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HomeBigger Than Madoff?
Posted by Larry Doyle on March 30th, 2009 7:56 PM |
Each and every time I read a review of the Auction Rate Preferred Securities market, I come away thinking it was one enormous Ponzi scheme. Let’s review the facts as reported from a just published Bloomberg story of a $4.7 BILLION Settlement by Citigroup and Wachovia with California Auction Rate Investors:
States, student-loan agencies and closed-end mutual funds were the primary issuers of the securities, long-term bonds with interest rates set at weekly or monthly auctions.
1. Issuers have long term projects funded by long term loans or preferred shares. Those loans or shares are the underlying collateral in an auction rate preferred transaction. While people investing in a pure Ponzi scheme believed they were investing in a legitimate money manager’s business, investors in ARPS believed they were investing in a money market fund. The key here is MISREPRESENTATION.
The debt, marketed by bankers as cash equivalents, offered investors yields of a quarter-percentage point or more above conventional money-market funds, indexes show.
2. In both a Ponzi scheme and ARPS, the allure of regular liquidity with solid returns draws new money into the game. With a Ponzi scheme, the returns are better than a benchmark index. With ARPS, the returns were better than other cash alternatives or money market funds. (more…)
Oppy’s Pain in the ARS!!
Posted by Larry Doyle on March 30th, 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? (more…)
Will TARP Screw ARPS Even Tighter?
Posted by Larry Doyle on March 25th, 2009 1:37 PM |
I have written extensively how Wall Street perpetrated a multi-billion dollar scam in the name of Auction Rate Preferred Securities (ARPS). For our newer readers, ARPS are securities funded by longer maturity underlying loans or preferred shares but marketed as short term cash or money market surrogates. How would that work? Wall Street ran very regular (weekly, monthly) auctions to provide liquidity for ARPS holders. The scam worked well until the overall market hit the skids and the Wall Street dealers backed away from providing liquidity to these supposed short term cash/money market instruments.
In the process of reviewing the underlying loans backing these deals, investors became aware of the long term nature of that collateral and thus their investment. While there is overwhelming evidence supporting the gross mismarketing of these securities, the SEC and FINRA have dragged their feet in rectifying this situation. Why? Great question.
I have highlighted that FINRA actually owned $647 million of ARPS as of year end 2006. That news is shocking to whomever I inform. Did FINRA sell their bonds? If so, to whom? When? What price? Did they front run an imploding market?
Could taxpayers via the TARP (Troubled Asset Recovery Program) actually get stuck making investors whole for a scam perpetrated by Wall Street? This fraud gets more bizarre at every turn. Welcome to the world of finance 2009.
I thank PT for sharing with me a story that broke yesterday: (more…)
