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ARS ‘Penalty Does Not Fit the Crime’ or Why I Am Becoming a Libertarian

Posted by Larry Doyle on February 9, 2011 7:38 AM |

Why is it that so many people in our nation do not trust our government, our media, and our banking system?

In my opinion, America continues to look and search for people and programs that truly represent their interests. In the course of a conversation yesterday with a former colleague, he spoke cogently as to why he is moving toward being a libertarian and why he believes so many others are as well. I found myself agreeing with him on so many fronts.  

When the aforementioned entities show themselves to be aligned with each other much more than the citizens of our nation, people will shun them with a passion. I believe that reality is occurring currently and will continue to accelerate as we move forward.

Along these lines, I ask the question as to why financial frauds and improprieties in our financial system not only persist but seem to grow larger?  When “the penalty does not fit the crime,” behaviors not only do not change but grow more firmly entrenched. I believe that dynamic has played out in Wall Street’s greatest scam of all, the distribution of auction-rate securities.

The $330 BILLION ARS market failed in early 2008. In the course of the first year, approximately half of investors’ funds — sold as cash equivalents — were returned. In the last two years, however, the pace of those refunds has slowed markedly and approximately $125 BILLION ARS remain outstanding. Why haven’t more ARS been refunded? Why haven’t more financial executives involved in the distribution of ARS been held to account? Why do financial regulators and law enforcement agents indict and prosecute those involved in multi-million dollar insider trading rings while bank executives involved in the multi-billion dollar scams go largely unpunished? Why, why, why?

Why? Because the financial industry has largely been able to buy its own regulation and oversight. As a result, punishments do not really fit the crimes.  I see further evidence of this once again in a fine recently paid by Union Bank of Switzerland. Bloomberg highlighted this story yesterday in writing, UBS Buys Back $1.5 Billion in Auction-Rate Securities in New Jersey Pact:

Two UBS AG units resolved allegations that they failed to fully disclose the risks of auction rate securities sold in New Jersey by agreeing to a $1.5 billion buyback, state Attorney General Paula T. Dow said.

“Disclosure of material facts to the investing public is not only the law, but is necessary for consumers to make fully informed decisions about investing their hard-earned money,” Dow said in a statement announcing the agreement.

In addition to the repurchases by UBS Securities LLC and UBS Financial Services Inc., Zurich-based UBS will pay New Jersey $3.7 million in civil penalties, representing the state’s pro rata share of an agreement negotiated by a multistate task force of regulators, Dow said.

So let’s get this straight. UBS, just like every other entity involved in the distribution of ARS, fails to uphold the law by “disclosing material facts to the investing public” and they walk away with a fine which represents .25% of the proceeds involved. .25%!! Yes, a quarter of one per cent. What do you think the fees generated by UBS were on these ARS? I will tell you this . . . they were certainly more than .25%. Who at UBS is shown the door? Who is indicted and prosecuted for failing to supervise? What about that?

Do you think the financial engineers working on other highly structured products encompassing unknown or uncertain risks would be dissuaded by a fine of .25%?

Why is the libertarian movement gaining momentum?

Right here.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own and not those of Greenwich Investment Management. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Kathy

    I appreciate your ongoing attention to a huge fraud, one that has disproportionately affected small investors. Three years after the industry collapsed the market — in my opinion, deliberately, as described in Phil Trupp’s book “Ruthless” — small investors at mid-stream firms like Oppenheimer & Co. have effectively lost their money.

    No one is doing anything about it. Not the SEC. Not even the state regulators, who championed ARS victims in the first two years.

    What I don’t know is whether libertarian policies will help. What we need is effective regulation by government officials beholden to no one. Let’s start with campaign law revision, and dream from there!

  • LD


    The reason for my stating that I am becoming a Libertarian is for the very simple reason that both parties have shown themselves incapable of implementing effective regulation as they are both beholden to the financial industry.

    Yes, campaign finance reform is a great start.

    Live free or die!!

  • coe

    Freedom from ineffective, clueless, self-aggrandizing, conflicted, and venal government representation is certainly something worth working toward…my fear is captured in the title of the old song by the group called Cream, “We’re Going Wrong”…It is simply stunning that $150B of primarily retail pain is locked away in the disgraceful inertia around the ARS scandal…How can the leaders and Boards of Directors of companies like Oppenheimer and E*TRADE and the rest of the usual suspects sleep at night? I guess their compensation packages can readily purchase the medicine to assuage any feelings of responsibility…the polarization in this country is dangerous – of that there is no doubt…yet, until each of us draws from within and acts ethically and keeps the well-being of the community in mind, all organizations will fall prey to self-interested behavior – I also happen to think we do have a chance in this great nation of ours to work for change – throw out the politicians who are the scoundrels, boycott the businesses that misbehave, scream the truth from the rooftops…somehow, LD, I think it has to happen by battling inch by inch, issue by issue…there are all sorts of lessons to be learned from the economics of the Euro zone, from the unrest in Egypt, from the troubles in Africa, and from the future challenges from the BRIC block…It is about leadership for sure, and on all levels…25 bps fine – a travesty of a mockery of a sham – keep punching, LD…you are getting through!

  • All political distinctions are rife with superficial/artificial aspirations. Realpolitik always wins.

    The ARS debacle remains emblematic of Wall Street’s deeply entrenched corruption and thievery. Which is why the U.S. Department of Justice is now jumping into the fray. Attorney General Eric Holder and his team are aware of the absurdly inappropriate fines being handed out to companies such as UBS. Holder and a hand-picked FBI team are now seeking to circumvent the usual civil wrist slapping of financial wrongdoers and has instead been the given goal of imposing stiff criminal penalties on securities violators.

    Holder’s move is is a delicate one, the outlines of which can be traced to the recent FBI insider trading probes. But inside trading is merely a test case. Holder intends to expand his operations, and he has vowed that financial vampires, when convicted, will do “hard time,” as opposed to the “Club Fed” treatment afford to swindlers such as Madoff.

    There will be plenty of opposition to Holder’s plans and actions, mostly from a Congress tied to Wall Street money. But we should applaud him as someone in government who is fed up and willing to take chances.

    But even if Holder succeeds in jailing the worst offenders, how will we erase fundamental greed? After all, we give hard time to murderer; the death penalty is still enforced in many states, yet the murder rate and gun violence continue to climb year after year, enabled, at least in part, by the National Rifle Association, an organization which openly refers to itself as Libertarian.

    Wall Street has always been a hotbed of greed and corruption. It might be argued that its culture inherently draws the wrong people of all political stripes. The Street’s major players represent an entrenched, institutionalized subculture of crime abetted by an uninformed public and a government which benefits from the largess of outfits like UBS, GS, BAC, Citi, and a community of apolitical and amoral hedge funds, mortgage lenders, etc.

    It may be argued that in face of this entrenched corruption Eric Holder is tilting at windmills. But let’s see what happens when the first group of inside traders are fitted with striped suits at maximum security prisons.

    We should recall that the French Revolution took a very long time to evolve into a civil society. It make take even longer to bring a semblance of civilization, fairness and decency to our rapacious financial community.

  • shaina


    I love this book, very resourceful!!! Thank you Mr. Trupp for opening up our eyes!

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