Sense on Cents

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

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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.

This entry was posted on Thursday, April 25th, 2013 at 8:43 AM and is filed under ARPS, ARS, Auction Rate Securities scandal, General. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.