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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.

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