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Oppy’s Pain in the ARS!!

Posted by Larry Doyle on March 30, 2009 12:46 PM |

There is little doubt the American populace is getting increasingly frustrated with the pace and level of government bailouts. Are we about to literally “go over the line?”

Is the United States about to allow a Canadian company to incorporate itself here in the U.S. for the purpose of receiving a bailout? Is this the height of hypocrisy or what?

I refer to the fact that Oppenheimer Holdings, a Toronto based investment company involved in the travesty surrounding the sale of ARS (Auction Rate Securities) is looking to incorporate in Delaware in order to receive federal bailout funds. From Bloomberg’s If Oppenheimer Gets Handout, Blame Canada:

Oppenheimer “is exploring becoming a U.S. corporation and a U.S. bank holding company in order to help resolve the ARS problem for our clients,” the company said in its annual letter to shareholders released last week. (Toronto’s Oppenheimer & Co. isn’t related to OppenheimerFunds Inc., a unit of Massachusetts Mutual Life Insurance Co.)

The “ARS problem,” of course, is the nasty pickle Oppenheimer has gotten itself into with customers who hold $929.6 million in auction-rate securities, the ill-fated investments that flat-lined in February 2008. The auction-rate meltdown left investors at Oppenheimer and many of its Wall Street brethren unable to liquidate positions that had been marketed as, well, pretty darned liquid, to customers who often had no clue about the product’s risks.

Why should U.S. taxpayers bail out an investment company that improperly marketed securities? Why shouldn’t Oppenheimer, and every other investment manager or bank that improperly – if not fraudulently – marketed ARPS, be forced to make their own investors whole?

Some managers did make some investors whole. Meanwhile, there are still thousands of investors holding in excess of $100 billion in ARPS also looking to be made whole. What about them? Why has the Madoff situation, a $60 billion scam, received extensive coverage while this hundred billion dollar scam gets very limited coverage? Kudos to Bloomberg for shedding light on it.

While some fund managers did not actually underwrite these deals but were merely part of a “selling group,” they still need to be held accountable. Some fund managers get this but seemingly not Oppenheimer. Bloomberg writes how some mangers have caved to investor pressure:

Downstreamers said that they weren’t responsible for the mess to the same degree as underwriters like Merrill and Citigroup were. Hey, all they did was sell the stuff, not underwrite it. Over time, though, some downstreamers such as Fidelity Investments bowed to pressure and made customers whole, which increasingly makes Oppenheimer look the part of the piker.

And don’t think they don’t know it. If ARS markets stay frozen, more client claims may come, the company said in its annual report filed with regulators on March 3. Worse, it could mean “a competitive disadvantage” now that competitors have settled similar litigation with clients, Oppenheimer wrote.

Obviously Oppenheimer is feeling the pressure. As that heat rises, a move to the good old U.S. of A is looking more and more appealing:

Come one, come all, to America. Because it is only here that you can peddle a product that blows up on customers, fight the regulators who tell you to give customers their money back, and then rush to the government breadlines when you see Uncle Sam whipping out his checkbook. Presto, before you know it, taxpayers are paying one another back for money they lost at the hands of their trusty brokers — even if the brokers work for companies based outside the munificent U.S.A.

Let’s not be too generous, though, to the regulators. As I have written here extensively, FINRA owned $647 million in ARPS and has turned its back on many investors who remain with ARPS positions.


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