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Calling All Auction-Rate Securities Holders: “A Break for 8 Banks” or Did the Fed Violate Your Property Rights?

Posted by Larry Doyle on April 14, 2011 5:48 PM |

New information would seem to implicate the Federal Reserve for violating the property rights of tens of thousands of investors holding auction-rate securities. Could this be true? Let’s navigate.

I have been writing about the nightmare known as auction-rate securities since mid-January 2009. I often pause to reflect on ARS holders whom I have ‘met’ here at Sense on Cents but whom I will never truly know. I think of how their lives have been forever changed and negatively impacted from having been entangled in this ARS web. The pain shared in so many stories is very real.

I have also often thought that somebody or some institution within our government sacrificed the welfare (cash, mental, physical, emotional) of so many tens of thousands of individual ARS holders in order to help our large financial institutions. I shared that opinion in the midst of an interview with PBS last week. (The PBS documentary addressing the ARS travesty should run this summer.)

Today we learn that the Federal Reserve intervened in the midst of an SEC investigation of the ARS scandal in mid-2008 and ‘slowed the horses.’

I thank the various readers who brought this story written by Gretchen Morgenson in today’s New York Times to my attention. Morgenson elevates her standing in the Sense on Cents Hall of Fame in writing, In Financial Crisis, No Prosecution of Top Figures.

In her commentary Morgenson highlights how the government in the personages of a number of individuals felt compelled to save the economy by saving the banks. If individual rights to property had to be trampled in the process, so be it.

Really? Is that how a nation of laws is supposed to work. Let’s navigate and ask some hard questions that demand answers.

Specifically in regard to the ARS debacle, Morgenson writes,

In July 2008, the staff of the S.E.C. received a phone call from Scott G. Alvarez, general counsel at the Federal Reserve in Washington.

The purpose: to discuss an S.E.C. investigation into improprieties by several of the nation’s largest brokerage firms. Their actions had hammered thousands of investors holding the short-term investments known as auction-rate securities.

These investments carry interest rates that reset regularly, usually weekly, in auctions overseen by the brokerage firms that sell them. They were popular among investors because the interest rates they received were slightly higher than what they could earn elsewhere.

For years, companies like UBS and Goldman Sachs operated auctions of these securities, promoting them as highly liquid investments. But by mid-February 2008, as the subprime mortgage crisis began to spread, investors holding hundreds of billions of dollars of these securities could no longer cash them in.

As the S.E.C. investigated these events, several of its officials argued that the banks should make all investors whole on the securities, according to three people with knowledge of the negotiations but who were not authorized to speak publicly, because banks had marketed them as safe investments.

What do we learn? Well, actually we knew most of what I will highlight here but Morgenson confirms:

1. The SEC was increasingly well aware of the widespread improprieties that various banks and brokers engaged in while marketing ARS.

2. The SEC knew it had a major problem and appreciated that ARS investors should be made whole. Remember, the money invested in ARS was investor money. ARS were sold as cash-equivalents.

3. The Wall Street banks and brokers misrepresented ARS as safe, cash-equivalent investments. In any court of law with a rational judge, an ARS case brought by a plaintiff should have been a slam-dunk.

Morgenson highlights that the Federal Reserve’s Scott Alvarez intervened with the SEC in July 2008. At that point the Fed obviously knew that the large Wall Street banks were in serious trouble and would need all the cash they could find to support their rapidly eroding capital base. Screw the ARS holders even if it was their cash.

Seemingly according to Alvarez and the Federal Reserve the banks needed the cash more than the individuals and institutions to whom it belonged.

Wait a second here? Did the Fed effectively abrogate the property rights of these ARS holders and further facilitate a fraud perpetrated by the Wall Street banks and brokers? Call me crazy but it is very obvious that is exactly what the Fed did. Under what statute is the Federal Reserve allowed to do that? Is there any doubt as to who calls the shots in this country?

Do you think when the banks saw the Fed step in like this in mid-2008 that the banks believed the Fed would ultimately bail them out? Lehman’s Dick Fuld certainly believed that and overplayed his hand prior to Lehman’s failure but Bank of America, Citigroup, Goldman and the other banks could likely sense their leverage over the Fed was increasing. Let’s navigate further as Morgenson writes,

But Mr. Alvarez suggested that the S.E.C. soften the proposed terms of the auction-rate settlements. His staff followed up with more calls to the S.E.C., cautioning that banks might run short on capital if they had to pay the many billions of dollars needed to make all auction-rate clients whole, the people briefed on the conversations said. The S.E.C. wound up requiring eight banks to pay back only individual investors. For institutional investors — like pension funds — that bought the securities, the S.E.C. told the banks to make only their “best efforts.”

This shift eased the pain significantly at some of the nation’s biggest banks. For Citigroup, the new terms meant it had to redeem $7 billion in the securities for individual investors — but it was off the hook for about $12 billion owned by institutions. These institutions have subsequently recouped some but not all of their investments. Mr. Alvarez declined to comment, through a spokeswoman.

An S.E.C. spokesman said: “The primary consideration was remedying the alleged wrongdoing and in fashioning that remedy, the emphasis was placed on retail investors because they were suffering the greatest hardship and had the fewest avenues for redress.”

Wow!! So the Fed and the SEC started picking the winners and losers in terms of who got repaid and who did not. Hold on a second. If that is the case, then why three years after the ARS market totally froze and with Wall Street having paid out multiple hundreds of billions in bonuses and compensation over the last few years are there still many thousands of ARS investors waiting to be repaid approximately $100 billion?

Have we further crossed the threshold from trying to save the banks and the economy while violating the rights of the ARS investors to now simply permitting the effective theft of ARS funds by the banks and the brokers?

Get Alvarez back in here and ask him that!! Answer that question!! Get Bernanke and Geithner too. Don’t forget Cuomo!! Answer the question, gentlemen!! Ask Mary Schapiro as well.

I will share that a very knowledgeable individual on this topic wrote to me today and said,

It really is a sensational story even beyond the ARS. I just hope people will take notice. It calls into serious question the ethics of DOJ, Geithner, Cuomo, and the “W” administration. As you know, I was told by a cabinet member that “W” knew of the ARS scandal but didn’t understand it or pursue the deal making.

Let me remind these officials of one simple thing. While you think you may be doing the right thing by our country and our economy, in regard to the ARS nightmare,


Thank you Ms. Morgenson for your superb work on this topic. Thank you also to PBS for the work they are doing on producing the documentary on the ARS debacle.

While this nightmare continues, let us NEVER forget that FINRA, Wall Street’s SRO charged with protecting investors liquidated its own ~$647 million ARS position from its own internal investment portfolio at some point in mid-2007. America still needs to learn the details of that liquidation.

You can not make this stuff up but the fight continues. On behalf of every ARS investor I will keep punchin’ for your benefit.

Questions and comments encouraged and appreciated.

Larry Doyle

Related Commentary
Sense on Cents/ARS
Sense on Cents/Wall Street-Washington Incest
Sense on Cents/Harry Markopolos: “Don’t Trust Your Government”

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Rick

    This administration and the last one as well allowed for the abrogation of property rights in regard to auction rate securities, the Chrysler creditors, homeowners.

    Who else has gotten screwed? Taxpayers!!

  • ARS Holder


    Who is looking out for me?

  • Eddie D

    Hi Larry, On behalf of all Ars victims thanks for keeping the fight alive. I have been stuck in Ars for over 3 yrs and have not seen one penny back from Oppenheimer &co. I have learned a few things about where I stand in the financial world. Nowhere. Only after you have been lied to, manipulated out of your money, and robbed do you find out there is no recorse or protection for you out there. If you happen to get your money back after you were the victim of some scheme it’s only because it served some other purpose or you got lucky. The SEC, FINRA, almost all AG, put NY at the top of the list, and the rest of the governmental agencies exist to protect the financial industry from real damage. They are not there to watch over you and your money. The guise of investor protection allows you to sleep at night believing your money is safe. When you realize that you have been done wrong and turn to one of the angecies mentioned above for help and get treated like your the criminal it hits you how screwed you really are. Anyone still stuck in Ars that attempted to get their money back can attest to that.

    • fred

      Eddie D,

      Your reply is spot on, our gov’t has their priorities ass backwards. As a start, lobbyists should be banned from direct contact with our elected officials; their lobbying efforts should be directed at the voting public. Elected officials should be beholden to the public interest not special interests.


    Buy silver and hide it in the mattress(safe) is the moral I learned in all of this, being an ARPS victim. ( albeit by default got redeemed finally, only after a 3 year nightmare) The so called financial institutions in America are 99.999999% crooks and criminal thieves with the U.S. government by the Elite ( both so-called parties) there only to shield them.

    Get out of US dollars into anything else, be it wheat in a bushel or silver or palladium, or even Mexican pesos, my choice is Canadian $ and silver.

    Don’t even have a “trading” brokerage account as the IRS intends to start spying there now. The US is bankrupt and now they want us little people to bail them out. NO I SAY!

    Just wait one morning they will announce a 40% tax on all IRA distributions. Pay the lower rate now and cash and buy silver coins!

    Wall street is only there to cheat you. Their creed is the capital Income Theory>> Your capital becomes their income, even if they have to steal it.

  • Al

    Thank you, Larry, for continuing to write about the issue of Auction Rate Securities.

    I have a question:

    Who should be responsible for paying back our ARS money?

    A – Broker dealers (Schwab, E*Trade, Oppenheimer, …)
    B – Fund families (Nuveen, Blackrock, …)
    C – ARS market makers (Chase, ?, …)
    D – Fed (taxpayers?)

    Thank you.

    • LD


      I believe those entities which sold the ARS bear the responsibility to make investors whole. This fact does not enter into what penalties should be assessed for related damages.

      To the extent that the larger banks paid fees to downstream firms to distribute the ARS, then those larger firms can and should incur an assessment in making investors whole as well.

      The fund families certainly do not get a pass.

      I see no reason why taxpayers should bear the cost.

  • Big Blue

    Do you think the New York Football Giants also got entangled in the ARS mess? Likely that the corporation building the stadium issued ARS to fund the stadium but now can not roll over the debt.

    Giants Stadium Seeks Information on Auction-Rate Securities Hedging

  • jim

    Larry, thanks for continuing to fight for all ARS holders and keeping the pressure on. Gretchen Morgenson from the NY Times has also been doing a great job with ongoing coverage – maybe we will finally get relief before another year goes by – still waiting for Raymond James to step up to the plate and do the right thing..nothing yet!

  • Ed

    Never before have so many dollars been embezzled, stolen and diverted from so many citizens by so many greedy politicians, regulators, business executives and community organizers.

  • Mikaele

    Thanks Larry!!!!
    What goes on, is not what were told to see. Read some state statutes and these things I were sold are excluded. I would get in more trouble if I stole a candy bar from the local market. Even though I didn’t ask for securities, I can’t get justice for being ripped off.
    Still living in a tent because of OPCO

  • JoanZ

    Been reading you and following your concern for all of us who own ARS….it’s been 3 years and my husband is 81 and I can’t wait for ARPS to be redeemed any longer….I started arbitration against the financial advisor who sold them to me and I am finding it will be a very expensive as I have to get a lawyer since he has one.. The ARPS he sold us are Blackrock and MFS two very active financial rich companies….My question who is responsible to get my money returned…The financial advisor who advised us to purchase them ??? and why can’t Blackrock and MFS give back our funds after 3 years…I have since left the advisor as of course I lost faith in him…it seems I have no choice but to go to arbitration but of course I could lose and it will cost a lot of money as well. What to do??? Thanks for being there and keeping this terrible injustice alive….

    • Kathy

      I think this is an important point. The funds are getting way with murder — maybe literally. They continue to make money off stolen goods.

      BlackRock, Pimco — these giant firms could refinance every stinking penny that they hold of ill-gotten money. But why should they? The government said they could keep it as long as they like.

      Good luck with your arbitration, Joan. I hope you have a good lawyer, and I hope you win.

  • Al

    Aw, what a twisted web you weave here…I am a broker for a major mid level firm that has not redeemed ARS and let me just say – too bad. Stop crying. It’s an investment. It went bad. You lost. Move on. The firms have. My firm is flush with cash and nobody is making us give it back.

    This nonstop crying is emblematic of investors who bitch whenever an investment doesn’t pan out. It’s called Capitalism, folks. You knew that ARS was riksky, we told everybody “This is a high risk venture; proceed with caution.”

    • LD

      You are delusional. Wonder why people do not trust so many within the industry and why volumes are dropping like a rock?

      Well, given that you talk a big game and if you are so firm in your position, then here we go, ….


    • jj

      If you really told your customers “This is a high risk
      venture”, then your customers need to stop crying.

      Apparently you are the only broker who told customers about
      ARS risks.

      Also, I’m curious to know why you mentioned ARS at all to your customers if they were risky. I doubt they asked for ARS on their own.

    • Kathy

      You’re a flat-out liar. We were all told it was “safe as cash,” “just like cash,” a “money market.” No risk, especially pushed on risk-averse investors. If we had ever heard the words “perpetual bonds,” we would have run for the hills.

    • Kathy

      Why do you even bother to post something like this, which is verifiably untrue? ARS were targeted by investment banks toward risk-averse small investors. Read the lawsuits against UBS for the exact strategy.

  • ess

    I don’t get it… Shaprio was head of finra when they cashed in on the ARS… market crashed in 2008, she leaves fina with 9 million in 2008, Blankfein in 2010 made 9 million…
    finra’s That’s what they paid to enable fina to hire and retain the quality of executives needed to carry out effectively FINRA’s regulatory mission.

    now I ask you is this a joke? or what…a bad one at that.

  • JoanZ

    if I was told they were even slightly risking I would never have purchased them…they were sold at good as cash, can get you money when you needed, never mentioned the words Auction Rate Securites, but municipal bonds…sold to us Nov 07 and they froze in Feb.08…It’s been 3 years. To AI….they were not an investment . They were sold as a holding for cash such as a CD….and not only that they did not pay more than a CD….we only needed to hold to tax time which was April of 08…

    • Kathy

      And don’t forget how ARS appeared on your investment bank statement: listed under CASH.

  • WRD

    This story puts an entirely new spin on the definition of ‘banksters.’

    Reading the comments and plight of those scammed by ARS is truly painful. How does our nation let this happen.

  • Kathy

    Seemingly according to Alvarez and the Federal Reserve the banks needed the cash more than the individuals and institutions to whom it belonged.

    After 3 years of fury at having been defrauded, I am more furious than ever.

    I was one of the people who filed a complaint with the SEC. I followed it up. I called them, and got “investigators” to return my calls. They seemed so sincere. They were patsys at best.

    I have wondered for three years how a $360 BILLION fraud so central to the collapse of our economy could go virtually undiscussed. I wondered why Congress held a hearing, and then essentially talked about something else.

    I have my answer, after three years. The fix was in. They had the money, and they decided to keep it, because they could.

    Now someone tell me what I’m supposed to believe in when I hear “United States Of America.” I have lost my trust.

  • Kathy

    And I want to thank Larry for staying with this. Please don’t give up. Nothing less than the full faith and credit of the US government depends on telling these truths.

    I believe the total is $100 billion still stolen. The victims at Oppenheimer & Co., Schwab, other “midstreams” still wait. Many of them are elderly, as we’ve read above. The elderly are disproportionately represented, because risk-averse people were targeted.

    This story must become as as well known as a $336 billion fraud deserves to be. (sorry, typo above, $336 billion, not $360 billion — but hey, who’s counting, when it’s stolen money?)

  • Bill

    An obvious remedy for the ARS scandal, which would have avoided pressure on the banks, would have been to compel the issuers to redeem the ARS.

  • liz


    Thank you so much for your continued coverage of this scandal. It helps to know that 3 years later, I’m not alone in this battle. Pimco hasn’t redeemed a penny of my money since Yr. 2007. Since Invesco’s purchase of Van Kampen there have been no redemptions either (nor no update on when they plan to redeem)

    When is your PBS special airing this summer? How do we go about getting more tv coverage on this issue to call the various funds and brokerage houses on their corruption and theft of our money?

    • LD


      Thank you for your gracious sentiment and I am glad to help provide some moral support and hope that the PBS documentary will lead to pressure on those entities which still have not made investors whole.

      I do not know the exact date of the show but I believe it will be sometime within the next month or two. I will certainly make sure everybody who visits Sense on Cents will be well aware. I am hopeful it will create the national public attention this situation truly deserves.

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