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ARS Update April 2013: The Nightmare Continues

Posted by Larry Doyle on April 25, 2013 8:43 AM |

Five plus years after the meltdown of the largest fraud ever perpetrated on Wall Street, and the nightmare that defines the world of auction-rate securities goes on.

While Wall Street, Washington, and the media would very much like to leave the pain encompassing the ARS market largely in the rear view mirror, for many individuals who still hold on to the hope that they may ultimately get repaid in full from these widely distributed “cash-surrogate” instruments, the pain and anxiety remain front and center.

I continue to hear regularly from many individual ARS holders.

Not that anybody needs further reason to know that individual investors on Wall Street are at an enormous disadvantage in the face of captured and corrupted regulators and institutions that possess more information, but a recent piece of data I unearthed while working on my upcoming book (think I might be able to get Mary Schapiro to come to a book signing and autograph some copies!!??) speaks volumes to this point. 

Let’s navigate and review what former FINRA CEO and SEC Chairman Mary Schapiro had to say when questioned in Congressional testimony on the topic of the $336 billion ARS market:

“Per remarks you made in October of 2008,

“In 2006, institutional investors owned abut 80 per cent of auction-rate securities. But by the end of 2007, the number had plummeted to 30 per cent. It’s clear that many institutions understood the risk in terms of their own investments, but the question is: was that information freely shared with other investors? There was both a legal and ethical obligation to do so.”

So institutions with the help of Wall Street dealers unload approximately $160 billion of ARS onto Mom and Pop in the space of a year and the market regulators at the SEC and FINRA allowed it to happen. Not only that but as we know FINRA itself unloaded ~$650 million ARS in that same time frame.

Yet FINRA’s spokesman at the time Herb Perone had the balls to issue what certainly appears to be a bold-faced lie when he stated shortly thereafter that FINRA did not know the auctions were poised to weaken. Right!!

The street works feverishly for a good year to unload $160 billion ARS onto individual investors, FINRA tacks on their own $650 million in ARS but they did not know the market was poised to implode. Is there really any surprise why people do not believe anything that comes out of the mouths of our regulators?

How does FINRA and the SEC get away with this? Well, when NOBODY atop Capitol Hill holds them accountable . . .
Yet countless individuals continue to be stressed and strangled by this ARS market. I hear from many of these investors regularly. Very often their anger is directed at the folks at Oppenheimer. What is new over there?

Aside from recently losing an ARS case brought by US Airways, the firm was also recently downgraded by Standard & Poor’s to a “B” rating from “B+”. In the release, S&P referenced the company’s legal and regulatory settlements requiring the firm to buy back considerable amounts of ARS.

In what appears to be either an interesting sleight of hand, a mathematically challenged reporter, or perhaps just an outright lie, S&P also highlighted that “the remaining ARS clients hold has been reduced by 90% since the market failed in February 2008.” How does that match up with the fact that the company reports that at calendar year end 2012 it had repurchased $77.1 million in ARS and clients still had $212.9 million ARS outstanding?

My “sense on cents” intuition would indicate to me that the firm is trying to put a good face on what is an ongoing nightmare. Maybe somebody from the firm can contact me and explain this new math. They are telling the truth, aren’t they?

Even better, why don’t they just issue some debt or equity and repay the remaining ARS hostages back at par?

Any ARS investors out there who have and care to share recent knowledge or developments, I know many investors would welcome hearing from you. The simple fact is five plus years after this disaster, $50 plus billion in ARS remain outstanding.

Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no 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.

  • Randee

    The ARS mess is the most disgusting event to occur on Wall St. and that includes Madoff. So many more people were screwed by ARS and yet aside from this site do you hear anything about it. Oppenheimer is a tawdry, awful firm that apparently lies and if it keeps getting downgraded will eventually be out of business. Why the Oppenheimers did not go after the big issuers in court is beyond me.

  • Bill

    Those who went the litigation route have entered tolling agreements so the statute of limitations would not run out and there has been no activity for quite a while. Others were able to liquidate sometimes at substantial discounts. I have one remaining position paying at the penalty rate which is advantageous to me. Someone is asleep as this issue should be called.

  • mikaele

    Thanks again LD!!
    Off the record because I didn’t ask, our state sec invest. doesn’t know what to do. understands what happened and because of Cuomo’ settlement and me selling on secondary I remain in ARPS limbo land. They are powers too big.
    Aloha

  • Don

    Larry

    As an ARPS holder (via Oppenheimer), I’ve been reading your posts on it for a while. With respect to this post, I think I have an answer for the confusing math you identified.

    When Opp/S&P says Opp clients have been paid out of 90% of their positions, I believe Opp is taking credit for the redemptions done by the original issuers such as Nuveen, Invesco, Blackrock, etc.

    In my own experience, I have had substantial pay-outs from these issuers. I have received nothing from Opp in terms of buybacks, although they can certainly claim I have fewer ARPS left in my account

    As a side note you may find interesting, a few years ago I had a conversation with some senior PIMCO guys. While I don’t hold any of their ARPS the conversation turned to the subject.

    Their view was it was cheap money and they would never redeem unless they had to.

    While it may cost me a few bps, I will put money back with Nuveen and others that I think acted responsibly, but I will never touch a PIMCO product knowing how mercenary they can be towards some of their stakeholders






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