Polis23 - Illegale beleggingsfondsen

The WSJ has a nice article summarizing the auction-rate security mess, along with a short primer on what auction rate securities are, as well as how they are bought and sold through auction. Definitely worth the read for those interested in what has recently become a larger Wall Street focus.

Auction-rate securities are essentially a form of debt issued by municipalities, student-loan organizations, and others interested in borrowing for the long-term, but doing so at short-term interest rates. How is this achieved? By auction, of course. Every 7, 28, or 35 days, depending on the product, banks will hold auctions in what amounts to a resetting of the interest rates as the securities are passed on to the new security holders (or reset for existing holders that want to stay long).

As reported, UBS (UBS), Merrill Lynch (MER), and Citigroup (C) alone have committed to buying back more than $36 billion of the securities. The problem that each of these companies find themselves in, among others, is that at times the auction-rate securities may have been promoted as being similar to short-term CDs, but with higher returns. Unfortunately, as credit problems increased, the auction-rate security market also began to freeze up, making it difficult for these securities to be re-priced. Many investors were left with bank statements that simply listed a "null" placeholder where their security prices were once quoted, implying that liquidity was poor enough that a reliable price could not be provided.

To complicate matters, apparently the liquidity issue has persisted for a while, even as more securities were being marketed and sold, causing many banks to prop-up the market by issuing their own bids. The WSJ reports that UBS alone may have submitted bids in just under 70% of its auctions between January 2006 to February 2008. Allegations against Merrill Lynch imply that it gave the false impression that demand was high, driven in part by dark pools of liquidity in the auction market (see previous posts here, here, here, and here on dark pools of liquidity).

As recourse, and a way for UBS to hopefully reduced the intensity of this recent black eye (how many eyes does UBS even have?), the company has agreed to buy back from investors nearly $19 billion of auction-rate securities, starting with individuals and charities this October, all the way to institutional clients in mid-2010. It is worth noting that while UBS plans to start buying back securities in October, the actual purchase could take longer.

As reported in a Barron's article back in May, and discussed in a previous post, how much money investors get back from auction-rate securities depends on who originally issued the securities. The investors of auction-rate securities sold by a municipality or a closed-end taxable mutual fund have already received their money or will be receiving it soon. Investors in closed-end tax-free municipal-bond funds will probably have to wait a little longer. If you or one of your investment funds purchased auction-rate securities sold by a CDO or student-loan trust, well, you may be waiting a while to get your money back, possibly many years.

The auction-rate security issues once again highlight the need for better due diligence and a better understanding of risk. As we often forget, higher reward is almost always accompanied by higher risk - I dare say 100% of the time, but someone will always find exceptions in an inefficient market. If you look for more return, you need to understand the risk. Auction-rate securities based on CDOs should have raised red flags for some. Deception is one thing, but offering a blind-eye is another.

Furthermore, the way we talk about risk also probably needs to change. For instance, have you ever noticed that we seem to be having "100 year floods" every other year, or how the metaphorical "perfect storm", whether in finance, insurance, or other fields seems to occur with more regularity? Anecdotal? Sure. But eventually simply stating that the recent event was the prefect storm or a once-in-a-lifetime event will not cut it. There are only so many times that you can cry wolf before no one cares about the real danger lurking in the woods. Maybe auction-rate securities and their current issues provide another one of those warning calls we need to listen to, regardless of its eventual magnitude and implications in the current market.

by: David Enke posted on: August 10, 2008 on seekingalpha.com

The Wall Street Journal's “UBS to Pay $19 Billion As Auction Mess Hits Wall Street” reports on state attorneys general entering into settlements with banks on auction rate securities [ARS]. UBS (UBS), Merrill Lynch (MER) and Citigroup (C) have agreed to buy back more than $36B,as well as pay fines. The process will start with individuals and charities in October and institutional clients in mid 2010. Over 100,000 individuals were included in the more than $330B sold.

The basis of the complaint is that investors were misled about the safety and liquidity of ARS. While the market was drying up, the banks temporarily stepped in to support the auctions. This gave the illusion of liquidity as the bank tried to unload their inventory through their retail channels. Commissions for the product were increased at many firms, and a Merrill Lynch analyst’s dire warning was enhanced to say only ARS offered “higher returns in exchange for less liquidity.” Apparently, even this subtle warning was buried so deep in Frances Constable’s report that no one found it. Merrill Lynch even categorized ARS as “other cash” on clients’ brokerage statements.

In "Auction Rate Bonds are not Cash Equivalents" and "Retail Investors stuck with Auction Rate Securities", I wrote about how investors should have known that they actually purchased long term bonds. And in "Mechanics of Auction Rate Securities", I explained the convoluted market for ARS almost guarantees liquidity crunches from time to time. So how were so many smart people lolled into complacency? I think the answers are greed and laziness.

Sure, the banks consciously tried to hide the liquidity risks, and the reduced monoline ratings accentuated the problems. But investors should have understood the maturity of the bonds they purchased, and the market for trading them. Retail investors, charities, and small and medium sized business are very lucky to be bailed out. It is difficult to know how large businesses will fare. Those being helped should keep in mind that the only reason they are being helped is the desecration the ARS caused public finance. The attorneys general had little sympathy for investors.

This scandal reminds me of the analysts’ scandal emanating from the dot-com crash. In both cases the investors knew they were being taken for a ride, but greed and laziness prevailed. The only sympathy I have for ARS investors is that the Alan Greenspan era made many desperate for yield. Many people pushed further out on the risk scale then they might have been comfortable with. The banks soothed their fears and they say took advantage of them.

Why did the banks lose and have to buyback the ARS, while they came off relatively unscathed in the dot-com bust? The difference here is that ARS trade in a captive market. When I bought municipal bond unit trusts in the 1980’s, I knew that was also a captive market. But no one told me it was just like cash. Captive markets present disclosure risks to their sponsors.
by: Michael Steinberg posted on: August 10, 2008 on seekingalpha.com

New York, August 8: Citigroup and Merrill Lynch said they would buy back billions of dollars of illiquid auction-rate securities from retail clients, and Citigroup agreed to pay a $100 million fine to settle charges it fraudulently misled investors about the debt's risk.

The announcements could pave the way for settlements or buybacks by UBS AG and other financial companies whose clients own such debt, following the February meltdown of the $330 billion auction-rate market.

Citigroup agreed to buy back about $7.5 billion of the debt, as part of settlements with New York Attorney General Andrew Cuomo and the US Securities and Exchange Commission.

Meanwhile, after US markets closed, Merrill offered for a one-year period beginning Jan. 15, 2009 to buy back auction-rate debt it sold to retail clients. It estimated that its clients hold $12 billion of the debt.

Both companies offered to buy back the debt at face value.

For Citigroup, which said it may face a $500 million pre-tax loss, Thursday's settlement will hinder efforts by Chief Executive Vikram Pandit to cut costs and restore profitability following $17.4 billion of losses in the last three quarters.

"It's really a face-saving attempt," said Brian Yelvington, an analyst at CreditSights Inc in New York, referring to Citigroup. "Other banks that have sponsored these programs could be under pressure to do something similar."

Merrill's buyback offer, meanwhile, comes after a year when the bank and brokerage suffered $19.2 billion of losses.

Denise Voigt Crawford, the Texas securities commissioner, late on Thursday said state regulators are examining auction-rate practices of 11 banks and brokerages in addition to Citigroup, and that she expects more settlements soon.

Richard Blumenthal, Connecticut's attorney general, in an interview said he hoped the Citigroup settlement "sends a very compelling message that others should follow Citigroup's example and do the right thing."

Auction-rate debt has interest rates that reset through periodic auctions, typically held every seven, 28 or 35 days.

Once thought safe, much of the market has been frozen since Wall Street brokerages stopped supporting the debt. This led to higher borrowing costs for state and local governments, hurting taxpayers.

Late on Thursday, Bank of America Corp, the largest US retail bank, said it received subpoenas from federal and state regulators over auction-rate debt.

Meanwhile, STMicroelectronics NV this week sued Credit Suisse Group AG, saying the bank invested $450 million of the chipmaker's cash in auction-rate debt without permission. A Credit Suisse spokesman declined to comment.

DOING CONSUMERS JUSTICE

Regulators said Citigroup would buy back auction-rate debt from about 40,000 retail customers, charities and small or mid-sized businesses by Nov. 5. Citigroup agreed to fully reimburse retail investors who sold the debt at a loss.

The SEC said the bank would also use its "best efforts" to liquidate, by the end of 2009, an additional $12 billion of the debt held by more than 2,600 institutional investors.

New York and the North American Securities Administrators Association will split Citigroup's $100 million fine.

Cuomo had accused Citigroup of wrongly telling customers the debt was safe, liquid and the equivalent of cash.

"This is not just a Wall Street issue, this is a Main Street issue," Cuomo said at a news conference.

He said Thursday's settlement "will help restore confidence in this market," and added, "It does justice for consumers."

Merrill said its buyback covers more than 30,000 clients.

"Our clients have been caught in an unprecedented liquidity crisis," Chief Executive John Thain said. "We are solving it by giving them the option of selling their positions to us."

Massachusetts' top securities regulator, William Galvin, plans to continue pursuing his lawsuit accusing Merrill of fraud in marketing the debt, a spokesman said.

Cuomo said he would review Merrill's plan.

New York and Massachusetts also have accused UBS of fraud in marketing the debt. UBS spokeswoman Karina Byrne said the Swiss bank was working with regulators toward "a comprehensive solution" for investors in auction-rate debt.

Citigroup and Merrill said their buyback offers would not materially affect capital. Citigroup said it has liquidated more than half its retail clients' auction-rate holdings, while Merrill said it has liquidated more than 40 per cent.

The settlement by Citigroup follows costly and embarrassing scandals the bank faced earlier this decade, including inflated stock research, its Japanese private bank, a rogue bond trade in Europe, and the collapses of Enron Corp and WorldCom Inc.

In Thursday trading on the New York Stock Exchange, Citigroup shares closed down $1.23 at $18.47, while Merrill fell $2.40, or 8.4 per cent, to $26.10.

JUST ONE MORE PROBLEM

Citigroup has incurred more than $58 billion of write-downs and credit losses since mid-2007 as the housing market deteriorated and capital markets seized up, causing losses on subprime mortgages and other risky debt.

"It's just one more product that's blown up in the face of the investment banks," said William Smith, president of Smith Asset Management Inc in New York. "The problem is they've got to take all these billions of dollars on the balance sheet."

Citigroup was the largest underwriter of auction-rate debt in all but one year this decade, Thomson Financial data show. Merrill ranked among the top 10 underwriters each year.

Analysts said the auction-rate market might struggle to regain its equilibrium.
"You used to just see the rating and take things for granted," said William Bellamy, director of fixed income at Thompson, Siegel & Walmsley in Richmond, Virginia. "People have to do a little bit more due diligence."
Reuters
Posted online: Friday , August 08, 2008 at 10:54 hrs on financialexpress.com

NEW YORK
Swiss banking giant UBS AG agreed Friday to buy back nearly $20 billion in auction-rate securities from investors, a day after Citigroup Inc. reached a similar settlement with regulators for $7 billion as part of a wide-ranging investigation into the collapse of the market for the bond-like investments.

UBS will repurchase all $18.6 billion of the securities it sold and pay a fine of $150 million as part of an investigation led by New York Attorney General Andrew Cuomo into whether banks misled customers about the safety of the securities.

Cuomo said in an interview that his investigation into the troubled securities is continuing. Of the two settlements reached in as many days with UBS and Citigroup, he said: "We tend to start with the largest because that can make the greatest impact."

As part of its settlement announced Thursday, Citigroup will also pay fines of $100 million.

The bond-like investments were widely held by many institutional and individual investors and were seen as highly liquid, money market-like investments. However the market for them collapsed in February amid the downturn in the broader credit markets.

The $330 billion auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, except the interest rates were reset at regular auctions, some as frequently as once a week. A number of companies invested in the securities because they could treat their holdings almost like cash.

Regulators have been investigating the collapse in the market to determine who was responsible for its demise and how to make investors whole.

"What we've established is the institutions are responsible," Cuomo said. "People will get their money, and get it back in the immediate future."

More than 80,000 investors nationwide are affected by the two agreements.

UBS agreed to repurchase all of the auction-rate securities it sold to retail customers, charities and small and mid-size businesses beginning Jan. 1. That group holds about $8.3 billion in securities. Within that group, customers with less than $1 million in assets at UBS will be able to sell the securities back to the bank beginning Oct. 31.

The bank will begin repurchasing securities from institutional investors -- worth a total of about $10.3 billion -- beginning in June 2010.

Any customers who sold the securities at a loss after the market failed Feb. 13 will be reimbursed.

The settlements with UBS and Citigroup provide parameters to other banks on how to resolve situations surrounding their sales of auction-rate securities, Cuomo said.

Bank of America Corp. and Bank of New York Mellon Corp. have both disclosed they received requests for information about the sale of auction-rate securities, and Merrill Lynch & Co. has said it will voluntarily repurchase $12 billion of the securities from clients.

Cuomo noted Merrill's repurchase program falls short of the steps agreed to by UBS and Citigroup, and his office will continue to investigate the bank.

Both UBS and Citigroup will take charges tied to the repurchase of the securities because they will be forced to price them at their current market value and not at the par value being paid to repurchase them.

UBS said it will take a charge of about $900 million on a pretax basis based on the difference between the par value of the securities and their current market values and the cost of the regulatory fine.

Half of the $150 million fine will go to New York, which led the investigation and where UBS's U.S. headquarters are located. The other half will be distributed to other states, including Massachusetts and New Hampshire among others.

In reaching the settlement, UBS did not acknowledge to any wrongdoing.

UBS will record the charge in its second-quarter results, which are scheduled to be released Tuesday.

Citigroup said it will take a pretax charge of about $500 million because of its settlement.
By STEPHEN BERNARD
The Associated Press August 8, 2008, 5:33PM on businessweek.com

SAN FRANCISCO — Credit Suisse has been sued by STMicroelectronics NV for allegedly placing $450 million of the chipmaker's cash into auction-rate securities without its authorization.

STMicro had thought the cash would be invested by Switzerland's second-biggest bank in highly liquid and secure investments, in this case U.S. government-backed student loans, STMicro said in an Aug. 6 complaint filed in federal court in Brooklyn, New York.

Europe's biggest computer-chip maker alleges Credit Suisse instead bought illiquid, risky and unsuitable auction rate securities consisting of collateralized debt obligations and credit-linked notes, some of which were backed by subprime real estate loans, the chipmaker said in its complaint.

"We do not comment on meritless lawsuits," said Credit Suisse spokesman David Walker in New York. An STMicro official could not immediately be reached to comment.

STMicro claimed in its lawsuit that "at least a dozen other multinational corporations are victims of the same scheme carried out by the same group of brokers and directors at Credit Suisse Securities and furthered by Credit Suisse Group."

STMicro said it believed more than $2 billion of these clients' money ended up invested in auction-rate securities.

Auction-rate debt bears interest rates that reset through periodic auctions typically held every seven, 28 or 35 days. Once thought safe, much of that market has been frozen since Wall Street brokerages stopped supporting the debt.

STMicro's lawsuit comes as Citigroup Inc agreed Thursday to buy back more than $7 billion of illiquid auction-rate securities and pay a $100 million fine to settle charges it fraudulently misled investors about the debt's risk.

That agreement with New York Attorney General Andrew Cuomo and the U.S. Securities and Exchange Commission could pave the way for settlements with UBS AG, Merrill Lynch & Co and others following February's meltdown of the $330 billion auction-rate market.

After STMicro discovered its cash had not been invested as it had believed and confronted Credit Suisse about it, "Credit Suisse told ST that if it attempted to force Credit Suisse to return its money through legal proceedings, Credit Suisse would make the process painful and embarrassing for ST," according to the complaint. (Reporting by Duncan Martell, with additional reporting by Dan Wilchins in New York; Editing by Braden Reddall)
Copyright 2008 Reuters. 08/07/2008 10:21 PM

De Amerikaanse grootbanken JP Morgan Chase, Wachovia en Morgan Stanley maken nu ook het voorwerp uit van een gerechtelijk onderzoek naar de verkoop van waardeloze obligaties. Ze ontvingen een oproepbrief om een minnelijke schikking te treffen. Alvast Morgan Stanley en Wachovia lijken bereid om een schikking te treffen.

(belga) - Vorige week namen Citigroup, UBS en Merrill Lynch al voor tientallen miljarden dollar van die waardeloos geworden obligaties terug. Die actie maakt deel uit van een minnelijke schikking in de VS tussen de banken enerzijds en het Amerikaanse gerecht, de beurswaakhond SEC en een reeks Amerikaanse staten anderzijds.

De grootbanken hadden de voorbije jaren waardepapieren aan de man gebracht zonder de kopers in te lichten over de risico's. Het ging om een speciaal soort obligaties (zogenaamde ARS) waarvan de intrest geregeld wijzigde via veilingen. Deze beleggingen werden ooit als veilig beschouwd, maar zijn sinds februari niet langer verhandelbaar toen de markt implodeerde als gevolg van de kredietcrisis.

JP Morgan Chase, Morgan Stanley en Wachovia worden aangespoord 'onmiddellijk' gesprekken over een minnelijke schikking te beginnen. Bij het gerechtelijk onderzoek zijn minstens 18 banken betrokken. De markt van deze ARS-producten werd begin dit jaar geschat op 330 miljard dollar.

Wachovia heeft nu een provisie genomen van 500 miljoen dollar. De bank zegt 'actieve gesprekken' te voeren met de autoriteiten.
Morgan Stanley verklaarde op zijn beurt bereid te zijn tot 4,5 miljard dollar ARS-obligaties terug te kopen, maar dat zou volgens de openbare aanklager niet genoeg zijn. 'Too little, too late', luidde het.
De TIJD, 12 augustus 2008