More Fun with Auction Rate Securities

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American banks will many times sell products that devastate their customer’s financial health. Auction rate securities are one such product.

Here is a real world example. Oppenheimer and Company, Inc., a broker-dealer, agreed to restore $31 million to retail investors holding illiquid auction rate securities. Fourteen broker-dealers have settled with the New York Attorney General, Andrew Cuomo. These brokers have agreed to buyback $60 billion of auction rate securities from retail customers. A listing of the banks and broker-dealers can be found at the end of this post.

The New York Attorney General’s nationwide investigation “into the auction rate securities market found that auction rate securities had been marketed and sold as safe, cash-equivalent products, when in fact they faced increasing liquidity risk.”

What does this mean to you? Banks and broker-dealers care about making money and will do anything to acquire it. They will sell you products ill suited to your investment goals. Banks should have known that auction rate securities carried more risk than money market investments. Yet they sold them to retail and corporate clients as cash-equivalent products. Were the banks ignorant and incompetent as regards the nature of auction rate securities? Did the banks know the risks of auction rate securities and decide to sell them to unsuspecting clients as cash-equivalent products anyway? You can decide for yourself.

Realize that the settlement applied to retail customers only. Corporate customers have experienced great losses associated with auction rate securities. Corporate customers were expected to know the risks involved and will not receive settlements. How does this make you feel about the competence of financial professionals in some of America’s largest corporations?

Some corporations have sued the banks to recover losses from auction rate security investments (WSJ January 2, 2010). They will not receive a settlement. Corporate CEOs, CFOs, and treasurers are expected to know what their doing when creating and implementing an investment policy. Their investment in auction rate securities demonstrates their ignorance and incompetence regarding investment products.

Please remember that all these banks and their employees are still providing investment advice. The banks paid a fine but they are still able to dispense potentially devastating investment advice. You have been warned. This is how business is now done in America.

Scumbag Banks that sold auction rate securities as “cash-equivalent products”
Oppenheimer and Company, Inc.
Banc of America Securities LLC and Banc of America Investment Services, Inc.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Deutsche Bank Securities Inc.
Fidelity Investments
Goldman Sachs & Co.
JPMorgan Chase & Co.
Merrill Lynch
Pierce, Fenner & Smith Inc.
Morgan Stanley & Co. Inc. and RBC Capital Markets Corporation
TD Ameritrade, Inc.
UBS Securities LLC and UBS Financial Services, Inc.
Wachovia Securities LLC and Wachovia Capital Markets Inc.

Source: Website of the New York Attorney General. Story reported on February 24, 2010.