By Michael McDonald
Aug. 18 (Bloomberg) -- New York State Attorney General Andrew Cuomo's effort to force buybacks by Wall Street banks and brokers of auction-rate securities may not help some individual investors.
In the last two weeks, Cuomo reached agreements with Citigroup Inc., UBS AG, Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp. to buy back $42 billion of the debt they sold directly to individuals. The accords don't extend to investors holding most of the remaining $160 billion bought from mutual fund firms or brokers that didn't underwrite the debt.
``This is a glaring oversight,'' said Jonathan Kahn, an investor in New York who holds auction-rate debt underwritten by Goldman Sachs Group Inc. that he purchased from a different brokerage he declined to identify.
Cuomo said the New York-based investment bank is still negotiating with regulators. ``The industry is now taking responsibility for correcting a problem they helped create, and we'll continue working to make all investors whole,'' Cuomo, 50, said in a statement on Aug. 15.
Investors have been stuck in the securities, which are long-term debt that have interest rates typically set every seven, 28 or 35 days through periodic auctions, since the market collapsed in February. Dealers, who for two decades bought debt that went unsold at auctions, suddenly pulled back because of widening credit-market losses.
`Taking Responsibility'
Investors who were told the debt was as safe and liquid as money-market funds were left with depreciating securities they couldn't sell as auctions failed. Cuomo says the brokerages continued to market the debt as cash equivalents even though they knew demand was weakening.
``At the heart of this investigation is the simple goal of returning billions of dollars back into the hands of investors, which in turn injects confidence into the entire market,'' Cuomo said in the Aug. 15 statement.
The auction-rate probes focused on the biggest underwriters because those banks have the largest concentration of clients with the debt, Cuomo said. Citigroup was the market's biggest underwriter, arranging $55.3 billion in municipal auction-rate debt sales between 2000 and 2008, followed by UBS at $42.4 billion, according to data from Thomson Reuters.
The market has shrunk to about $200 billion from $330 billion as borrowers refinanced the securities using other types of debt. Individuals are the biggest holders, followed by publicly traded companies, which own about $32 billion, according to Pluris Valuation Advisors LLC in New York.
UBS Responds
``We're accountable for our clients,'' and not the clients of other brokers, Marten Hoekstra, head of the wealth management Americas division at UBS, said in an Aug. 8 interview. The Zurich-based bank agreed that day to pay fines of $150 million to state and federal regulators and buy back as much as $18.6 billion of the debt.
Joseph Evangelisti, a spokesman for New York-based JPMorgan, which agreed to buy back $3 billion, said its settlement didn't extend to customers of other firms. Susan Thomson, a spokeswoman for New York-based Citigroup, didn't return telephone calls for comment. Morgan Stanley spokesman Mark Lake in New York declined to comment.
Missouri Secretary of State Robin Carnahan confirmed the settlement with Charlotte, North Carolina-based Wachovia is limited to the bank's clients.
``Any brokerage firm or bank with a significant wealth- management practice put clients into auction-rate securities,'' said Barry Silbert, chief executive officer of New York-based Restricted Stock Partners, which operates a trading system for hard-to-sell securities. ``Therein lies the challenge on where to draw the line on who would be forced to buy this back.''
Cuomo's List
Cuomo said he subpoenaed about 25 companies that sold auction-rate securities. There are also 12 states coordinating probes into the collapse of the market, as well as the U.S. Securities and Exchange Commission. Cuomo's investigation has expanded to include Fidelity Investments and Charles Schwab Corp. of San Francisco, CNBC reported on Aug. 15, citing people with knowledge of the situation it didn't name.
``We're working our way down the list'' of brokerages, said Cuomo, a Democrat who was elected attorney general of New York in 2006. He said in an Aug. 15 interview that he eventually ``would be in a position to bring action against the smaller brokers.''
Smaller brokerages and mutual fund companies say they were also misled by Wall Street banks about the health of the market.
``We are not in the same situation as the firms who are offering to buy securities they issued or underwrote back from customers to whom they sold them,'' Vincent Loporchio, a spokesman for Fidelity, said in an Aug. 15 e-mail response to questions. He wouldn't comment on any communication between regulators and the Boston-based mutual fund company.
Oppenheimer Inc., a broker-dealer based in New York, told its clients last week it is working with the Washington-based Regional Bond Dealers Association to press for SEC intervention in the probes so banks that neither underwrote securities nor brokered auctions are not forced to buy them back from customers.
``Oppenheimer did not have any advance knowledge of the likely failure'' of the market, the company told clients in an Aug. 14 e-mail. Oppenheimer's general counsel, Dennis McNamara, didn't return calls for comment. Jon Teall, spokesman for the regional bond dealers, declined to comment.
To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.
Posts
No comments:
Post a Comment