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Will TARP Screw ARPS Even Tighter?

Posted by Larry Doyle on March 25, 2009 1:37 PM |

screw1I have written extensively how Wall Street perpetrated a multi-billion dollar scam in the name of Auction Rate Preferred Securities (ARPS). For our newer readers, ARPS are securities funded by longer maturity underlying loans or preferred shares but marketed as short term cash or money market surrogates. How would that work? Wall Street ran very regular (weekly, monthly) auctions to provide liquidity for ARPS holders. The scam worked well until the overall market hit the skids and the Wall Street dealers backed away from providing liquidity to these supposed short term cash/money market instruments.

In the process of reviewing the underlying loans backing these deals, investors became aware of the long term nature of that collateral and thus their investment. While there is overwhelming evidence supporting the gross mismarketing of these securities, the SEC and FINRA have dragged their feet in rectifying this situation. Why? Great question.

I have highlighted that FINRA actually owned $647 million of ARPS as of year end 2006. That news is shocking to whomever I inform. Did FINRA sell their bonds? If so, to whom? When? What price? Did they front run an imploding market?

Could taxpayers via the TARP (Troubled Asset Recovery Program) actually get stuck making investors whole for a scam perpetrated by Wall Street? This fraud gets more bizarre at every turn. Welcome to the world of finance 2009.

I thank PT for sharing with me a story that broke yesterday:

Oppenheimer May Seek TARP Funds to Repay Auction-Rate Clients
By Miles Weiss

March 24 (Bloomberg) — Oppenheimer & Co.’s Canadian parent said it may seek money from the U.S. government’s financial- bailout programs to repay brokerage customers facing losses on frozen auction-rate securities.

Oppenheimer Holdings Inc., based in Toronto, asked shareholders to approve an incorporation switch to Delaware, which would make the firm more likely to qualify for the rescue funds, according to a March 13 proxy statement. Money from the Treasury’s Troubled Asset Relief Program “could assist us” in repurchasing securities from clients trapped when the $330 billion auction-rate market seized up, the company said in the filing.

“It takes your breath away,” Anthony Sanders, a finance professor at Arizona State University, said in an interview. “We’re going to ask taxpayers, the people who got hurt by these securities, to pay for buying them back.” Sanders, a former head of mortgage-backed securities research at Deutsche Bank AG, testified before Congress this month on TARP fund use.

Federal and state regulators forced companies including New York-based Citigroup Inc. and UBS AG of Zurich to buy back more than $50 billion of auction-rate securities that plunged in value in February 2008 after underwriters pulled out of the market. Oppenheimer Holdings, whose retail clients were stuck with about $930 million of the debt, said in a March 3 regulatory filing that repurchasing the securities “would likely have a material adverse effect” on its financial condition.

Brian Maddox, a spokesman for the company, said getting TARP money is only one reason to reincorporate in the U.S. The move also would simplify its corporate structure and provide greater access to U.S. capital markets.

‘No Assurance’

“We have no assurance that we would qualify for” U.S. bailout funds, Oppenheimer Holdings said in the proxy statement, “nor have we determined that we would participate in any of these programs.”

Oppenheimer Holdings, formerly Fahnestock Viner Holdings Inc., owns Oppenheimer & Co., which is already incorporated in Delaware. The New York-based unit’s roots go back to the late Leon Levy and Jack Nash, founders of the hedge fund Odyssey Partners LP. The company is separate from OppenheimerFunds Inc., a unit of Massachusetts Mutual Life Insurance Co. of Springfield, Massachusetts.

Auction-rate securities typically are long-term bonds or preferred shares whose interest rates are set at weekly or monthly auctions run by broker-dealers. Wall Street firms marketed the securities as a cash equivalent that offered higher yields than conventional money-market funds.

Massachusetts Action

Many investors got stuck holding auction-rate securities when outside bidders disappeared and investment banks that ran the auctions refused to buy the securities.

After getting underwriters such as Citigroup to buy back the securities at face value, state regulators began focusing on banks and brokerages that resold the auction-rate debt.

In November, the Massachusetts Securities Division filed an administrative action seeking to compel Oppenheimer & Co. to make state residents whole on as much as $56 million of auction- rate securities.

The state said Oppenheimer & Co. promoted auction-rate securities to clients as Chief Executive Officer Albert Lowenthal and members of management sold their personal holdings amid the market’s decline. Oppenheimer Holdings denied the allegations at the time and said it planned to “vigorously” defend the brokerage unit.

Arbitration Claims

A Financial Industry Regulatory Authority arbitration panel last month ordered Credit Suisse Securities USA LLC of New York to pay some $400 million in fees to resolve claims it misled STMicroelectronics NV into buying auction-rate securities. At the time, experts said it could lead to a spate of other arbitration claims.

Oppenheimer & Co. was notified last month that two clients, US Airways Group Inc. and Hansen Beverage Co., had filed arbitration claims with FINRA, according to the firm’s March 3 annual report. US Airways, the Tempe, Arizona-based airline, wants Oppenheimer & Co. to buy back $250 million in auction-rate securities. Hansen Beverage is seeking to have a $60 million purchase rescinded.

“Many of our competitors have redeemed auction-rate securities from their customers and our failure to have done so presents a significant issue for us with our clients and regulators,” Oppenheimer Holdings said in its proxy statement.

Programs such as TARP, “might under certain circumstances provide the liquidity necessary” to redeem auction-rate securities held by clients.

Daniel Cravens, a spokesman for US Airways, declined to comment on the airline’s arbitration claim. Heather Marsh, an attorney at Hansen Natural Corp. of Corona, California, the parent company of Hansen Beverage, didn’t immediately return a call.

If TARP funds are used to benefit Oppenheimer or any other entity, it is the equivalent of all taxpayers supporting Wall Street firms in the perpetration of a fraud.

For anybody interested in my total coverage of this ARPS story, I provide the following:

Let’s Really Question Ms. Schapiro

Riveting Testimony From a Great American, Harry Markopolos

Warden Grows Veggies With Prisoners

Turn That Screw a Little Tighter


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