than
$300 billion of auction-rate securities are held by investors ranging
from mutual funds and big institutions to wealthy individual investors,
according to Moody's Investors Service. The securities are long-term
bonds sold by issuers such as municipalities, arts organizations, universities
and closed-end mutual funds like Nuveen Investments and BlackRock with
interest rates reset in auctions held every seven to 35 days.
Several
brokerage firms said they won't make a decision on whether to take similar
action until Monday, the last day of the month.
A Morgan
Stanley spokesman declined to comment. A spokesman at Oppenheimer &
Co. said a decision whether to mark the securities to market hasn't
been made. A broker at RBC Wealth Management, a unit of Royal Bank of
Canada, said that as of Thursday, auction-rate securities were being
carried at par value on client accounts.
UBS, Deutsche
Bank AG, Merrill Lynch, Morgan Stanley and Citigroup have been sued
in U.S. District Court in Manhattan for allegedly deceptive marketing
of auction-rate securities. More lawsuits are expected over the coming
weeks.
The firms
have denied any improper conduct and said they are working with clients
on a case-by-case basis to address investors' liquidity issues. For
example, UBS and Morgan Stanley have both said they're exploring various
alternatives, including loans.
The lawsuits
have generally alleged that the banks improperly marketed the auction-rate
securities to individual investors as similar to cash or money-market
funds -- essentially a safe place to park their money for a short term
-- and failed to disclose the complex, long-term nature of the bonds
underlying the securities.
The securities,
initially limited to institutional investors, became more widely available
to individual investors in recent years.
-- by
Jane J. Kim, Ian Salisbury and Jennifer Levitz of the Wall Street
Journal.
The following
story appeared on Bloomberg at 7:16 PM EDT on Friday night, March 28,
2008:
UBS
Cuts 5% From Clients' Auction-Rate Bond Valuation (Update3)
By Adam
L. Cataldo and Martin Z. Braun
March
28 (Bloomberg) -- UBS AG has cut the value of the auction-rate securities
its customers have in their accounts by about 5 percent following more
than a month of market upheaval.
"This
is the right thing to do,'' said Michelle Creeden, a UBS spokeswoman,
in a prepared statement. ``It is in the best interest of our clients
to provide them full transparency regarding their account. Given current
market dislocations, this is the next logical step for any committed
wealth manager.''
UBS will
inform clients of the reduced value of their holdings via their online
statements, Briefing.com said, citing a Dow Jones report. UBS customers
had maintained full value without any discount that could reflect bondholders'
inability to sell their holdings.
UBS's
action comes after auction-rate bond failures rose to about 71 percent
this week, up from about 69 percent last week, according to data compiled
by Bloomberg. The $330 billion auction-rate securities market originally
attracted borrowers by offering financing for 20 years or more at variable
costs determined through periodic bidding.
Auction-rate
bonds have interest rates determined through bidding run by dealers
every seven, 28 or 35 days. When there aren't enough buyers, the auction
fails and rates are set at a predetermined level set in documents when
the bonds were issued.
"The
fact that they aren't worth par or may not be worth par is not going
to be acceptable to any owners of these securities,'' said Gary Miller,
a partner at the Houston law firm of Boyar and Miller. ``It's certainly
not acceptable to me.''
Miller
invested $750,000 from the sale of his house in auction-rate securities
with UBS last December. After signing a contract on a new home, Miller
said he called his broker to cash out of the securities and was told
he couldn't. When he bought the debt, Miller said he asked his broker
whether there had ever been an unsuccessful auction.
"The
answer was, `No, there's never been a failure in the auctions,''' Miller
said. He has sold $300,000 of his holdings. He still owns $450,000 of
auction-rate preferred securities and municipal bonds.
UBS' action
"would appear to be acknowledgement'' that the auction-rate securities
they sold to their customers are worth less than they claimed, said
Jonathan Levine, an attorney with the San Francisco law firm of Girard
Gibbs LLP. Levine filed a class-action lawsuit against UBS on March
21, listing as named plaintiffs a San Diego retiree couple who it says
owned $1 million of the securities. The suit accuses the firm of telling
investors the bonds were the same as cash or a money market fund equivalent.
"These
securities were not safe, liquid, riskless cash- equivalent investments
as they were represented to be,'' Levine said.
To contact
the reporters on this story: Adam L. Cataldo in New York at acataldo@bloomberg.net;
Martin Z. Braun in New York at mbraun6@bloomberg.net.
Late
Friday, March 28, 2008.
From The
Wall Street Journal online:
UBS
Cutting Value Of Auction-Rate Securities In Brokerage Accounts
By EVELYN JUAN, JED HOROWITZ and ANDREW DOWELL
March 28, 2008 3:40 p.m.
TORONTO
-- In the first confirmation that problems in the auction-rate securities
markets has eroded the principal holdings of individual investors, UBS
AG is marking down the value of the securities in its brokerage customers'
accounts.
Until
now, customers who were unable to sell securities in regularly scheduled
auctions were told that the securities retained full value and would
receive higher interest rates.
UBS, however,
using an internal model to value the securities, will mark them down
this afternoon and inform clients via their online statements shortly
thereafter, people familiar with the matter said. The markdowns will
range from a few percentage points to more than 20%, the people said.
UBS confirmed
that it will mark down the value of the securities. The losses won't
be realized immediately, as investors are currently unable to sell the
securities for lack of a market. But the unilateral move is sure to
roil relations between brokers and their clients, who generally believed
they were buying investments that were about as safe as cash while offering
a slightly higher yield.
The markdowns
reflect the estimated drop in value of the securities now that the market
has seized up. UBS isn't offering to buy the securities at the new prices,
the people said.
Shares
in UBS were 4.9% lower in afternoon trading at $27.69.
More than
$300 billion of auction-rate securities are held by investors ranging
from mutual funds and big institutions to wealthy individual investors,
according to Moody's Investors Service. The securities are long-term
bonds sold by issuers such as municipalities, arts organizations, universities
and closed-end mutual funds like Nuveen Investments and BlackRock with
interest rates reset in auctions held every 7 to 35 days.
The auctions
are failing, because banks such as UBS, Goldman Sachs Group, Merrill
Lynch, Citigroup Inc. and Wachovia Corp. that often conduct more than
100 auctions a day have recently balked at buying the securities when
there aren't enough bidders.
The banks'
fear putting the assets on their own debt-laden books, and other investors
are shying from buying out of fear that they will be stuck with the
securities.
Several
brokerage firms said they won't make a decision on whether to take similar
action until Monday, the last day of the month.
Merrill
Lynch warned clients in their February statements that the value of
their securities could fall if pricing services consider the market's
illiquidity when setting their value. The February statements showed
the auction rate securities at full value, or par.
A Morgan
Stanley spokesman declined to comment. A spokesman at Oppenheimer &
Co. said a decision whether to mark the securities to market hasn't
been made. A broker at RBC Wealth Management, a unit of Royal Bank of
Canada, said that as of Thursday, auction-rate securities were being
carried at par value on client accounts.
UBS, Deutsche
Bank AG, Merrill Lynch, Morgan Stanley and Citigroup have been sued
in U.S. District Court in Manhattan for allegedly deceptive marketing
of auction-rate securities. More lawsuits are expected over the coming
weeks.
The firms
have denied any improper conduct and said they are working with clients
on a case-by-case basis to address investors' liquidity issues. For
example, UBS and Morgan Stanley have both said they're exploring various
alternatives, including loans.
The lawsuits
have generally alleged that the banks improperly marketed the auction-rate
securities to individual investors as similar to cash or money-market
funds -- essentially a safe place to park their money for a short term
-- and failed to disclose the complex, long-term nature of the bonds
underlying the securities.
The securities,
initially limited to institutional investors, became more widely available
to individual investors in recent years as issuers and auction-rate
sellers lowered the required minimum investment from about $250,000
to $25,000, according to the lawsuits.
During
the day Friday, March 28, 2008
This one
from Times
Online
Legg
Mason admits defeat over bond funds
Tom Bawden in New York
Legg Mason,
the US fund manager, admitted today that it had no idea how to "restore
liquidity" to the market for so-called auction-rate preferred securities
in some of its bond funds.
The group,
which manages just over $1,000 billion of assets in total, acknowledged
that the holders of $672 million worth of shares in seven "closed
end" funds, or investment trusts, cannot sell them since the credit
crunch has virtually closed the market for such securities.
Auction
rate preferred securities are issued by bond funds and are typically
highly liquid shares that can be traded in frequent "Dutch"
auctions. The shares’ dividend is reset at each auction, to a level
determined by demand for the securities.
The market
for these securities has dried up in recent weeks as steep declines
in the value of bonds, and rising fears that securities underwriters
will not be able to meet claims resulting from bond defaults, deter
investors from owning them.
Legg Mason
blamed the failed auctions on the "broader economic conditions
and continued dislocations in the credit markets," adding that
"it is not a credit issue" related to the funds or their portfolios.
The group
added that it was working on ways to restore liquidity to the seven
funds’ auction-rate shares but admitted that had no solution and
may never have one.
"We
cannot provide any assurance that potential solutions will be workable,
receive all necessary approvals or implemented. At this time we cannot
provide definitive timing for a resolution to this issue," the
company said.
Legg Mason
is the latest in a series of fund managers to raise concerns about trading
it its auction rate shares. Earlier this month, BlackRock said it expected
auction-rate securities to continue to fail and said it would explore
ways to help its fund shareholders who are suffering due to the lack
of liquidity.
Closed
end funds have issued more than $60 billion of auction-rate preferred
securities and their investors, including Wall Street firms, stand to
lose much of this if the market for them does not resume.
Friday morning, March 28. From RTT News, "global financial newswires"
Legg
Mason Seeks Liquidity Solutions For Auction Rate Preferred Securities
3/28/2008
10:52:13 AM On Friday, Legg Mason Inc. (LM) announced that it is continuing
to actively explore potential solutions to restore liquidity to shareholders
of auction rate preferred securities or ARPS issued by seven LMP and
Western Asset branded closed-end funds advised by its affiliates. The
company noted that these Funds have issued about $672 million in ARPS.
The company
said that it has been working on potential alternative financing solutions.
Legg Mason
said that it is fully aware of the urgency to resolve this situation
and is committed to explore any and all possible solutions that are
equitable to both the preferred and common shareholders of these Funds.
early
Friday, March 28, 2008
Angela Goodwin
writes:
Dear Harry,
I have $400,000 frozen in ARPS. We were sold this garbage by UBS in
in early 2007. However, we did not know that we had arps until a few
weeks ago. We were told we had a money market/CD type account. My husband
and I agree with the advice that the $60 million dollar ARPS investor
is giving. We started writing letters to UBS on March 3, 2007. We have
also filed complaints with Finra, the SEC, the NJ state securities agency
and our congessman. We would like to now band together with fellow ARPS
and start the attack. Please let me know what you plan on doing next
to get your money back!
Dear Angela,
You're on the right track. File complaints. Write letters. As to banding
together? I'm asking for everyone stuck in these things to also send me
their story, their name and email address. Right now, I don't have sufficient
numbers to become a lobbying force. As this drags on, I hope that that
will change. Meantime, I'm trying, with this column, to keep everyone
informed on each day's developments.
Harry Newton
The Wall
Street Journal carries this depressing story today:
'Auction
Rates' Clip Tech Firms' Profits.
Write-Downs
Mount After Market Seizes Up For Cash Alternative
by Rebecca Buckman
Technology
firms, which traditionally shunned debt and were thought to be relatively
immune to a credit crunch, are seeing their earnings dented by holdings
of auction-rate securities.
Dallas
telecom company MetroPCS Communications Inc. recently took an $83 million
charge related to auction-rate securities, the arcane debt instruments
-- once thought to be as safe as cash -- that are now nearly impossible
to sell in today's jittery markets. Last Thursday, hand-held-device
maker Palm Inc. said it, too, would take a charge for auction-rate holdings,
though it hasn't disclosed how much.
Other
tech companies, including Internet-service provider EarthLink Inc.,
said in recent regulatory filings that they may take charges. Though
many companies likely won't take charges, accounting experts do expect
more auction-rate hits in coming weeks as they disclose financial results
for the quarter ending Monday.
It is
yet another example of how the credit crisis that began with subprime-mortgage
woes is spreading to many corners of the financial markets, including
companies that aren't laden with debt. The $330 billion market for the
securities -- long-term instruments with rates that reset frequently
at auction -- has seized up, making it difficult for holders to convert
them to cash.
Because
of the tech industry's fast-growing and sometimes volatile nature, many
publicly traded companies like to keep large cash balances and use stock
to do deals. The auction-rate instruments were often touted by the banks
that sold them as a higher-yielding alternative to cash.
Those
large cash holdings may now come back to haunt. Starting next month,
the list of companies disclosing large auction-rate holdings, and possibly
taking earnings charges, "is going to grow pretty quickly,"
said Barry Silbert, chief executive of Restricted Stock Partners, a
New York electronic-trading company that is trying to create a secondary
market for auction-rate securities.
Although
many tech companies said the instruments represent just a small percentage
of their cash and they don't need to liquidate them soon, some "are
going to need this cash eventually," Mr. Silbert said. He predicts
10% to 30% of the auction-rate securities market "will never trade
at par again," and many firms will have to dump the securities
at a steep loss -- if they can unload them at all.
That could
have a big impact on some firms. Internet job-search company Monster
Worldwide Inc. has 62% of its cash and short-term investments, or about
$357 million, parked in auction rates, J.P. Morgan Chase said in a research
note last week. Because of that exposure, the investment bank predicted,
"it is likely" Monster will have to suspend its stock-buyback
plans and turn to loans to fund cash acquisitions.
In a statement,
Monster, of New York, said it believes "its ability to generate
strong cash flow and its existing cash on-hand is ample to execute its
future strategies."
Meanwhile,
EarthLink said in its annual report filed Feb. 28 that it held $60 million
in auction-rate securities, $20 million of which had failed to settle
at auction. Interest rates typically reset at auctions every seven to
35 days, but for the past several weeks there haven't been enough buyers
for most auctions to succeed. The holders of the securities are then
stuck with them.
EarthLink,
based in Atlanta, said in the report there was "no assurance"
that auctions for the rest of its securities would be successful, but
"we do not anticipate the current lack of liquidity on these investments
will affect our ability to operate our business as usual." The
company said it had no comment beyond what it disclosed in the filing.
MetroPCS
and Palm declined to comment. In a conference call last week, Palm disclosed
it held $74.7 million in illiquid auction-rate securities as of the
end of its third quarter, Feb. 29. The Sunnyvale, Calif., company said
it will take a write-down, but not for the entire amount.
Not all
companies holding large auction-rate positions are taking write-downs.
Financial-software maker Intuit Inc. has nearly one-third of its roughly
$1 billion in cash and short-term investments tied up in auction-rate
securities, almost all of which are at least temporarily illiquid. The
Mountain View, Calif., company said it isn't taking any action on those
securities.
"Our
position is, we've got plenty of cash," said Bob Lawson, Intuit's
head of investor relations. "We're collecting the interest, and
things, I think, will sort out in the next few months." If the
market doesn't revive in the next 12 months, he said the company will
reclassify them as long-term holdings, from short-term holdings, on
its balance sheet.
Charles
Mulford, an accounting professor at the Georgia Institute of Technology,
said if auctions are failing, the securities "really should be
classified as long term." If the underlying creditworthiness of
the auction-rate securities is strong and they still are delivering
a strong rate of return, they could eventually be liquidated and a company
wouldn't need to take a charge against earnings, he said.
Intuit
said its auction-rate securities are backed by student loans, which
Mr. Lawson said are further supported by the Education Department.
Some auction-rate
securities "are more toxic than others," said Mark Scoles,
a partner with accounting firm Grant Thornton LLP in Chicago. Some of
the securities are bundles of other, risky investments, he said, and
some of those instruments ran into trouble months ago; a few companies
wrote down the value of auction-rate holdings as long ago as September,
he said.
Because
no one knows when, or if, the market for auction-rate securities will
revive, "there is some leeway for companies to decide" how
to treat the problem, said Reena Aggarwal, a finance professor at Georgetown
University's McDonough School of Business. "It's a little bit of
a gray area."
Bloomberg
carries these stories today:
Auction
Failures Rise to 71% as Dallas-Area Airport Refinances
By Jeremy
R. Cooke and Darrell Preston
March
28 (Bloomberg) -- Auction-rate bond failures rose to about 71 percent
this week, forcing borrowers from Dallas and Fort Worth's airport to
Ascension Health in Missouri to refinance the debt and avoid paying
penalty interest rates.
The amount
of auctions that failed to draw enough buyers to a market that also
includes debt of student lenders and closed- end mutual funds increased
from 69 percent last week, according to data compiled by Bloomberg.
Rates are set through a bidding process managed by banks typically every
seven, 28 or 35 days.
States
and municipalities are fleeing the auction-rate market after it began
collapsing about seven weeks ago as investors balked at buying the securities
on concern about the creditworthiness of bond insurers guaranteeing
the debt. Dealers stopped purchasing the unwanted debt, and the average
rate for weekly municipal auction bonds rose to 6.56 percent on March
19, from 3.63 percent on Jan. 16, based on the latest public data from
the Securities Industry and Financial Markets Association.
``The
auction-rate market is just going to keep getting worse,'' said Michael
Phemister, the vice president of finance at Dallas-Fort Worth International
Airport, the world's third busiest airport by takeoffs and landings.
The airport,
known as DFW and owned by the two cities, converted $337 million of
auction debt to new bonds with fixed rates as high as 6.25 percent that
will be paid through at least November 2009. Some of the penalty rates
on the auction bonds were poised to go higher, after one insurer lost
an investment- grade rating, Phemister said.
"We
felt restructuring was the right thing to do,'' in part, to free investors
from auctions that would likely continue to fail, Phemister said. Would-be
sellers can't get their money when auctions fail.
The auction-rate
securities market originally attracted borrowers by offering financing
for 20 years or more at variable costs determined through periodic bidding.
They were sold to some investors as money market equivalents.
While
not obligated to do so, underwriters from UBS AG to Goldman Sachs Group
Inc. and Citigroup Inc. often bid for their own accounts when too many
people wanted to sell at auction. That prevented the bonds from falling
in value and kept interest costs down. From the creation of the securities
in 1984 through 2007, there were less than 50 recorded failures, according
to Moody's Investors Service.
Auction
failures have numbered in the hundreds each day since Feb. 13, and 60
percent or more of public auctions have been unsuccessful, based on
data compiled by Bloomberg from auction agents Deutsche Bank AG, Wilmington
Trust Corp., Bank of New York Mellon Corp. and Wells Fargo & Co.
Out of 2,865 auctions this week, 2,023 failed.
"The
ARS that have the higher rates are rapidly being bonded out into longer
maturities to lessen the pain for the issuers,'' Tom Spalding, senior
investment officer at Nuveen Investments in Chicago, said in an e-mail,
using the abbreviation for auction-rate securities.
Municipal
borrowers are pulling more than $21 billion of bonds out of auction
rates by May 1, according to official notices compiled by Bloomberg.
Closed-end
funds' preferred shares and student-loan debt made up about $148 billion
of the $331 billion auction-rate market as of year-end 2007, according
to a Feb. 13 Bank of America Corp. report. A greater proportion of their
auctions are failing because many of their penalty rates are tied to
a formula based on the London interbank offered rate or other money-market
benchmarks that limit the increase.
Smaller,
less frequent borrowers and those on the losing end of interest-rate
swaps attached to their auction-rate deals might take much longer to
get out, said Matt Fabian, managing director at research firm Municipal
Market Advisors. Issuers used the swaps to hedge interest-rate risk.
"It
might be a year or two before some of these are unwound,'' Fabian said.
"It's definitely consuming more cash'' for some issuers.
Dallas-Fort
Worth airport, or DFW, converted debt this week that will continue carrying
guarantees from MBIA Insurance Corp. and XL Capital Assurance Inc. MBIA's
AAA rating remains under review for a possible downgrade at Fitch Ratings;
XL Capital Assurance was cut to BB, or below investment grade, from
A.
The airport
will pay 6.125 percent on $56 million of 10- year bonds through late
next year, when it has the option to buy back the bonds at face value.
It faced a possible penalty rate of 2.75 times one-month Libor, or about
7.43 percent, on its auction bonds.
"Anyone
who buys this bond knows there is a high probability we will refund
in 18 months,'' Phemister said. "It gives us some flexibility.''
Also this
week, Kansas City, Missouri-based Ascension Health planned to start
converting all of its tax-exempt auction debt through the sale of $326
million in fixed-rate bonds. The largest U.S. nonprofit health system's
refinancing continues next week and will remove insurance from the debt,
while maintaining interest-rate swap agreements.
To contact
the reporters on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net;
Darrell Preston in Dallas at dpreston@bloomberg.net.
Muni
Storm Opens Crazy Market for Investors in 2008: by Joe Mysak
March
28 (Bloomberg) -- The municipal bond market was just on the verge of
becoming popular when the storm hit.
In 2006,
more taxpayers than ever before said they received tax-exempt interest,
according to the latest edition of the Internal Revenue Service's Statistics
of Income Bulletin, bedside reading for anyone who wants to understand
money in America.
More than
6 million tax returns (filed in 2007) reported collecting tax-exempt
interest totaling almost $70 billion. That's a 35 percent increase from
the 4.5 million taxpayers who claimed such interest in 2005.
What terrific
news! That 4 million (and climbing) figure has been the norm for years,
and one of the things that has made me most nervous about the future
of municipal bonds. The tiny number of investors who buy tax-exempts
makes the market a ripe target for those who would regulate or tax it
out of existence.
By comparison,
of the 138 million tax returns filed in 2006, 62 million reported receiving
taxable interest; 32 million reported getting ordinary dividends.
The increase
to 6 million taxpayers (preliminary data) means the municipal market
has more constituents, besides the states and localities that borrow
money at tax-exempt interest rates, of course. On to 10 million! The
only problem is that the municipal market has cracked up. Will people
sour on it?
Let's
take a closer look at the numbers. Who finally caught the municipal
bond bug? Not surprisingly, those at the very top of the charts, those
taxpayers with adjusted gross incomes (salaries and wages) of $200,000
or more.
Of the
4 million-plus taxpayers who said they made that much, 1.4 million claimed
tax-exempt interest of almost $41 billion. In 2005, fewer than 1 million
did.
Of the
12 million taxpayers who said they made between $100,000 and $200,000,
1.5 million claimed tax-exempt interest of about $12 billion. In 2005,
just about 1 million taxpayers in this group reported tax-exempt interest.
People
are getting the message that part of their investments should be in
tax-exempt bonds and funds, that it's just too good an asset class to
be left to plutocrats.
Maybe
it was just a matter of more people getting richer in 2006. In 2005,
the number of taxpayers with incomes of more than $200,000 was about
3 million. In 2006, this increased to more than 4 million. Make it into
the top tier and a whole new range of investments is opened up to you.
I wonder
what those investors thought of the municipal market in 2007 and so
far in 2008? First the prices of their municipal bonds declined, the
result of hedge-fund selling.
Then the
bond insurers had to fight for their lives, with the struggle to maintain
top AAA ratings being played out in the press every day, and affecting
every part of the market.
And at
the end of the year, dealers stopped supporting the auction-rate securities
market, letting auctions fail. This meant one thing for the municipalities
that sold such securities, quite another for the investors who bought
the preferred shares sold by closed-end funds, as we have seen.
Municipalities
found themselves paying a penalty for failed auctions, and moved to
convert their debt to fixed-rate. Closed- end funds faced much smaller,
if any, penalties, and thus have no incentive to do anything with their
auction-rate paper. The auctions keep failing, and as long as they do,
preferred-share holders are stuck with their investments.
Some funds
say they plan to work out a way to give their preferred shareholders
liquidity at par -- which is what those investors thought they had,
in the first place.
These
people, it appears, never read the prospectuses for their shares, and
instead relied on their brokers. The brokers relied on almost three
largely uninterrupted decades of securities firms supporting auctions.
The shareholders
are angry with the fund companies, and furious with their own brokers.
The class-action lawsuits are now flying.
The investors
in the tax-exempt closed-end funds are in a special hell all their own
because the funds won't refinance tax-exempt dividends with new, presumably
higher-costing, taxable debt. In the March 12 announcement that it was
seeking to refinance preferred shares, Nuveen Investments Inc. said
it would take "considerably longer'' to refinance its 87 leveraged
closed-end municipal bond funds, and didn't put a date on when this
might be completed.
Municipal
bonds are no longer boring. Now they're crazy and a little unpredictable:
hardly an endearing quality in 2008.
Thursday,
March 27, 2008:
Friends
and fellow sufferers,
I set this
new web site up to serve as a central site for news on Auction Rate Preferreds.
Until I get everything moved over, you'll find the old columns still on
www.InSearchOfThePerfectInvestment.com.
As usual, email me with stuff that may be helpful to your fellow sufferers.
There really
hasn't been anything of consequence on the ARPs front in the past few
days. More suits, more complaints. But no money.
The big
takeaway is that your locked ARPs will stay locked on April 15. If you're
looking for a way to pay taxes, you'd better find other monies. You can,
of course, borrow from your local broker/banker who originally put you
into the ARPs. But that deal is seriously risky. To wit, all brokers want
you to sign for a term loan. That means they most likely will demand their
money back at the end of your loan -- say six months. If you don't have
the money, they will sell your ARPs at distress prices. Think housing
foreclosure. You could easily be out 30% on your ARPs.
I believe
that eventually most of us will get our cash out of our ARPs, since the
issuers will eventually figure ways to raise the money from other sources.
But I also believe that this may take several years. The capital markets
are in dead freeze, with lenders frozen in fear. They fear upcoming disasters,
such as more housing loan losses, more investment and commercial bank
collapses and other horrible happenings that have not yet happened.
Neither
my long-term optimism nor the miserable state of today's capital markets
should dissuade us poor locked ARPs holders from our number mission --
scream and shout. Bring pressure on our brokers. Bring pressure
on our issuers.
Without
our continuing pressure, they'll take the easy road -- talk about not
harming the equity holders and reap the easy "management fees"
from managing their funds and our locked monies. Let's face it, not having
to deal with the mechanics of weekly auctions makes the issuers' jobs
easy and pleasant. Our job is to make our plight real and their jobs unpleasant.
Don't forget
to talk to government officials in Washington. They just used $30 billion
of our money to bail out Bear Stearns and give JPMorgan a huge Christmas
present. They also are sending us $117 billion in a "stimulus"
package. Meantime, there's $360 billion locked up in failed auction rate
securities. It strikes me Washington ought to pay some attention to our
plight. Just think if some of us actually spent our money -- on houses,
businesses, goods, salaries, services... The economy would get a nice
boost. And, boy, does it need a boost.
Nuveen
says it's working. Reader Todd Henderson emailed Tim Hurd,
partner at Dearborn Madison in charge of Dearborn's disastrous acquisition
last summer of Nuveen. Tim Hurd's email address is Thurd@mdcp.com.
Email him, please.
Hi Harry,
This is the response I got from Nuveen when I emailed Tim Hurd.
Dear Mr. Henderson,
We received
your email dated March 23, 2008 directed to Mr. Hurd at Madison Dearborn
Partners, expressing your concern with the Nuveen Auction Rate Preferred
Securities. We do appreciate the time you have taken to contact us and
we also understand the urgency in the need to restore liquidity in this
particular market.
Nuveen
Investments does recognize the challenge facing the industry and we
want to reassure you that we are working diligently at pursuing the
potential solution to all the Nuveen auction rate preferred shares as
discussed in the press release and conference call on March 12, 2008.
We are devoting substantial resources to quickly but carefully evaluate
all viable options. Replay
our conference call.
We hope
to soon communicate and implement specific refinancing solutions, pending
our ability to address all specific details and to gain fund board approval.
We cannot provide anything more specific at this time, because we’re
still working on the proposed strategies and they are highly dependent
on the market and certain outside factors. We must consider each fund’s
objectives and policies, regulations, tax and financial consequences,
as well as market feasibility in order to implement potential solutions
for each of our 100 affected leveraged closed-end funds employing $15
billion in auction-rate preferred shares.
It is
our strong hope and desire that this liquidity issue and implementation
of a solution to the auction rate preferred market will be resolved
so that you and other shareholders will have access to the funds you
invested. Please continue to audit the Nuveen.com site for updates on
the auction rate preferred securities market located on the home page
of the website under the section “Information on the Auction Rate
Preferred Market”, which is also found at www.nuveen.com/arps.
Sincerely,
Kevin Aldridge
Nuveen Investments
This is
the standard stuff Nuveen has been feeding its unhappy ARPs holders (that
includes me). See my earlier comments about living the easy life. Apparently
Nuveen is releasing a press statement on Monday March 31, 2008. (They
said they would. But didn't. -- Harry Newton, April 1, 2008)
Citigroup gets hit with class action suit. For
the filing at the court, click
here. The law firm which filed the suit
has a useful web site, AuctionRateHELP.com.
The lawyer in charge is Joseph Levi. He's a
knowlegeable intelligent fellow. His main web site is www.zlk.com.
Americas
Watchdog Demands Banks & Financial Institutions Refund Small Investors
Money Placed In Auction Rate Preferred Shares. This
is today's press release:
Americas
Watchdog has uncovered a gigantic pattern of what appears to be possible
fraud, with respect to US banks or global financial service companies
selling US citizens an investment device called an "auction rate
preferred share" (ARPS). The possible issue with fraud has to do
with the banks or financial institutions telling investors that an auction
rate preferred share was just like a CD & investors could get their
money back in 7 business days. Now investors are being told there is
no answer as to when they will get their money back. According to Americas
Watchdog, "we are talking about thousands of US citizens that trusted
a bank or financial institution with their life savings & now they
cannot get their money out. Why not"?
(PRWEB)
March 27, 2008 -- Americas Watchdog is calling upon U.S. banks, or global
financial institutions that sold U.S. citizens a auction rate preferred
share (ARPS) to stop playing games, and refund the investors money immediately.
According to Americas watchdog, small investors were sold "auction
rate preferred shares" (ARPS) as a "better substitute for
a CD."
According
to Americas Watchdog, investors were told by their bank or stock broker
that, "You can get your money back in 7 business days, or less.
A ARPS is just like a CD." According to Americas watchdog, "U.S.
consumers relied upon the seven day period to cash out, by the banker
or stock broker and now they are being told they cannot get their money
back by the bank or stock broker, or it may take months". Americas
Watchdog and its Corporate Whistle Blower Center consider this to be
just one more big lie on the part of Wall Street.
Americas
Watchdog alleges the following about auction rate preferred shares:
* Small
investors (Mom and Pops) were told by a bank representative or a stock
broker that "auction rate preferred shares were just like a CD
with no risk."
* Small investors in most cases told the bank or stock broker that they
did not want a risky investment and they wanted something that was liquid.
* Small investors were told by the U.S. Bank or stock broker that they
could get the money out within seven business days.
* Small investors were not given a prospectus on an auction rate preferred
share even though it was a security. According to Americas Watchdog;
"so US banks or global financial institutions are no longer required
to give a small investor a prospectus when selling a security in the
US? Why do we have a Securities & Exchange Commission?"
* Now small investors who were talked into an "auction rate preferred
shares (ARPS) are being told by a US bank or global financial institution,
"they can borrow up to 50% of their money back from the bank or
global financial institution if they need cash". According to Americas
Watchdog, "this is ridiculous, first the small investor gets lied
to about the liquidity of an auction rate preferred share, then they
get told by the bank or the stock broker, the small investor can borrow
their own money back with interest? For lack of a much better word or
words, this is baloney"!
* Small investors may have total exposure in option rate preferred shares
in the hundreds of billions of dollars. For many small investors, a
bank or a stock broker talked the small investor into giving them their
entire life savings. "Why can't they get their money out of this
'safe, easy to get out of' investment?" asks America's Watchdog.
According
to Americas Watchdog, "Auction rate preferred shares were offered
to investors with no prospectus, and the investors were given statements
showing the auction rate preferred share was cash. This was obviously
a big lie on the part of banks and financial institutions."
Americas
Watchdog is demanding that the U.S. banks and global financial institutions
refund all money in auction rate preferred shares immediately. The group
claims, "This is just one more example of Wall Street lying through
its teeth, at the expense of small investors who were sold a bill of
goods. Give the U.S. investors who purchased a option rare preferred
share back their money, or else we make sure everyone gets an attorney
& every State Attorney General is forced to get involved."
Because
of this obvious liquidity issue with some major U.S. banks and global
financial services companies, Americas Watchdog is strongly recommending
that U.S. consumers have no more than $100,000 in any one U.S. bank,
and consumers need to be certain the bank/financial institution has
U.S. federal deposit insurance.
On the
topic of Wall Street embellishments, Americas Watchdog indicates, "This
week we heard that Wall Street and world financial markets considered
the U.S. real estate down turn over. Nothing could be further from the
truth. U.S. real estate markets will lose another 10% of value in 2008
and at least as much in 2009 because of increasing foreclosures, and
desperate sellers selling at any price in a short sale. Our nation is
headed into a very deep recession, why continue to lie about it? Why
trust Wall Street after the real estate disaster and now the option
rate preferred shares fraud debacle?"
Americas
Watchdog's National Mortgage Complaint Center is one of the most quoted
sources in the nation on the US mortgage meltdown. Their web site is
located at http://NationalMortgageComplaintCenter.com.
Americas
Watchdog and its Corporate Whistle Blower Center are all about consumer
protection and corporate responsibility. Americas Watchdog's Corporate
Whistle Blower Center's web site is located at http://AmericasWatchdog.com.
State
refinances pension securities. Deal
locks in lower interest rates outside auction-rate market
From the Milwaukee Journal Sentinel
The State of Wisconsin has refinanced almost $800 million of pension
securities it issued in 2003, a deal that will save taxpayers millions
of dollars in interest, officials said.
The refinanced items were auction-rate securities that had interest
rates that reset every 28 days. As problems in the subprime mortgage
market spread through the financial world, the market for such securities
collapsed, causing the state to pay interest rates as high as 14.75%.
The refinance
bonds have much lower rates.
In all,
the state sold $798 million in new bonds, using the money to pay off
some of the auction-rate securities. Of the new bonds, $498 million
have a fixed interest rate of 6.1%. The rest have a floating rate that
is capped by an insurance contract with several companies, among them
a subsidiary of Bear Stearns Cos., said Frank Hoadley, the state's capital
finance director.
Bear Stearns
has run into problems and is being sold to JPMorgan Chase & Co.,
but both Hoadley and Peter Block, who follows Wisconsin finances for
Standard & Poor's in Chicago, said the contracts are solid.
"Everything
should be fine with it," Block said of the Bear Stearns connection.
He added Wisconsin was skillful and smart in the way it refinanced the
auction-rate securities. The deal was done March 19 and cost the state
about $4.3 million in underwriting, insurance and other costs, Hoadley
said.
The state
would have preferred to have refinanced all $945 million of the auction-rate
securities but was unable to find buyers for anything more than what
it sold, Hoadley said. The rest of securities will continue to have
their rates reset periodically, with the next time being Tuesday.
Harry Newton
|
advertisement
INVESTMENT
LOSSES?
You may be entitled
to recover some or all of your losses.
Matton & Grossman
Attorneys at Law
312-236-9800
www.FightWallStreet.com
|
November
1, 2008
Thank
You. Thank You. Thank You.
Mr.
Newton:
I want to personally thank you for all the information you have posted
since February of 2008 about Auction Rate Securities. I was laid off work
on January 3rd, 2008 after being with the company ( a car dealership)
for 23 years, it was very devastating to me and my family, just when I
thought things could not get worse I find out in February 2008 that all
of my life saving's were tied up in Auction Rate Securities ($750,000.00).
It was very scary. I looked and got information from your site every day.
It kept me informed and gave me the strength to keep the faith that one
day I would have all my money returned. I have learned so much from you
about investing. Your information taught me to be very cautious about
Financial Advisors, I don't think I will ever trust one again. As of Nov
1st, 2008 I have gotten all my money returned, some was from redemptions
and the rest from the settlement agreement with attorney-general Andrew
Como.
Thank you again for what you have done and what you did to help many individuals
like me get our money returned. You are a real special individual. Thank
you for taking your time to have done this. THANK YOU, THANK YOU AND THANK
YOU.
I hope all get their monies returned as well and I hope you also get yours.
I think I read in one of your post that you did.
Sincerely,
Ray in Florida.
October
10
Harry's
Hall of ARPS Shame - update 9
Companies
UBS
Merrill Lynch
Morgan Stanley
Allianz/Pimco/Bill Gross
Raymond James
Oppenheimer
Bank of America
E*Trade
TD Ameritrade (Click)
Charles Schwab
Northern Trust
Stifel Nicholas (sub of Stifel Financial)
Wells Fargo
Goldman Sachs
Lazy,
hopeless, hapless regulators
Jerry
Brown, California Attorney General
Bill MCollum, Florida Attorney General
Email
me your suggested additions.
Explain why
Harry's
Hall of ARPS Plaudits
HSBC
is number 1
From SmartMoney's Jim Stewart:
At
least one firm, HSBC, deserves credit for acting more proactively to protect
its clients. The firm said that because of "the high value we place
on our customer relationships," it offered to buy back its clients'
auction rate securities on June 20 and completed the purchases by the
end of July. HSBC said some customers didn't participate, and the firm
is "continuing to address the needs of the few remaining customers."
July
31
Congress Gets On Board:
Announces Sept 18 Hearing
WASHINGTON
(Dow Jones)--U.S. House lawmakers Thursday put Wall Street firms that
sold now-troubled auction-rate securities on notice: work with investors
or you will face regulation.
House
Financial Services Committee Chairman Barney Frank, D-Mass., announced
that his panel will hold a Sept. 18, 2008 hearing on problems in the
auction-rate market, which has frozen up over the last year amid broader
credit concerns.
Frank,
flanked by the panel's ranking Republican and a subcommittee chairman,
said such advance notice of a hearing is "unusual." The goal,
he said, is to give firms that sold auction-rate securities time to
address concerns and help investors who have lost money or been denied
access to their funds.
"I
hope that when we have this hearing in September some of the entities
that sold these will be able to come to us and be able to tell us what
actions they have taken to undo some of this damage that has been done,"
Frank said.
Rep.
Paul Kanjorski, D-Pa. and chairman of the capital markets subcommittee,
was more blunt.
"You
have your chance for the next 45 to 50 days to do something. If you
don't do something, the Congress will do something," Kanjorski
said.
The
announcement came on the same day the Massachusetts Secretary of the
Commonwealth charged Merrill Lynch & Co. (MER) with fraud in pushing
the sale of auction-rate securities while "misstating the stability
of the auction market itself."
Secretary
William Galvin said Merrill aggressively sold auction-rate securities
to investors while censoring its own research analysts so that they
would downplay concerns about the stability of the auction-rate market.
Frank
called the situation "troubling" and said it "does appear
to me that there was inappropriate action on the part of some otherwise
respectable financial institutions in the sale of auction-rate securities."
Continued
Frank, "These were securities that were sold to investors in many
cases I believe with grossly inadequate explanations of what they entailed
and underestimation by a significant amount of the risk."
-By
Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; michael.crittenden@dowjones.com
June
26
Secretary
Galvin of Mass Charges UBS
with Fraud in Auction Rate
Securities Dealings
Full
documents.
(Mountains
of them)
July
17
Update
on ARPS from law firm, Girard Gibbs.
July
2
Should
I borrow against my ARPS?
Hi
Harry,
Thanks
for all the great work you’ve been doing for all of us who are
in this mess. I have a quick question. I’m being told by Merrill
that I should borrow against my Nuveen products. Do you know anything
about anyone who has done this? Is there any real risk? Will I be giving
up rights that matter? I’m pretty sure that I don’t have a
case against Merrill—unless I could prove that they knew the bottom
was falling out and didn’t inform me on purpose. Am I being short-sighted?
I don’t absolutely need these funds; it’s just that all of
the other monies I could tap into would carry some minor form of penalty
or other for breaking.
Anon
Dear
Anon,
The
simple answer is that it all depends on the terms of the deal Merrill
is offering. Here's what you need to watch out for:
1.
Is this a term loan or a loan that matures whenever Merrill decides?
2.
Will you have to repay the loan before your ARPS (i.e. the security
for the loan) is redeemed?
3.
If so, will they sell your ARPS at whatever price they choose?
4.
If it's less than par, who eats the loss? Probably you. In short, watch
out. -- HN
July
1
COMPLIANCE
WATCH:
Advisor
Alleges UBS Forced Resignation
By
Daisy Maxey and Jaime Levy Pessin
NEW
YORK (Dow Jones)--A financial advisor who sold millions in auction-rate
securities to municipalities while working for UBS Investment Services
Inc. has filed a federal whistle-blower complaint against the firm,
alleging that he faced retaliation after cooperating with a Massachusetts
investigation into the sales.
In
a complaint filed with the U.S. epartment of Labor in mid-June, Timothy
Flynn, a former senior vice president at UBS Financial Services alleges
that after he told Massachusetts regulators that financial advisors
had not been informed of the liquidity issues in the auction-rate marketplace,
the UBS AG (UBS) unit locked him out of his office, prevented its staff
from talking to him and ultimately uspended and prevented him from doing
his job.
Flynn,
who along with his team has sold more than $30 million in auction-rate
securities to Massachusetts towns and public clients since 2006, according
to the complaint, resigned from UBS last week.
"Mr.
Flynn cooperated fully with the Massachusetts' attorney general, and
as a direct result was retaliated against by UBS," said Jason Archinaco,
an attorney with Pittsburgh-based White and Williams LLP, which is representing
Flynn. Flynn had no choice but to resign, as he had been cut off from
his clients for weeks, and "just couldn't do his job anymore,"
Archinaco said.
Such
complaints can result in statutory damages and payment of attorneys'
fees, or could turn into an arbitration complaint or litigation, "depending
on how much harm occurs long-term to my client's career, Archinaco said.
Kris
Kagel, a spokesman for UBS, said that the firm denies the allegations
and plans to defend itself vigorously. "The firm has taken no improper
actions against Mr. Flynn," Kagel said. "Mr. Flynn made the
decision to resign of his own volition."
Debt
from municipalities, charitable organizations, student lenders and closed-end
mutual funds was sold at auction for years. While the underlying securities
had long-term maturities, the auction-rate securities functioned like
short-term investments because interest rates were reset routinely at
the auctions, which were backstopped by Wall Street firms. The $330
billion auction-rate market collapsed in February, when Wall Street
stopped supporting the auctions.
Although
some auction-rate issuers have bought back securities, many investors
remain stuck in the now-illiquid products.
Complaint: Email Access Was Cut Off
UBS
is facing sharp scrutiny in Massachusetts related to its sales of auction-rate
securities. In May, UBS Financial Services settled with the Massachusetts
attorney general's office to return $37 million to the Massachusetts
Turnpike Authority and 17 municipalities that invested in auction-rate
securities after it agreed that the securities weren't permissible investments
under their official investment mandates. Most of those investments
had been sold by Flynn and his team, according to the complaint.
And
last week Massachusetts Secretary of the Commonwealth William Galvin's
office charged UBS Securities LLC and UBS Financial Services Inc. with
fraud for offloading millions in auction-rate securities to retail clients
as a way to clean out its inventory once it was clear that the auction
market was in trouble. Other states may follow, and the Securities and
Exchange Commission and the Financial Industry Regulatory Authority
are also looking into sales of auction-rate securities to retail clients
by various firms.
Flynn
alleges in his complaint that UBS told brokers that auction-rate securities
were cash equivalents, and "failed and refused to disclose"
to its employees and clients that the securities were not liquid. UBS
informed Flynn and other brokers as late as Feb. 12 that the auction-rate
securities market was being "fully supported" by UBS, according
to the complaint.
Massachusetts
Attorney General Martha Coakley began investigating UBS' sale of auction-rate
securities in the state sometime around February. In addition, UBS began
its own internal investigation, according to the complaint. In March,
Flynn was contacted by the attorney general's office, which sought his
testimony relating to the $37 million in investments made by his municipal
clients in the state.
In
April, Flynn told UBS' counsel that he would cooperate with the attorney
general's office, the complaint says. Prior to that, he "was told
that his job was not in jeopardy, nor was UBS considering any job action
against him," according to the complaint.
In
an April 1 email to Louis Poulin, a branch operations manager, and Kerry
Zinn, director/regulatory counsel at UBS Financial Services, Flynn,
says, of himself and another advisor, "I want to make you aware
of our intent to cooperate (as able) with all parties. First and foremost,
we intend to cooperate with any and all regulatory bodies. Second, we
continue to communicate and cooperate with our exposed clients as they
struggle through this catastrophic market failure. Third, I feel I have
been extremely supportive of the firm and have run a good practice."
An
email from Zinn dated April 2 thanks Flynn for his reassurances concerning
his continued cooperation. "No one has ever questioned your intention
to cooperate with UBSFS or the Mass AG or to tell the truth on the record,"
the email says in part. It also warns Flynn, "I do not believe
that email is an appropriate forum or vehicle for memorializing these
discussions."
Flynn
testified on April 16, and UBS settled with the attorney general's office
in May. After his testimony, the complaint alleges, UBS instructed him
not to communicate directly with his clients on all matters, subjected
him to heightened scrutiny and additional bureaucratic procedures and
began telling his co-workers that the attorney general had asked for
his removal.
Flynn
ultimately was locked out of his office, had his email access terminated
and was ordered by UBS to resign or be terminated, the complaint alleges.
(Daisy
Maxey is a Getting Personal columnist who writes about personal
finance; she covers topics including hedge funds, annuities, closed-end
funds and new trends in mutual funds.)
(Jaime
Levy Pessin covers compliance and regulatory issues affecting financial
advisors.)
By
Daisy Maxey, Dow Jones Newswires; 201-938-4048; daisy.maxey@dowjones.com
By
Jaime Levy Pessin, Dow Jones Newswires; 201-938-4546; jaime.pessin@dowjones.com
June
27
Alleged
deceptive sales practices at UBS
from boston.com
AUG.
22, 2007 David Shulman, UBS's municipal bond chief and head of fixed
income, launches sales effort, urging brokers to get individual clients
to buy auction-rate securities.
Shulman
sells large portion of his personal holdings in auction-rate securities.
SEPT.
6 An internal e-mail from Shulman suggests the firm exit the auction-rate
business. Notes "legal and reputational issues on this decision."
OCT.
31 Shulman, in e-mail to colleague, calls the investments "a huge
albatross."
DEC.
11 Ross Jackman, a Shulman deputy, says in internal e-mail, "The
auctions aren't going to come back."
DEC.
12 Shulman sells the rest of his personal auction-rate holdings.
DEC.
15 Shulman, in an e-mail to UBS chief risk officer Joseph Scoby, discusses
whether to stop supporting auctions: "the moral obligation runs
very deep."
FEB.
8, 2008 In "upbeat" UBS conference call, brokers are told,
"the public auction continues to be very effective."
FEB.
12 Internal e-mail to Shulman urges, "we need to beat the bushes
harder than ever to unload this paper."
FEB.
13 Auctions fail. Massachusetts investors are sold $50 million of the
securities in prior five days.
YESTERDAY
UBS is sued by Massachusetts Securities Division.
June
24
Your
deadline for filing against your broker may be approaching
-- update 3
by Harry Newton
I
am not a lawyer. So take everything I write here as guidance, not gospel.
Most of us were sold ARPS by our brokers as cash or cash equivalents.
There is considerable evidence that our brokers' employers, the brokerage
houses, knew better. They knew ARPS were not "cash equivalents"
and the auctions could fail -- they had in the past. The brokerage houses
also got some of their favored clients out of ARPS before the auctions
collapsed in mid-February.
Hence,
many owners of ARPS are now arguing that it was fraud and are asking
for recission -- a legal term which means reverse the transaction. You
take back the ARPS you foisted on me. You give me back my cash money.
You'll
probably need an experienced SEC type arbitration attorney as there
is a process. You typically send a letter to your brokerage company
demanding rescission, which has then a certain number of days to respond.
When they don't reply, then you file an arbitration claims. There is
apparently an outrageous FINRA filing fee of $1800.
All
U.S. states have laws that say you must file your fraud claim (against
your brokerage firm) within a certain time -- or your claim becomes
worthless. In some states it's six months, though one reader has written
that it's 5 years for "certain federal securities claims."
To be sure, let's asume six months. let's say you were "sold"
your ARPS in January, 2008. Figure six months. You clearly don't have
much time. (Is this a reason why many of the brokerage houses and the
issuers have been delaying?)
There's
also a set process for making claims on your brokerage firm. You have
to file a Statement of Claim and your reasons (causes) for that
Claim. Your reasons are somewhat covered under Finra Rule 2310. You
will need to claim things like:
1.
The representations made to you about ARPS were fraudulent, misleading
and misrepresented the nature of the risk. They were also inconsistent
with your own investment objectives which you had made perfectly clear
to your boker -- namely you wanted a cash-like parking place for your
cash.
2.
Your broker/investment adviser breached his fiduciary responsibility
to you.
3.
ARPS were totally unsuitable for you. For example, you were older and/or
had a reason to need your liquidity that the broker was aware of --
like you had sold one house and were just parking the money pending
closing on another. Yet your broker recommended ARPS and thus violated
Finra rules 2310 and 2110.
4.
There was fraud and manipulative practices. Your broker ommitted material
facts -- for example, he never sent you a prospectus. He never told
you how the auctions worked, or the fact that some had failed.
5.
Breach of implied contract between you and your broker.
6.
Failure to properly supervise and/or a negligent supervisor. Here you
argue that the brokerage firm screwed up by not supervising and/or training
your broker adequately as to the risks posed by ARPS.
7.
Your broker and his brokerage house was generally negligent. They did
not meet the standard of care which Finra expects.
Your
first step is to find out how long you have. You may need to file your
Statement of Claim this week. Get on it NOW.
++++++
June
16
Wanted
for a Reporter to Interview
1.
Someone who will talk about not getting the redemption they expected
from their ARPS.
2.
Someone who bought student loan auction rate securities after Oct. 1
last year.
If
you're willing to talk to a reporter, please email me
June 10 -- Update 1
What
are my options?
by Harry Newton
1.
Cut back your spending. See this mess as "forced saving."
Swallow your aggravation. This is not an option for most people, I have
learned.
2.
Borrow money from your broker. Make sure you don't get a term loan.
See elsewhere on this site for why. This is probably not a good option,
either since brokerage firms are proving increasingly difficult to deal
with.
3.
Sell your ARPS on the secondary markets. As more and more ARPS are being
redeemed, prices are rising. Now you should be able to get 90-91
cents on the dollar. There are two secondary markets -- Restricted
Trading, which deals with individuals, like you and me and companies
like Fieldstone, which deals only with "institutions," like
the junk brokerage firm which sold you the stuff you're now stuck in.
Most brokerage firms won't deal with the likes of Fieldstone for legal
reasons you'll find elsewhere on this site.
4.
Insist that your brokerage firm provide you written documentation of
the pressures they are applying on the ARPS issuers. They won't. But
you need to ask. Pressure is pretty all we have. Make sure you contact
state regulators, especially attorneys-general.
5.
Send letters, make phone calls. Keep up the pressure on issuers. Send
me your "story." I have many reporters who want ARPS owners
to stand up and be quoted. These stories continue the pressure. Send
me your story --
5.
Cuss and pray. This "strategy" (also called hope) is as effective
as the pregnant girl rubbing vanishing cream on her stomach. You need
to keep the pressure up.
You
must read this letter
May
7
The writer. Kathleen Mullen, is an Colorado attorney who
got put into ARPS by the Smith Barney subsdiary of Citigroup. Ms. Mullen
has been practicing law for 33 years, most of the time in Denver. She
wrote this letter letter as part of her ongoing efforts to secure her
investment in auction rate securities back from Citigroup. This letter
brings together some incredible research and some -- what appear to
me -- to be impeccable legal arguments that cast real doubt on Citigroup's
honesty. I've excerpted a few paragraphs of Ms. Mullen's letter below.
But you need to read the entire letter. It's really good. Click
here. The Exhibit K mentioned in the letter, the Citigroup Bhatia
analysisis, is separate. Click
here.
+
To the extent that your April 23, 2008 letter is intended to serve as
Citigroup's formal response to my March 7, 2008 claim seeking rescission
of the sale of the auction rate securities sold to me by your company
during the period June 2007 through January 2008, your letter does not
address the central core element of my complaint as well as the complaints
of thousands of retail investors of auction rate securities. Citigroup
marketed and sold to me and other individual investors auction rate
securities as safe, cash-equivalent investments, comparable to money
market accounts, which could be easily redeemed at face value, while
failing to disclose that auction rate securities were only "liquid"
because your firm and the other broker-dealers had created an artificial
market which would dry up as soon as your firm and the other broker-dealers
withdrew from the market. ...
+ During the period June 2007 through January 2008 when auction rate
preferred shares were sold to me by its Colorado Springs office, Citigroup
and the other broker-dealers clearly knew that such securities were
neither cash-equivalent investments nor safe and liquid investments
comparable to money market accounts. They knew that the design of auction
rate securities had a fundamental defect, which required Citigroup and
other broker dealers to manipulate the market by buying auction rate
securities for their proprietary accounts in auctions in order to maintain
the appearance of liquidity in these shares.
+ Citigroup and the other broker dealers were also aware that, despite
their manipulation of the auctions to give the appearance of liquidity
to auction rate securities, such auctions failed at various times over
the years, and began failing again in August 2007 As failed auctions
increased in the fourth quarter of 2007 and in January 2008, Citigroup
did not disclose these failed auctions to its investors, but instead
increased its marketing of auction rate securities to individual retail
customers. In early December 2007. By mid-February 2008, the market
collapsed when Citigroup and the other broker-dealers withdrew from
the market thus causing thousands of auction rate securities auctions
to fail on a weekly basis.
+
In fact, Citigroup and the other broker dealers were clearly aware of
the design defect in auction rate securities in 2002 as evidenced by
Merrill Lynch's request to the SEC for approval to modify auction rate
preferred shares by including a demand provision in such shares, which
would be exercisable upon (1) a failed auction, (2) a failure to hold
a scheduled auction, (3) a failure by a fund to make a scheduled payment
of dividends or redemption proceeds and (4) a failure to make scheduled
payments of the liquidated amounts. Exhibit E. The SEC issued a No-Action
letter under Investment Company Act Rule 2a-7, which essentially approved
the suggested modification of auction rate preferred shares to provide
ensured liquidity to such shares as suggested by Merrill Lynch. Exhibit
F. This proposal, however, was never implemented because the large investment
banks, including Citigroup, would not agree to serve as the guarantor
of the demand provision.
+ Mr. Bhatia's analysis also predicts that the auction rate market will
cease to exist, leaving current investors with no defined, reliable
method for redeeming their securities. Although the financial loss to
brokers and asset managers of the broker-dealers firms, according to
Mr. Bhatia, will only be 1%-2% per year, the adverse impact on the reputations
of Citigroup and the other broker dealers looms large.
+
According to Mr. Bhatia, if the liquidity problems with auction rate
securities are not resolved quickly, Citigroup and the other broker
dealers risk a withdrawal from these brokerage firms of the $750 billion
in assets controlled by auction rate securities clients.
May
2
Calamos
Announces Additional
Auction
Rate Preferred Security Refinancing
*
Calamos to refinance $300 million of outstanding auction rate preferred
securities (ARPs) of Calamos Global Dynamic Income Fund (CHW).
*
Proceeds of refinancing will be used to redeem approximately 85.7% of
outstanding ARPs for CHW.
*
Groundbreaking refinancing in the form of a 3-year extendible note,
the first capital markets refinancing solution for closed-end fund auction
rate preferred securities eligible for purchase by money market funds.
*
Total refinancing announced to date stands at $1.239 billion, representing
approximately 54% of all outstanding ARPs issued by Calamos closed-end
funds.
*
Calamos continues to seek additional refinancing solutions.
*
Calamos to host a conference call on May 6, 2008 at 11:00 am CST to
discuss further details of the CHW refinancing.
NAPERVILLE,
Ill., May 2, 2008-- Calamos Investments announced today that it intends
to refinance $300 million of the outstanding auction rate preferred
securities (ARPs) issued by the Calamos Global Dynamic Income Fund (NYSE:
CHW). This announcement comes a week after Calamos announced the refinancing
of an aggregate of $939 million of outstanding ARPs of the Calamos Global
Total Return Fund (NYSE: CGO) and the Calamos Strategic Total Return
Fund (NYSE: CSQ). "We have stressed all along that we would work
rapidly to secure solutions to the recent liquidity crisis in the ARPs
market," stated John P. Calamos, Sr., the chairman, chief executive
officer and co-chief investment officer of Calamos Investments. "We
are committed to seeing this issue through to a successful resolution
across our entire fund complex, and we want our fund shareholders to
know that we have been and will continue to focus on finding solutions
for all of our closed-end fund shareholders."
Calamos
has secured an alternative form of borrowing that will enable, based
on current market conditions, CHW to redeem approximately 85.7% or $300
million of its outstanding ARPs at their par value. The refinancing
comes in the form of the first money market eligible extendible note
to be issued by a closed-end fund. This refinancing, together with the
previously announced refinancings of CGO and CSQ, represents $ 1.239
billion or approximately 53.8% of the total auction rate preferred outstanding
in the five Calamos closed-end funds.
Upon
completion of the refinancing, which has been approved by the Board
of Trustees of CHW, the leverage ratio for the fund is not currently
expected to change materially and the funds will continue to meet the
asset coverage requirements of the Investment Company Act of 1940.
Since
the amount of refinancing for CHW is less than the total amount outstanding,
this refinancing will take place pro rata by auction series. Below is
a chart showing the shares outstanding per series and the number that
the fund will redeem via this refinancing. It is important to note that
the Depository Trust Company (DTC), the securities' holder of record,
will determine how to allocate this partial redemption of shares among
each participant broker-dealer account. Each participant broker-dealer,
as nominee for underlying beneficial owners (street name shareholders),
in turn will determine how redeemed shares are allocated among its beneficial
owners.
The
fund expects to begin issuing redemption notices in the next several
days and redemptions will coincide with the completion of the refinancing
transaction.
Calamos
Investments will host a conference call at 11:00 a.m., central time,
on May 6, 2008, to discuss the refinancing of the fund's ARPs. The conference
call is accessible by dialing one of the following numbers, in the US
or Canada dial 800.379.3942, internationally or locally dial 706.679.7206.
The conference ID is 46468685. If you choose to listen online please
visit our website for more details. In addition, up-to-the-minute information
regarding all Calamos ARPS-related solutions can be found at Calamos'
ARPS Info Center.
April
30
from
Ask Matt
Krantz
Auction-rate
bonds leave many investors hanging
Q:
My broker told me it was safe to put almost my entire life savings
into bonds sold by the Missouri Higher Education Loan Authority. But
the interest rate has fallen from nearly 6% to about 2% and I'm told
I can't sell. What should I do?
A:
Sounds like you've been sucked into the credit-crunch vortex.
What
you, and many other investors are stuck with, are what's called auction-rate
securities. Auction-rate securities are bonds sold by municipalities
and mutual funds that, on paper, were ingenious. These were long-term
bonds that gave these borrowers access to money for 20 or more years.
Buyers also got higher yields than they'd get on money market investments.
But,
what's different, is that auction rate securities don't have a stated
interest rate. Instead, the bonds are supposed to be offered in a periodic
auction, ususally every 7, 28, 35 or 49 days, and investors would bid
on them. The interest rate would be reset depending on the auction results.
The more bidders, the lower the interest rate.
In
theory, it's a good idea. Borrowers can access money for long periods
at what are basically short-term interest rates. And investors who need
their money back after a short term, in theory, can sell their securities
to other investors. The theory, unfortunately, blinded many brokers
who suggested these investments to clients and said they were as good
as money in the bank.
In
February, investors got a rude awakening. It turns out many of these
auction-rate securities only had high credit ratings because they were
guaranteed by large bond insurance companies. When the insurance companies
ran into trouble, due to their exposure to sub-prime loans, investors
realized the safety net for many auction-rate securities was gone. Suddenly,
new investors weren't willing to bid in the auctions — leaving
existing investors like you holding the bag. If there are no buyers
for the bonds bidding in the auctions, you can't sell yours.
So
the question is: What should you do now?
Step
1: Don't panic. You're not alone. Regulators are aware of the problem
and are looking into it. State regulators from Florida, Georgia, Illinois,
Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington
are all investigating this matter as part of a initiative from the North
American Securities Administrators Association. You can read more about
the investigation by clicking on the link below.
FROM
OUR ARCHIVE: Read about the
auction rate investigation.
The
Securities and Exchange Commission is also aware of the problem. "While
we cannot disclose specific matters, as a general matter, we are looking
at representations made to investors when they purchased auction rate
securities, in coordination with FINRA," John Heine, spokesman
for the SEC, said in an e-mailed response.
The
SEC has, as long as two years ago, slapped brokerages on the wrist over
the way the auctions were conducted. This action shows that the SEC
is aware of this market and the abuses in the past.
PREVIOUS
SEC ACTION: From
2006.
Step
2: Run up the chain of command at the brokerage. If you don't get any
help from your broker, call your broker's boss and if necessary, keep
working up the chain, says Sally Hurme, an attorney for the AARP. The
question at hand is whether your broker sold you an investment that
was "unsuitable," which is a word you should use because
it will get attention at the brokerage. That is, did he or she know
you needed a stream of income and he told you this was a risk-free investment
that would provide it. Regulators have been paying keen attention to
suitability of broker recommendations, Hurme says.
Gather
as much information as you can about your investment. Ask the brokerage
firm what it will do for you. Also, ask for any documents about the
security you bought. Ask for the prospectus on the security. That will
contain details about the bond that you own.
Also,
on your brokerage statement, you should see the CUSIP number for the
bond you bought. The CUSIP number is like a ticker symbol, or identifier
of the bond. Run that CUSIP number through Finra.org, which is one of
the leading regulators of the securities industry. Here's how:
1.
Go to finra.org/marketdata
2.
Enter your bond's CUSIP number on the "Search" box in the
upper right-hand corner of the page. Change the pull-down box to bond
and click the Go button. The CUSIP on the bond you're asking about is
606072HM1. Click on the name of the bond. Here's where you can look
up some details on the bond.
Regarding
your specific bond, using the FINRA site and a Bloomberg terminal, I
can tell you that the bond appears to come up for auction once a month.
The next auction is scheduled for May 1. Tell your broker to try to
sell your bonds. Who knows, you might get lucky.
Step
3: If you can't sell your bond and the broker gives you no satisfaction,
contact the regulators. You'll want to canvass all the regulators and
let them know you're one of the victims, Hurme says. That includes FINRA,
which oversees the brokers.
COMPLAINT
CENTER: For
the Financial Industry Regulatory Authority.
Next,
make your situation known to all the states involved. That includes
the state you live in, the state the broker is located in and the state
the bond issuer is in. A great place to do this is with the NASAA, at
www.nasaa.org.
Click
on the "Contact your regulator" link on the left-hand side
of the page. Click on each state that's affected, and you will get contact
information. When you call or contact the state regulators, make sure
you have the bond CUSIP number and information about your broker.
Finally,
let the SEC know. There is a section to file complaints here.
Step
4: Weigh your options. You essentially have four immediate options as
you wait to see what the regulators do: Hold on to your security, try
to sell it, borrow or sell other asset to help you through.
Each
course has its own risks. Holding on, in some cases, might work. There
are some auction rate securities that failed in February that are now
functioning. The auction rate bonds sold by the Metropolitan Museum
of Art, New York, for instance, failed, but are trading again.
You
may not be as lucky. The type of loan you own, student loans, is one
of the worst performing areas of auction-rate securities. Investors
are fearful of credit risk and are unwilling to bid so far. Plus, it
looks as if when an auction in your bond fails, the rate goes lower,
not higher. That means there's not exactly going to be a line forming
of people willing to bid for the auction at the low rates.
It's
possible the issuer of the bond will try to restructure its auction
rate bonds by selling new bonds to replace yours. But that's unclear
in the tight credit market. Again, student loans continue to be one
of the worst spots in the auction rate market. The student loan organizations
don't have many options available to them.
Will
Shaffner, spokesman at the Missouri Higher Education Loan Authority,
told me April 25 the student loan market remains difficult. "The
auction rate note market to students loans is still not functioning,"
he says. MOHELA is working to find a solution, since the problem is
costing them, too, with high interest rates on some other bonds that
have failed, he says, and causing difficultly in raising more money.
MOHELA is seeking Congress' help in finding a solution to get the market
for student loans functioning again, he says. Here's the latest information
about the bonds available on the website (pdf).
That
leaves the option of selling the bond. But again, this isn't going to
help you since your bond is student loan backed. Your brokerage may
allow you to borrow money, but you'll likely pay interest on that or,
they will want you to sign a document saying you won't sue them in the
future. You may be able to sell other assets and wait this out, but
then, you're eating into your nest egg further and may have capital
gains that create a taxable event for you.
Get
more details on these options here.
Step
5: Consider legal representation. Even if the regulators do tackle these
cases and win, it could take years before you see a penny. If you've
pursued all the steps above and don't get anywhere, you may consider
a lawyer, Hurme says. The lawyer may be better able to use language
with the broker to get more satisfactory results. There's also a chance
you can take the brokerage to arbitration and try to get a settlement
that way.
There
are also attorneys who are pursuing the possibility of pooling many
investors who bought these investments into a super suit. Girard Gibbs
is one of the law firms that has filed a complaint against leading investment
banks and brokerages including Citigroup, UBS, Wachovia, Merrill Lynch,
Wells Fargo, Morgan Stanley, J.P. Morgan Chase and TD Ameritrade over
this issue.
Daniel
Girard, partner at Girard Gibbs, says investors will not be precluded
from pursuing claims in arbitration against brokers even if they join
the preliminary formation of the class action. "People don't need
to make a choice now," he says. You can get more information about
the action
here.
As
you can see, there aren't many great options at this point. Your best
hope is that somehow the credit crunch eases and either the auction-rate
security starts trading again or the issuer may refinance the debt.
Matt
Krantz is a financial markets reporter at USA TODAY and author of Investing
Online for Dummies. He answers a different reader question every weekday
in his Ask Matt column at money.usatoday.com. To submit a question,
e-mail Matt at mkrantz@usatoday.com.
April
30
From
LawyersandSettlements.com
New
York, NY: What Barbara requested from her broker was a safe liquid alternative
to her placing large sums in the bank but what she ended up with was
auction rate securities that cannot be cashed out.
"I
told my broker that I had quite a bit of cash on hand and was looking
to park it," says Barbara. "The bank was charging me too high
interest fees in connection with the money market rate they were offering.
My broker said no problem; he had some short-term paper that was safe
and easily redeemable. No issues. I must've asked him ten different
ways about the liquidity and safety, making it clear I needed to be
liquid because I pay quarterly tax estimates. He said, 'This short term
paper is rolled over every 7-35 days with no problem getting into it
or out of it--liquid and safe. I'd get three tax exempt bonds. I thought
they would be Triple A underwritten municipal bonds.
I had the money wired to him, which I'd done on a previous transaction
with him. He never sent me anything except a confirmation statement.
The term auction rate security was never mentioned nor was any possibility
of an auction situation. As far as I was concerned, I was buying a safe,
completely liquid alternative to a bank account.
But in late December, I had to make a tax payment and called him to
redeem $100,000. I sent him a fax, as he requested, along with the destination
of the money wire, and two days later I had it in my account. It was
simpler than buying gas."
Barbara had no inkling that anything was going wrong, until the call
came.
"On
March 14," Barbara continues, "he wanted to know if it was
a good time to call, knowing that I'd been in the south taking care
of my seriously ill father. And that's when he proceeded to explain
that we had a problem. I had no idea he had put me into something that
was different from what he'd originally described to me. What he explained
was that the securities were bought and sold at auction and held for
a substantial amount of time, normally without problem. It was a very
orderly process; the securities were easily redeemable--someone sold
them, someone else bought them. I myself had just witnessed in December
that the pattern had worked quite nicely--or so I thought.
He went on to explain that my two remaining bonds were in that inaccessible
category. Their principal was safe but they had become illiquid. This
was the first I'd ever heard of this.
I was quite distressed, given my state of mind at that time. My father
had been in the hospital 91 days and I was just about exhausted, although
I usually have a good level of energy. The broker assured me that his
firm was working out different ways to deal with the situation and that
they were going to make me their 'number one priority'. I said fine,
go deal with it now.
But I kept calling and emailing every two or three days for a couple
weeks and eventually I opened a margin account with them and borrowed
some money on margin in order to make the tax payments.
That's when I found the lawyer Diane Nygaard on the Lawyers and Settlements
site. We sent out a demand letter requesting that the broker buy back
the securities, as they should never have been sold under false pretenses.
If they don't comply, we will file for arbitration.
This has been a major learning experience for me. As educated as you
are, you have to rely on others, like doctors or investment professionals,
and even if the broker has the best intentions in the world sometimes
they get mislead. But in this case here, they sold one thing that turned
out to be completely different. There's no way I would have invested
in anything that risked liquidity.
Barbara is a sophisticated New Yorker, who is not only annoyed and enraged
about her own situation but for others. "Everything I read,"
she says, "is investment houses making money hand over fist and
get preferential tax treatment but the bulk of the people injured in
this $330 billion debacle are individual investors and companies but
not the larger institutional places. If they knew about it, didn't they
have a fiduciary responsibility to their clients? That's the issue here."
If your auction rate securities have been devalued or marked down, and
are considering arbitration or a class action suit, the council of a
lawyer will steer you in the direction of your best interest.
April
29
From
Liquidating
Frozen Auction-Rates
by Alan Rappeport
The
market for auction-rate securities remains largely stuck, but a secondary
market is slowly budding.
The
frozen market for auction-rate securities is showing a few signs of
thaw in a new secondary market, as transactions are slowly starting
to pick up pace for those needing to cash out quickly.
The
Restricted Securities Trading Network began listing auction-rates last
month on its electronic trading network. Transactions were slow to begin
but now average between seven and 10 per day, according to Barry Silbert,
CEO of RSTN.
Auction-rate
securities are long-term bonds and preferred stocks that resemble short-term
instruments because their interest rates are reset periodically —
usually every 7, 28, 35, or 49 days. The rate is reset by a modified
Dutch-auction process, and because investors are supposed to be able
to buy and sell the securities so frequently they are generally regarded
as equivalent to cash. However, the $330 billion market has become a
cash-trap in recent months as the auctions became a victim of the credit
crisis.
According
to Silbert, 700 RSTN members, mostly hedge funds and institutional investors,
have expressed interest in purchasing auction-rates. So far more than
170 are listed, with par values ranging from $25,000 to $40 million.
One concern with the secondary market has been the discounts investors
would incur on securities.
To
date, municipal auction-rate securities are seeing discounts of up to
10 percent on RSTN. Auction-rate preferred securities are between 10
percent and 20 percent. And student loan auction-rates are 25 percent
and up.
RSTN
has seen the fewest number of student loan transactions so far because
holders have been unwilling to take large discounts on them. Silbert
says these securities have the lowest chance of a refinance in the short-term
because issuers pay low interest on them and don't generally have capital
to restructure them.
One
investor, writing on the website AuctionRatePreferreds.org ,
said the process of liquidating his $300,000 face-value holding on the
secondary market took about one month. RSTN found him a buyer within
three weeks, after negotiations he took a loss of 18 percent, and within
a few days he had his money.
"It
was unpleasant to take the loss, but at least now I have the cash to
invest in other things," writes the investor, Tom Hoffman. He adds,
"The idea of the ARPS auction process returning to 'normal' is
a complete fantasy."
Meanwhile,
funds and banks that issued auction-rate securities and marketed them
as equivalent to cash are facing increased scrutiny from regulators
and litigation from investors. Last week Barney Frank, chairman of the
House Financial Services Committee, and Paul Kanjorski, chairman of
the Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises, prodded the Securities and Exchange Commission to take
action.
In
a letter to SEC chairman Christopher Cox, Frank and Kanjorski questioned
whether brokers who sold the securities "did so using deceptive
or misleading practices." They also recommended that SEC quickly
give mutual fund companies temporary relief from the regulator's asset-coverage
tests so they can redeem some of the illiquid securities.
+++++
April
25, 2008 9:33 a.m
Morgan Funds Move to Redeem Auction-Rate Preferred Shares
By Kevin Kingsburgy
The Wall Street Journal
The
board of trustees at 10 Morgan Stanley closed-end municipal-bond funds
approved the use of alternative sources of leverage that will allow
the funds to redeem some of their auction-rate preferred shares.
No
timetable has been set for redeeming the shares, auctions on which began
failing in February and resulted in investors finding themselves trapped
in the previously viewed cash-like holdings. The securities are issued
by municipalities and other tax-exempt institutions in addition to closed-end
funds.
The
funds' boards approved the use of Tender Option Bonds to refinance up
to 30% of each fund's ARPS leverage. Morgan Stanley said the bonds are
derivatives created by placing high quality municipal bonds into a trust
arrangement and, in exchange, each fund receives cash and a residual
interest security. The trust then issues securities which are purchased
by third parties and pay interest rates that generally reset weekly
based on a short-term index rate.
Using
the bonds, said Morgan Stanley, depends on factors including the availability
of high-quality municipal bonds at certain yield levels to be transferred
to the trust structure and demand for the securities issued by the trust.
Morgan Stanley noted higher short-term interest rates would result in
higher interest payable on the trust securities but lower income generated
by them, resulting in reduced income to shareholders "and possibly
a decline in the overall yield and market value of each respective fund's
common shares."
Other
fund managers have been working out alternatives to allow investors
in the preferred shares to get out of the investments. Because of invetors
being unable to cash out of some auction-rate securities, lawsuits have
resulted amid claims that the investments weren't as safe as billed.
The
10 funds approving the alternative leverage the Morgan Stanley Insured
Municipal Trust, Insured Municipal Bond Trust, Insured Municipal Income
Trust, California Insured Municipal Income Trust, Quality Municipal
Income Trust, Quality Municipal Investment Trust, Morgan Stanley Quality
Municipal Securities, California Quality Municipal Securities, New York
Quality Municipal Securities and Municipal Premium Income Trust.
From
Readers
Sunday,
April 20
Harry,
I
bit the bullet and sold my ARPS on the secondary market. I got 89% on
the dollar. This loss nets down to approximately 9.5 cents per dollar
after tax.
I sold them
on Restricted Stock Network. The transaction went smooth and the money
showed up in my account as promised. I decided that peace of mind was
more important to me than getting par, and I believe, within time, I will
get back to par..
Now it's
behind me and I've put the money to work. There are many great companies
out there with beaten down stock prices. Maybe by the end of the year
I'll make back what I have lost, who knows?
The important factor for me is that my fate is now in my hands, not in
the hands of an industry that has shown its disregard for the retail investor.
If the market clears next week, then I'll be happy for everyone who is
still in it with no regrets. This decision works for me. I'll take the
90 cents for that relief and certainty.
You take
a band-aid off slowly and it hurts for a long time; you take it off fast
and it only hurts for a second.
Thomas J
McCormick
Saturday
April 19
Hello-
I've e-mailed you a few times in the past week - not sure if you got them
or not...
Either way, I wanted to give you the info received from "our guy"
at Merrill Lynch. I've been sending e-mails and making phone calls (even
to his personal cell) the last few weeks and have even mentioned "the
"L" word" (lawyer) - I also went in to the office and spent
most of that time sobbing about how this mess he got us into has put tremendous
stress on my husband (this is true) the result is that he is keeping us
updated regularly. My "badgering" has resulted in calls from
the regional manager of Merrill Lynch and a letter from their compliance
dept that they are looking into the issues we have raised. We will not
let up until we have access to our money again!
.
Anyway, this is "today's update" from our broker:
Lori,
Just wanted to let you know about the other companies and their progress.
We are hopeful that Pimco will be moving towards a solution soon.
· Aberdeen Asset Management announced it would redeem all
$30 million of auction rate securities for its Global Income Fund.
· AllianceBernstein announced it would redeem a portion
of its auction rate securities for its three tax-exempt closed-end funds.
· BlackRock announced it intends to redeem $1.9 billion
of its $9.8 billion in outstanding auction rate securities for certain
taxable and tax-exempt closed-end funds.
· Clough Global Funds announced it would redeem all of its
$720 million of outstanding auction rate securities.
· Eaton Vance Management announced it would redeem $2.7
billion of its $3.3 billion of outstanding taxable auction rate securities.
· Gabelli Funds LLC announced it would redeem all $25 million
of auction rate securities for its Convertible and Income Securities Fund.
· ING Clarion announced it would redeem 22 percent of its
outstanding taxable auction rate securities.
· Nuveen Investments announced an initial stage redemption
of $714 million of its $4.3 billion of outstanding taxable auction rate
securities.
· Tortoise Advisors announced it would redeem $125 million
of its $180 million outstanding auction rate securities.
· Van Kampen announced it would redeem $350 million of the
$700 million in outstanding auction rate securities for its Senior Income
Trust.
I will keep you informed as I find out my information.
Take care,
Ted
Harry, we TRULY do appreciate all of the time and energy that you have
devoted to your site - we read it daily and it has reminded my dear husband
that we are not alone in this nightmare. Your site has also empowered
me to stay on our broker's back.
Sincerely,
Lori Nielsen
Monday
April 15
Dear Harry,
The
Restricted
Securities Trading Network
I
applaud
the great job you are doing on the ARPS issue.
I wanted to relate my own experience. Considering the whole picture, I
decided to get rid of the $300K face value Van Kampen ARPS I was holding,
and to deploy the money elsewhere. I contacted Restricted Securities Trading
Network (restrictedstockpartners.com).
They were helpful and efficient. In about three weeks they came up with
a buyer. After several days negotiation, we settled on 82 cents on the
dollar. The rest was handled through my broker and I got the funds in
two days.
Based on my own experience, I recommend them without qualification. It
was unpleasant to take the loss, but at least now I have the cash to invest
in other things and I feel confident that I will get back to $300K faster
in other things than by staying in the ARPS.
I think the ARPS fight is going to be long and bitter. Even if the funds
were willing to do the right thing (which they show no signs of doing),
there is the question of where they are going to come up with the money
to redeem all of the ARPS. Also, the idea of the ARPS auction process
returning to “normal” is a complete fantasy, and the suggestions
of some of the funds that this might happen in the future is close to
a deliberate lie. Nobody will ever buy these things again at face value.
I had given
some thought to beginning litigation against Van Kampen. There are some
pretty good theories under Massachusetts trust law. However, in the end
the numbers just said “get out”.
Tom Hoffman
Tuesday
April 8
Harry:
Just got
off the phone with a friend a Nuveen who said there is no way Nuveen
will convert their closed end funds to open ended funds, thus providing
liquidity to holders of their preferred securities. They are working
on a solution by refinancing their securities, but the previously mentioned
solution is not being discussed. Madison
Dearborn purchased Nuveen in large part because of the revenue
generated from their closed end business. Further, this friend stated
that investors in closed ends are stickier than the open ended fund
investors. He is certainly feeling the heat from his broker clients
but feels that the hash criticism toward Nuveen is unwarranted. He thinks
the banks that created this market should be doing more to remedy the
situation, I agree. This should give you a sense of the prevailing attitude
at Nuveen. Please withhold my name if you choose to post these comments,
as I do not want to cause any unnecessary problems for my friend.
Best regards,
Steve
Followup
email:
Perhaps
I wasn’t clear, I agree Nuveen is responsible but I think the banks/brokers
that sold the securities are just as responsible. I expressed my frustration
with Nuveen and told my friend he is kidding himself if he does not
think this will permanently damage its reputation. I do not think the
problem will be solved by the issuers dragging their feet, unfortunately
I do not think we will see our money for at least twelve to eighteen
months. He admitted the best and quickest way to a resolution is to
keep up the pressure.
I agree
with just about everything you have said other than what I see as giving
the brokers (I was once one of them) a free pass. I doubt if you bought
your securities directly from Nuveen, rather they were probably purchased
through your broker. An equal amount of pressure needs to be applied
to the brokerage firms who sold this garbage without disclosing the
risks. The fact is your broker had no idea there was this kind of risk
because I suspect he did not read the prospectus. Like so many, he relied
on the expertise of his bond department. The salesman in the bond departments
didn’t understand the risks and in fact thought it was as good
as cash. If I sold you a car with no breaks and the owners manual states
there are no breaks, do I not bear the same level of responsibility
as the manufacturer of the car when you crash your car? I think I must.
The bottom
line is that Nuveen and the rest of the issuers are responsible, as
are the banks and brokerage firms. Like you I hear new stories every
day about how these securities were peddled. A friend has $500k locked
up in Nuveen preferred securities that he purchased from Northern Trust.
His banker told him it was as safe and as liquid as cash. Now he can
not get the money to pay for an addition he is putting on his house.
+++++++++++++
I had
a conversation with a Mr John Isaacson (I don't know the proper spelling
of his name, but that's close phonetically) who said he was a product
manager at Eaton Vance. Exactly what his job position was is unclear
to me. Anyway, I got the standard line of BS - "We're doing everything
we can, we're looking at all options, this is our number one priority,
etc." Of course, he was emphatic that there was no collusion between
EV and the brokerage houses concerning marketing of these instruments,
and of course EV was "Shocked" that anyone would think there
was. Anyway, about the only thing of possible value that came from the
conversation was that his time frame for EVs doing something about the
remaining $5B taxable ARPs would probably be within "weeks rather
than months", but it would probably be only a partial redemption
initially.
I got the impression that the partial redemption (if it occurs) would
be at least 50%. Aside from that, he would not be more specific. Net
result, pretty much zero.
Dennis
W. Kirsch, REM, P. E.
San Antonio TX 78216-2503
DWK1703@yahoo.com
Monday
April 7:
Harry,
Please
keep my communications confidential - I'm fairly certain my employer
would fire me for communicating with you.
I read your recent Nuveen posting with great interest and think you
are spot on with your perspective. The attorney's have taken over. Every
conference call I've listened to is so sterile that I get the feeling
there are 3 speakers on the call surrounded by 10 lawyers.
I have a difficult time buying the argument that their fiduciary responsibility
to the common shareholder prevents them from deleveraging the funds
- why not convert to an open end fund? The common shareholder would
receive an increase in value as the common share discount would disappear
because the funds would trade at their net asset value (NAV). The preferred
shareholder would get their money back. I think the mutual fund sponsors
have squandered an opportunity to be part of the solution as aopposed
to being part of the problem. Well enough of that....
Here's on factoid I found extremely interesting. I received a call from
Nuveen last week (I work for a large Wall Street firm - not UBS) from
a Nuven representative who called specifically to discuss ARPs with
me. This gentleman was more than just a mindless lackey. As I expressed
my disgust with Nuveen (and others) he aggressively tried to portray
Nuveen as doing more than any other company to fix the problem. It's
uncommon to have these types argue -- typically they just take the complaint
and are apologetic. I came away from the experience thining that this
must be part of Nuveen's damage control amongst the broker dealer community.
I wasn't impressed.
As part of our (my business partner and myself) effort to keep up the
pressure on the mutual fund sponsors we have informed every one of
them that the $100 million in mutual funds that we have under management
we are preparing to migrate to exchange traded funds (ETFs).
This whole situation is the single most egregious event I've witnessed
in my 25-years of working on Wall Street.
Keep up the good work.
A broker
at
Oppenheimer writes
to his client, "I think this piece (from Oppenheimer) shows how
hard everyone is working to solve the ARPS liquidity issue. Please let
me know if you have any questions."
The April 4 piece is called "Auction
Rate Securities: An Update."
The client
wrote to me that "my broker sent this to prove how hard the issuers
are working. Since 100 grand of my arps are in Van Kampen it didn't exactly
ease my mind. see Van Kampen, the last entry.
April
7, 2008.
Good website.
Good source of news on any new developments (or lack thereof).
The issuers
need to be pressured as much as possible in order to fix this. One would
think that they would stand to benefit greatly from fixing this problem.
The first issuer that addresses these ARS and unwinds their mess
will look very good compared with the others.
Thanks,
Cody Washburn
April
8, 2008
Posted at BloggingStocks
by Douglas
McIntyre
Filed under: Bad news, Industry, Law, Marketing and advertising, Palm
Inc (PALM)
SEC
to look at auction-rate securities
Yesterday,
Palm (NASDAQ:PALM) had to add $25 million to its losses for last quarter
due to a write down in the value of auction-rate securities. Public
companies are likely to have to do more of that as they report their
first-quarter numbers. A number of individuals will also get brokerage
statements that will show that each dollar they have in the instruments
is now worth as little as 80 cents.
The bonds
produced by the auction-rate market have been considered the equivalent
of cash since the market began in 1985. The auctions were run frequently
by big banks, so getting money in and out of the paper was easy. But,
late last year and early this year, the banks that made the market in
the instruments effectively shut the system down. Part of their role
was to take excess securities in each auction and hold them until the
next set of trading They could sell them then. But, in a tight credit
market, banks did not want to hold the paper on their balance sheets.
Now
the SEC and Financial Industry Regulatory Authority want to know if
brokerage firms and banks marketed the auction-rate securities as cash
equivalents while knowing that they were not.
According to The Wall Street Journal: "Brokers had pitched
auction-rate securities as liquid, super-safe investments with interest
rates slightly superior to those of conventional money-market funds.
Now investors are asking why they weren't warned about the possibility
of failed auctions."
The entire
value of auction-rate investments now in the market is nearly $360 billion.
Most of those securities are not trading now, so companies and individuals
cannot get their money out. That may make for one, very large class
action suit or a series of smaller ones by investors who want their
"cash"
Douglas
A. McIntyre is an editor at 247wallst.com.
+++++++++
To:
Laurence D.Fink
Chairman
Blackrock
40 E. 52 St.
New York, NY., 10022
Martin Cohen
Co-Chairman
Cohen & Steers
280 Park Ave.
New York, N.Y. 10017
John A,
Canning,Jr., Chm.
Madison Dearborn Partners, LLC
Three First National Plaza
Suite 3800
Chicago, Ill., 60602
Mario Gabelli,
Chm.
GAMCO Investors, Inc.
One Corporate Center
Rye, N.Y., 10580-1422
Christopher
Cox, Chm.
SEC
100 F. Street, NE
Washington, D.C. 20549
Andrew Coumo,
NYS Attorney-General
Bureau of Investor Protection and Securities
120 Broadway
New York, N.Y., 10271
Gentlemen,
My retirement plans, both IRA, and non-IRA are frozen in 7-day preferred
funds issued by your organizations at rates that do not reflect the non-tradability
and in fact at rates that are causing my fund's purchasing power to diminish
relative to inflation.
I have listened to conference calls as to how you are attempting to work
this out, but it is clear that a rapid fix is not truly being sought,
as your "Funds" enjoy below market rates, to the detriment of
the preferred investors.
I can
tell you how to solve this mess in a short period…"Allow the
re-set rates to rise until the market recognizes a favorable rate and
watch the trading begin."If these re-set rates were allowed to
rise by one quarter percent every failed auction [Every 7 or 28 days]
you would see trading commence when the rates became commensurate with
the risk. Wouldn't that be fair?, So if you are really serious about
solving the plight of holders of your relatively worthless junk security,
call a meeting of your Preferred B.O.D.'s (Boards of Directors) and
vote to allow the rates to float.
Sincerely,
Peter K.
Bommer
Individual Investor
Franklin Lakes, N.J.
|
