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February 14, 2008-2011: Auction Rate Securities Nightmare Continues

Posted by Larry Doyle on February 14, 2011 7:36 AM |

“Take it, Phil. It’s free money.”

With that statement the saga of noted author Phil Trupp into the world of auction-rate securities commenced. Phil’s nightmare experience with auction-rate securities mimicked that of so many other tens of thousands. Three years to the day after the ARS market totally collapsed, that nightmare in which investors remain unable to access their cash from their supposed cash-alternative investment continues.

Selected financial regulators, such as FINRA, have the balls to promote the success they have had in recouping ARS investors funds. Let the record show, though, that three years to the day when the ARS market froze, approximately 40% of investor funds remain frozen. Their nightmare continues. Who is standing up and fighting for these ARS investors?

What have been the great lessons of the ARS nightmare? So many lessons but, in my opinion, the following truly stand out:

1. Confirmation that the financial industry has no real interest in protecting investors.

2. Regulators are increasingly incapable of protecting investors from those who would prey upon them. (Regular readers are well aware of the fact that the regulator FINRA dumped its own ARS holdings mere months before the market totally froze. I first unearthed the fact that FINRA’s own internal investment portfolio held $647 million ARS on January 16, 2009, the day of Mary Schapiro’s confirmation hearing to be SEC chair. I wrote, Let’s Really Question Ms. Schapiro…) We learned that FINRA dumped these ARS holdings in late April 2009 in a Bloomberg article, which I referenced in writing, “FINRA Is Supposed to Police the Market”.

3. Brokers and others distributing structured financial products, along the lines of ARS, have limited understanding to the true embedded risks in these products.

4. State regulators with few exceptions are ill prepared to defend their citizens from those who sell and market scams such as ARS.

5. The financial media specifically and general media at large have limited willingness to take on an industry as powerful as Wall Street and truly call out the vermin who screwed our brothers and sisters.

I have never owned an ARS but I will never forget those enmeshed in this nightmare. As we continue to bring light to this ARS darkness, the lessons learned for others in our nation are so valuable. If you would like to learn so much of what really happened in the ARS saga, I strongly encourage you to pick up a copy of Phil Trupp’s Ruthless: How Enraged Investors Reclaimed Their Investments and Beat Wall Street.

While 60% of ARS funds have been returned, the refunding of the remaining approximately 40%, that total approximately $130 BILLION (yes, billion with a B!!!), presents a far greater challenge. Why is that and what is my concern?

Auction-rate securities were utilized to fund a wide array of municipal entities, such as hospitals, schools, sewer systems, and the like. I am concerned that in the current environment, these entities will be increasingly challenged to finance operations and may suffer a higher level of default as a result. I do not want to alarm investors who continue to hold out hope for a full return of their cash, but I believe those who continue to hold ARS should definitely determine what entity holds the debt backing your ARS. From there, you should determine the relative financial health of that entity. Are they at risk of default? Are they able to finance ongoing operations? Can they continue to service their debt? These are critically important questions at this juncture.

Be “ruthless” in your pursuit of this information. Do not sit idly by hoping a check will show up in your mail. From there, you will be better prepared to determine what to do with your ARS. Let me know what you learn so collectively all ARS investors may benefit from the knowledge gleaned.

I wish you all the best. Please know I will continually try to bring light to this nightmare and pressure on the industry and regulators on your behalf.

There is real power in sharing information. For those who have meaningful details related to the ARS nightmare and which may help others, please share them here. If you merely want to express your outrage or emotions at specific organizations, feel free to do that as well.

Larry Doyle

Sense on Cents Related Commentary
Sense on Cents/Auction-Rate Securities,

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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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