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May
13
The quote below from the weekend's Barrons is very important.
It shows that the pressure we're all bringing on our brokers and
our issuers is actually getting through. It's having some effect.
And please keep it up. These people must be made to understand that
if we don't get 100% of our money back and soon, there'll be legal
problems for them beyond their wildest imaginations and none of
us (nor our friends, nor our enemies) will ever do business with
these miserable people again ever. -- Harry Newton.
May
12 from
"... But some closed-end BlackRock funds sold auction-rate
preferred stock, which has stopped trading amid an effective shutdown
of the auction-rate-securities market. Until the situation is
resolved, it will be tough for BlackRock -- and many other asset
managers -- to sell new closed-end funds."
++++++++++++++++++++
May
10 from timesunion.com
(Albany, New York)
Plug
Power suing UBS for nearly $63 million
by
Larry Rulison, Business writer
COLONIE
-- Plug Power Inc. is suing UBS Financial Services Inc. for $62.8
million, claiming the brokerage firm improperly invested that sum
in so-called auction rate securities, now battered by the subprime
mortgage mess.
On Thursday, the Latham-based fuel-cell manufacturer announced it
was taking a $2.8 million charge to account for the drop in value
of the investments, which are bonds sold through periodic auction.
That
was the same day the company filed suit against UBS in U.S. District
Court in Albany. UBS has been the company's broker since 2005.
In
February, after the subprime mortgage meltdown, the $300 billion
market for auction rate securities, also known as ARS, dried up,
leaving Plug and others unable to liquidate their holdings.
The
auction rate securities UBS bought for Plug were backed by federally
insured student loans, and Plug said in the lawsuit that student
loan-backed ARS are the hardest to sell, with discounts of 25 percent
or more.
"Throughout
the fall of 2007, other brokers and investment advisers began advising
clients to liquidate their ARS holdings, in light of the failed
auctions and increased liquidity risks," the lawsuit states.
"UBS did not notify Plug Power of these risks."
A
UBS spokesman did not return a phone call or e-mail for comment.
This
week, UBS settled with 20 municipalities in Massachusetts that invested
in ARS, and New York Attorney General Andrew Cuomo also is investigating
the company.
Plug
said its chief financial officer, Gerry Anderson, called UBS in
October with concerns over the investments. Plug alleges the broker
told Anderson the securities "were safe and liquid."
Plug
warned investors in March that it held $92.8 million in ARS and
there was "increased liquidity risk" because of market
disruption.
Plug
spokesman Eoin Connolly said Friday he believes the company was
able to convert a portion of that to cash -- resulting in the current
$60 million in holdings. He said the suit was filed to give the
company options for recovering the money.
"It
could resolve itself any number of ways," he said.
As
of March 31, Plug had $146.8 million in cash, cash equivalents and
available-for-sale securities, among which $60 million was invested
in ARS.
During
a conference call Thursday, analysts asked officials how the company
would manage with a significant portion of its cash position tied
up in ARS.
Plug
is still spending about $10 million a quarter on research and development
on fuel-cell systems designed for both commercial and home power
markets, but its operations have yet to break even. It lost $20
million in the first quarter.
"We
still are confident that we will have appropriate liquidity to continue
to drive this business to market adoption and grow it profitably,"
Anderson said.
Larry
Rulison can be reached at 454-5504 or by e-mail at lrulison@timesunion.com.
+++++++++++++++++
May
8 from InvestmentFraud.pro
UBS
Settles Auction Rate Cases With Clients!
UBS
agrees to pay $37 million back to investors taken by the firm's
auction rate securities. This comes on the heels of the Mass. Attorney
General putting a great deal of pressure on the firm. UBS did not
just decide to do the right thing out of the goodness of their heart.
Nothing less than the AGs office putting its full weight on the
firm did the trick. For individual investors, nothing less than
a FINRA arbitration claim will get the firm to do the same thing
for individual investors.
Broker
to return $37m to towns
Wall Street firm settles with AG
By Beth Healy, Globe Staff May 8, 2008
A
major Wall Street firm agreed to return $37 million to 17 cities
and towns in the state, as well as to the Massachusetts Turnpike
Authority, after it allegedly misled them into buying investments
they thought were as safe as cash.
UBS
Financial Services Inc. reached an agreement with Attorney General
Martha Coakley after she found that the brokerage had not fully
disclosed the risks of the investments, known as auction-rate securities.
Cities were unable to get their hands on their money when the market
for these investments evaporated almost overnight.
Winchester,
which had invested more than any other town, will receive $6.8 million
in the settlement. The turnpike will receive $4.4 million, and the
city of Holyoke and its retirement system will get $3.2 million.
"There
have been a lot of new financial products," Coakley said. "There's
been a heavy push by brokers to sell them, and a rush by cities
and towns to take advantage of what appeared to be a burgeoning
market."
The
settlement was the first admission by UBS or any US brokerage that
something may have been amiss in the sales of municipal debt securities.
The market for these securities relied on weekly and monthly auctions
run by brokerage firms. But starting in February the auctions attracted
only sellers and no buyers, so the market failed.
UBS
spokeswoman Karina Byrne characterized the settlement as a one-time
event, based on a Massachusetts law that requires towns and cities
to keep cash in only highly liquid accounts so they are readily
accessible. She said the agreement followed the attorney general's
finding that these securities were "not permissible" in
municipal accounts.
"UBS
is pleased this matter has been resolved," Byrne said. The
firm is still under investigation by state and federal regulators
for how it sold such investments to individuals and companies.
In Barnstable, which invested the second-largest amount in the state
at $6.1 million, director of finance Mark Milne said the town first
realized it had a problem in February, when it tried to sell the
bonds.
"We
had tried to liquidate some of the money from this investment and
put it someplace else, and were told that we couldn't," Milne
said in an interview. The town needed the funds to pay bills coming
due, he said, and had to cash out other investments instead.
The
bonds accounted for about 6 percent of Barnstable's cash account,
Milne said. Not only was Barnstable treasurer Debra Blanchette told
she could withdraw the funds at any time, Milne said, but, "she
wasn't even told they were auction-rate securities."
Auction-rate
securities were part of a wave of arcane debt products that investment
firms sold heavily in the boom period before last summer's subprime
mortgage meltdown. With interest rates low, firms offered these
municipal bonds as a safe alternative to cash that paid a slightly
better yield. Investors were supposed to be able to get out of these
securities on a weekly or monthly basis.
But
there was a catch many investors didn't foresee: The securities
relied on constant investor demand at auctions. In February, spooked
investors stopped participating in the auctions altogether, leaving
sellers such as towns and public agencies unable to sell their securities.
The
result was that investors in this $330 billion auction-rate market
were stuck holding bonds they couldn't sell. They weren't losing
money, per se, but they could not access their money. UBS is now
buying back the bonds - something it and other brokers refused to
do when the market collapsed.
The
attorney general's action sprang from a case this year, in which
Merrill Lynch & Co. agreed to repay the city of Springfield
for $14 million in another type of debt that brokers were selling
to municipalities, CDOs, or collateralized debt obligations.
As with auction-rate bonds, CDOs were promoted as "cash-like"
but investors were unable to get their money out when the market
for mortgage-related debt froze.
Holyoke's
mayor, Michael J. Sullivan, called news of the UBS settlement "manna
from heaven."
Under
the agreement, UBS will buy back $3.2 million in auction-rate bonds
from the Western Massachusetts city and its retirement system. Sullivan
said the city had been advised by an investment consultant to buy
the securities, a move he said he believed was an "honest error."
Holyoke had not been in any immediate financial risk, Sullivan said,
but he added, "In the long term, we might have had some exposure
to those investments evaporating."
UBS
is hoping this matter is closed. This week, the firm said it's
leaving the municipal finance business. But this may be just
the beginning of the fallout from the collapse of auction-rate markets.
Secretary
of State William F. Galvin is investigating whether UBS and other
firms may have inappropriately sold these securities to individual
investors and businesses. In March, Galvin, who oversees the state
Securities Division, issued subpoenas to UBS, Merrill Lynch, and
Bank of America Investment Services Inc.
Specifically,
the division is examining whether investors were properly informed
of the risks in these securities, and whether they were appropriate
for the people who bought them. It's also looking into the role
the investment banks may have played in causing the auctions to
fail. UBS declined to comment on the investigation.
The
Securities and Exchange Commission also is investigating the auction-rate
markets.
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May
8
from today's Wall Street Journal
MUMBAI,
India -- Merrill Lynch & Co. Chief Executive John Thain
said he expects auction-rate securities held by the investment
bank's clients to be fully refinanced within one year by
the issuers, giving customers access to their cash.
"So
far, the securities held by customers in our system, about
23% of the total has already been refinanced, and so I expect,
over the next 12 months or so, we will see the securities
get [fully] refinanced by the issuers and the customers get
their money back," Mr. Thain said at a news conference
in Mumbai (the new name for Bombay).
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Auction-Rate
Securities
A Really, Truly Terrible Investment
by Liz Moyer, 05.08.08, 2:50 PM ET from Forbes.com
There
are bad investments, and then there are really, really
bad investments.
In
the $330 billion world of auction-rate securities, put
bonds backed by education loans in that latter category.
Not only are investors stuck with about $80 billion
of the unsellable bonds, many of them are now getting
paid zero interest for their troubles.
Regulators
and issuers are scrambling to find a way out for thousands
of investors, but this will typically mean that investors
who want to sell will have to do so at a loss.
Late
Wednesday, the Missouri Higher Education Loan Authority
told investors in some $3 billion of its outstanding
auction-rate bonds that it would buy back $30 million
or so at a discount, through a secondary trading market
set up in February by Restricted Stock Partners. It
is the first issuer of student-loan-backed auction rates
to step into the secondary market.
"Mohela,"
as the state's lending authority is known, won't say
what that discount will be, but Barry Silbert, the president
of New York-based Restricted Stock Partners says other
bonds backed by student loans have sold at discounts
of 20% to 25% or more.
In
April, JPMorgan Chase told investors in three student-loan-backed
bonds that it would buy back $1.1 billion at par. Other
banks, including UBS, have told investors it would mark
down their auction-rate holdings.
Auction-rate
securities are another one of those obscure and increasingly
toxic securities products that have gotten caught up
in the credit-market turmoil. They are long-term bonds,
the rates for which reset at periodic auctions, usually
at intervals of seven to 35 days. They allow issuers,
like municipal agencies and student lenders, to get
better borrowing terms for long-term debt. For investors,
they had behaved pretty much like cash--until this year.
But,
of course, they aren't cash. When the credit markets
seized up, investors started shying away from fixed
income, and the investment banks that cooked up the
products and sold them to investors refused to step
in and buy, allowing those auctions to fail. That left
investors unable to sell their holdings.
It
was an unhappy circumstance for the issuers, too. According
to the terms of the bonds, the interest rates would
reset at much higher penalty rates in the event of an
auction failure, then fluctuate in subsequent auctions.
Municipal
agencies like the Port Authority of New York and New
Jersey make up the bulk of auction-rate issuers, about
$185 billion worth. For many, the higher penalty rates
(for the Port Authority, rates reset to 20% from 4%
after a failed auction in February), threatened to derail
infrastructure projects, and many issuers have refinanced
into more traditional fixed-rate bonds.
At
least the investors in bonds backed by municipal debt
get paid the high penalty rate for the inconvenience
of having illiquid holdings. Investors in student-loan-backed
auction-rate securities are seeing the initial reset
rates plummet to zero because of the technical way these
bonds are structured. That means they are holding 30-year
bonds paying no interest. The 30-year Treasury, by comparison,
pays 4.59%.
For
example, $5 billion of auction-rate securities issued
by Pennsylvania Higher Education Assistance Agency,
one of the biggest in the market, recently reset to
zero.
The
investors in these securities include thousands of ordinary
people who thought they were buying money-market securities,
according to Karen Tyler, the state securities regulator
in North Dakota and president of the North American
Securities Administrators Association.
Instead,
these investors are stuck and can't sell without taking
a loss. And many have locked up funds they had set aside
for mortgage down payments or living expenses, small-business
payrolls, and, in the case of farmers, spring planting
funds, Tyler said.
Eleven
states, the Securities and Exchange Commission, and
the New York Attorney General's Office are investigating
how investment banks marketed and sold auction-rate
securities. Hundreds of complaints have poured in to
state regulators.
Merrill
Lynch and Goldman Sachs have said they had received
requests for information from various governmental agencies
regarding auction-rate securities, including the recent
failure of auctions, and are cooperating.
Massachusetts
state regulators subpoenaed Merrill, UBS and Bank of
America in March in regards to their auction-rate activities.
The
solution may be that regulators force the banks to return
the money to investors, which is why the task force
is looking into how the products were presented and
sold. "If it was represented that they were as
good as cash, then investment banks need to pay cash
for them," Tyler said. "The investment banks
need to make the liquidity event happen."
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May
7
"It
wasn't an auction. And it wasn't preferred." - Peter
Sidel, investor
"The issuers know if they don't fix this mess, they
won't stay in business."
This
week's contacts to harass:
1. Tim Hurd is the partner at Madison Dearborn responsible
for Nuveen. He needs to understand that if Nuveen doesn't
fix this mess, his $6 billion investment in Nuveen will be
valueless. Ditto for his job and his career. His direct phone
number is 312-895-1170.
2.
Bill Adams. He created the first Nuveen closed-end fund.
He is responsible at Nuveen for fixing this mess. He is EVP.
His direct phone number is 312-917-7711. Tell him to redeem
your ARPS or you'll never ever do business with Nuveen again.
My
friend has recently spoken to Mr. Adams. My friend's email
of May 8:
"Bill
Adams reiterated what we already know. The redemption is
delayed by the coordinating of the different facets of the
VRDPs. SEC, Put Provider and lining up MM funds who will
purchase. He said he owns shares of ARPs along with family
members and friends and can't go anywhere (socially) without
someone asking him when they will be redeemed. I spoke to
him about different aspects of ARPS that I have recently
researched and wanted confirmation for. Both Hurd and Adams
are concerned about their Nuveen reputation and ability
to bring new products to market if this is not resolved.
We spoke about 20 minutes."
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May 7
How
can we sell our ARPS?
by
Harry Newton
There
seem to be four ways of getting cash for our locked-up ARPS.
1.
Wait for redemption. I remain semi-optimistic that most of us
will eventually get our full money back. We should not fret that
we don't hear much from many of the issuers. Blame the lawyers for
the silence.
2.
Sell them privately to someone else. Your broker should be able
to oblige. There are people who actually want to buy these things.
Let's face it: Most yield more than you can get in money market
funds and in most other places.
3.
Sell them through Restricted
Securities Trading Network
(see below). They deal directly with retail investors, like you
and I.
4. Sell them through Southern
Trust Securities Holdings Corp. These guys are new to this
site. They're a retail broker who will open an account for you,
and then try to sell your securities where the best market is --
which at this stage looks like Fieldstone Securities (see below).
Robert Escobio is the chairman, CEO and head trader. I spoke with
him. He said he'd be happy to help an investor. But he was really
looking for a long-term relationship with a new investor -- not
one that involved selling the ARPS, taking the cash and fleeing.
I said I understood his concern and explained that my readers were
looking for someone to trust. They're in Florida, 305-446-4800.
You can also speak with Victor Casado and I believe Isabelle Campos,
whom I haven't spoken with.
Now
you should be aware that most brokers are reluctant to sell your
ARPS at anything below par, because they believe selling them will
open them up to serious legal liabiltity. And they will be forced
to make your losses up to you. If you sell for 90 cents on the dollar,
they will have to pay you the 10 cents you lost. Personally I think
they will be forced to pay you the money -- but the circumstances
of your selling are important. I'll address these at another time
when I find out more. Meantime I know it's scaring the brokers and
forcing them to tell their clients (i.e. you and me) a lot of lies
-- like there's no market for ARPS. There is. There is. Trust me.
Read the letter on the right.
May
6, 2008
A few readers have actually asked. Who am I? What do
I look like? Last week I saw this T-shirt in a shop window and I
thought, "I deserve this." Fortunately, I could still
afford the T-shirt, despite my $3.5 million in locked-up Nuveen
ARPS. Shall I send the $30 T-shirt bill to Nuveen? -- Harry Newton
photo
by Muriel Fullam
Early
May 5
The
following piece appeared in the prestigious Sunday New York Times
Business section. Gretchen Morgenson is an important financial journalist,
who obviously was in a big hurry when she wrote this nonsense. She
quotes Silbert of Restricted Securities Network, but she doesn't
quote anyone from Fieldstone Capital, who is offering more for ARPS.
She makes no mention of the pressures that the brokers are, in fact,
putting on the issuers, or the fact that many issuers know that
if they don't redeem their ARPS at par, they'll be out of business.
Nor does she attempt to outline the complexity of redemption and
the progress actually being made. I bet Ms. Morgenson never called
Bill Adams of Nuveen either. He's the boss of the biggest issuer.
His phone number is above. She certainly never called me and clearly
has never bothered to read this site. Frankly, for sloppy financial
journalism, Ms. Morgenson takes the cake. The sad part is I've always
been one of her biggest fans. -- Harry Newton.
May
4
Fair
Game
How to Clear a Road to Redemption
By GRETCHEN MORGENSON of The New York Times
IT
is Day 79 in the hostage crisis otherwise known as the auction-rate
securities market. Some $300 billion worth of investors’ funds
— advertised as being easy as pie to cash in — are still
locked up. And the brokerage firms that got investors into this
mess are doing little to help.
But
investors trapped in these securities are not the only victims of
this debacle; taxpayers are, too. That’s because municipal
issuers of auction-rate notes — towns, school districts, hospitals,
highway authorities and others — are being asked to pay up
to redeem and restructure the debt.
Even
as investors and taxpayers are hurt by this frozen market, Wall
Street is making money from it. In fact, the auction-rate securities
mess is another illustration of damaging conflicts of interest at
the nation’s big brokerage firms.
Auction-rate
securities are debt obligations issued by municipalities, nonprofit
entities and closed-end mutual funds. Interest rates on the securities
are set by periodic auctions, based on investor demand. The market
froze in February when buyers disappeared, and brokerage firms refused
to step in.
Naturally,
investment bankers who agreed to operate these auctions were paid
for their services: 0.25 percent of the security’s total issue
for each year of its life. Unnaturally, big firms still earn these
fees even though 70 percent of the weekly auctions of these securities
are failing.
The
firms also rake in banking fees when municipal issuers redeem the
securities. They haul in another round of revenue when they help
issuers unwind derivative contracts that are often intertwined with
the securities. These derivatives were designed to reduce costs
for the issuers by hedging their interest rate risks. Thanks to
the decline in interest rates, however, they can be frightfully
expensive to unspool.
By
my arithmetic, that’s Wall Street 3, Investors/Issuers 0.
Sure,
investors get interest on their money — but nowhere near enough
to compensate for being stuck in their holdings.
Issuers
of $78 billion in auction-rate securities have announced plans to
redeem the paper. Almost three-quarters of that involves municipal
notes, many with extra-high penalty rates of interest that must
be paid to holders when an auction fails. These rates encourage
redemption.
But
investors in the remaining issues are not so fortunate. They are
receiving no offers to redeem their securities, at least in part
because the penalty rates on this paper are ridiculously low —
120 percent of the London Interbank Offered Rate, or now around
3.5 percent. So issuers have little incentive to redeem.
Investors
desperate to sell can tap the Restricted Securities Trading Network,
a secondary market recently set up by Restricted Stock Partners
in New York. The action in the market is small but revealing.
Barry
Silbert, the network’s founder, said that about 10 trades occur
daily, with an average size of $350,000. He said municipal issues
trade at discounts of 2 percent to 10 percent, while closed-end
fund shares trade at a 15 percent haircut. Student loan securities
are the hardest to sell: their discounts are 25 percent or more.
Joseph
S. Fichera, chief executive of Saber Partners, said discounts like
these present opportunities for municipal issuers to buy back the
securities at a savings while also letting investors exit if they
choose. This would provide the liquidity that some people crave.
For
example, the Metropolitan Transportation Authority in New York recently
said it had $1.3 billion in failed auction securities outstanding
after a buyback. If it repurchased 15 percent at a discount of 8
percent, it would save $16 million. Imagine what a hospital or university,
short of cash, could do with such a windfall.
Issuers
would also benefit by renegotiating contracts to eliminate payments
for unsold securities and failed auctions. This would align Wall
Street’s incentives with its customers’ needs, Mr. Fichera
said. Since February, New York State would have saved $1 million
if it had not had to pay for failed auctions on its securities,
he estimated.
After
redeeming some debt, issuers could reap additional savings by refinancing
the rest at current market rates.
For
now, however, most Wall Street firms are advising their municipal
issuer clients to buy back their securities at par. This is where
the potential conflicts come in: discounted prices on these securities
pose problems for investment banks that sold them to investors as
cash.
If
an investment bank advised an auction-rate note issuer to redeem
at a discount, for example, that bank’s customers who decided
to sell would record a loss and have a claim for damages in an arbitration
case. (Until an investor sells, he technically has no loss.)
Encouraging
issuers to redeem at discounted prices could also force the firm
to mark down similar securities on its own books. While the market
is frozen, firms can avoid these markdowns.
“The
firms hold a lot of this themselves,” Mr. Silbert said, “and
they are trying to minimize the damage to their balance sheets.”
Wall
Street should stop with this me-first routine. Pronto. It should
stop billing issuers for failed auctions and should recommend that
they redeem securities at fair value in the marketplace.
Failing
that, issuers should work to fix the situation. “Governments
need to be as vigorous in representing their clients, the citizens,
as Wall Street is in representing its own interests,” Mr. Fichera
said. “The market will only produce efficient and fair results
if this happens.”
For
securities left outstanding, issuers should help thaw the market
by opening their auctions to more potential buyers; in recent years,
issuers have been happy with just one brokerage firm involved. The
results of the auctions should also be transparent instead of shrouded
in secrecy — showing how many bidders there are and at what
prices. If investors knew that one auction had four bidders and
another had 400, it would be pretty clear which security was riskier.
“Transparency
in the conduct of the auction is absolutely necessary to restore
investor confidence and get the bidding going again,” Mr. Fichera
said. “That way, investors can be informed about the risks
they are taking and compensated for them.”
April
30 afternoon
Getting
Stranger and Stranger
by Harry Newton
If
you go to your broker and say "Sell my ARPS," many will
say "We can't. There's no market for them." It seems that
the brokers, who sold you your ARPS because they were "as safe
as cash," are now afraid that, if they sell them for you at
a discount, they will be hit with a "deficiency claim."
Let's
say your broker now sells your ARPS at 90 cents on the dollar, the
theory is that will sue him under a deficiency claim for the 10
cents on the dollar he lost for you.
Well,
we know you can sell your ARPS on something called the Restricted
Securities Trading Network (see below). But they deal directly with
retail investors, like you and I. hence your chance of winning a
deficiency claim is slim.
But
there also, it turns out, are organizations that will also sell
your ARPS. But they won't deal with you directly. They deal with
your broker. They're an "instititional trading house."
One
of these brokers is called Fieldstone
Capital. I spoke to a nice man from Fieldstone today. He
told his firm had already sold $40 million plus of ARPS and presently
had an order in from a buyer for another $25 million plus of ARPS.
He said that a seller net out at 90 cents on the dollar. That means
you'd lose only 10 cents on the dollar. If you're interested in
selling, tell your broker to call Fieldstone Capital on 212-626-1400
and ask for a trader.
For
my current thinking on what to now, keep reading.
April
30
Sell
now or wait? (update 3)
by
Harry Newton
I
just had a nice chat with Barry Silbert, 32, CEO and founder (in
2005) of Restricted
Securities Trading Network (RSTN). Of late, he has been
selling ARPS owned by private investors (like you and me). The average
money received is 85.6%. In other words sellers have been
taking a 14.4% average haircut off par. His average transaction
size is $300,000. He tells me his buyers are institutions who seem
to have built elaborate pricing models and often bid precise numbers,
like $19,537 for a $25,000 ARPS.
Some
of my readers have asked me if I'm a shill (PR front) for RSTN.
I'm not. They've never paid me a nickel. And based on what I've
heard from Barry, read on his web site and heard from his customers,
he seems 100% legit. I'm impressed. He must be doing something right.
He has 40 employees and all the trappings of a serious trading operation
-- a trading desk, an operations team, a research team. He's even
regulated and accredited by FINRA which means you can't get into
his web site until you fill out some simple bits of paper.
Go
into his web site, you'll find around 160 ARPS collections logged
for sale. "Generally speaking," says Barry, "if you
give us an ARPS to sell, we have it sold, sealed, delivered and
the cash money forwarded to you within five days."
He
charges the seller (i.e. you) 1% for his services. That seems
reasonable to me when you begin to understand how much BS he has
to go through. Don't believe me? Read this document called Bidding
Rights Procedures.
The
$64 question is now, "Should I sell my ARPS now and take
the discount or should I wait? I'm not your financial adviser.
But here's my thinking. You have three choices:
1.
Wait for full par redemption. No one is making book on how long
that might be. Figure 24 months and you won't be disappointed. Waiting
isn't bad since you're getting paid more than you can get
in most money market funds. Right now Nuveen is paying me 3.595%
on my NUVEEN triple tax-free ARPS. I can't get that anywhere else.
Personally I don't need the money. And if you read my other site
InSearchOfThePerfectInvestment.com,
you'll know that I'm pretty negative on places "to put
my money to work," like the stockmarket, hedge funds or real
estate (commercial or residential). So I'm not selling for now.
2.
Sell your auction securities at a 15% discount. There are two
benefits: You won't have to read this boring column any more. You
can get on with your life. Maybe you're got a quick surefire way
to make back the loss. I haven't. But you may. If I knew anything
about investing I wouldn't be stuck in these ARPS. I would have
an intelligent financial adviser/broker (if there is such an animal)
and I wouldn't be in these cursed Nuveen ARPS. There is one silver
lining. The wife and I can't spend the money -- if ARPS can still
be called money! I should point out that selling today at a 15%
discount is possible today. But it may not be possible
tomorrow -- if something untoward happens and zillions of
ARPS owners suddenly put their holdings up for sale, i.e. "rush
for the door." I don't quite know what this scenario might
be. But it clearly could happen. I'm guessing that offering prices
would drop dramatically. And perhaps, at that point, we might not
be able to sell any of our ARPS.
3.
Take a loan from your friendly broker. As I've written a million
times, I wouldn't take a term loan. But a loan that comes due the
day my ARPS are redeemed at par isn't a bad deal. And a loan that
pays what you're earning on your ARPS, or less, is OK. The only
downer to this is that you'll have to talk to your broker. There's
a hell of lot of us that don't ever want to see his cherubic face
again. After all, they don't call them "broker" for nothing.
Whatever
you do, make sure you keep the pressure up. Keep sending the letters
and emails. Keep calling anyone you can reach. Be polite, but firm.
You've been wronged. You will never deal with your broker or the
issuer again. This is securities fraud, and all that.
I
continue to believe that the progress we are seeing -- there have
been many redemptions at par so far -- are a direct result of the
pressures all of us are applying. Keep up the good work.
April
23, 2008 13:31 EDT
Nuveen,
BlackRock Fund Investors
May Get Relief (Update1)
By
Christopher Condon
April
23 (Bloomberg) -- Nuveen Investments Inc., the largest U.S. closed-end
fund manager, and BlackRock Inc. may soon have a new way to finance
buybacks of securities that investors were stuck with when credit
markets seized up.
The
U.S. Securities and Exchange Commission probably will issue a no-action
letter "sooner rather than later'' approving a new type of
preferred stock that closed-end funds are seeking to sell, Douglas
Scheidt, an associate director in the agency's investment management
division in Washington, said in an interview.
Fund
managers plan to use the product to help finance redemptions of
most of the $64.3 billion of outstanding preferred stock they issued
to leverage investments and boost returns. Holders of the existing
securities, known as auction- rate preferreds, were angered when
trading froze in February. The new shares will be structured so
that money-market mutual funds, which invest $3.48 trillion, could
buy them.
"I
think this is a pivotal step,'' said Cecilia Gondor, an analyst
at Thomas J. Herzfeld Advisors Inc. in Miami, who specializes in
closed-end fund research. ``There are a few hurdles remaining, but
this should pave the way towards implementing a workable solution
for investors who have now been waiting for several months.''
So
far, more than 40 funds have announced plans to buy back about $11
billion of preferred shares, using bank loans, reverse repurchase
agreements and tender-option bonds. Boston-based Eaton Vance Corp.,
the second-largest U.S. manager of closed-end funds, said today
that three of its tax-exempt funds will buy back $580 million in
preferred shares.
The
preferred being reviewed by the SEC may speed up redemptions. The
shares will carry a put option, or right to sell the instrument
at any time. That will open the product to money funds, which
are prohibited from buying any security with a maturity of longer
than 13 months, and may ease liquidity concerns.
Refinancing
Struggle
Closed-end
funds raise a fixed amount of money from shareholders, unlike mutual
funds, which continually sell and redeem shares. They have struggled
to replace auction-rate preferred stock with new financing without
raising costs and reducing returns for common shareholders. New
options have posed a host of regulatory, market and tax-related
hurdles.
Auction-rate
securities allowed closed-end funds to raise long-term debt at short-term
rates. Once sold, they would change in auctions arranged by broker
every 7, 14 or 35 days. Institutions such as municipalities, hospitals
and universities were the biggest borrowers, with about $165 billion
in debt outstanding when the market stopped working. Student-loan
backed bonds accounted for about another $86 billion.
Auctions
Fail
The
interest-bearing securities were a popular alternative to money-market
funds for investors until the periodic auctions began to fail out
of concern that bond insurers would be downgraded. Wall Street firms,
saddled with more than $290 billion in asset writedowns and credit
losses, declined to step in to soak up the extra supply, as they
had sometimes done in the past.
SEC
approval of the new shares, known as variable-rate demand preferred,
would still leave fund companies with the larger obstacle of lining
up put providers, or financial institutions like banks, insurance
companies and broker-dealers willing to buy or find buyers when
holders want to sell.
It's
too soon to know whether enough put providers will come forward,
said Steven Baffico, head of closed-end funds at New York-based
BlackRock, the third-largest U.S. closed-end fund manager.
"We're
seeing a fairly pronounced shift with respect to risk management
to a more conservative posture,'' he said. "We're dealing with
pressures larger and more systemic than merely the auction-rate
market.''
Anne
Kritzmire, head of closed-end funds at Chicago-based Nuveen, declined
to comment.
Low
Reset Rates
Most
buyers of auction-rate municipal debt were rewarded with interest
rates that reset to as high as 22 percent when auctions failed.
That attracted new investors and pushed issuers to buy back many
of their bonds.
By
contrast, closed-end preferred shares carry penalty rates as low
as 3 percent, angering existing investors and giving fund managers
little incentive to redeem them.
Some
versions of the new securities may offer higher maximum interest
rates than existing preferred shares, adding a market-driven mechanism
for drawing in liquidity, according to Karrie McMillan, general
counsel for the Investment Company Institute, a Washington D.C.-based
trade group.
In
addition, put providers would also hold the right to sell the shares
back to the issuing fund or the fund's adviser "after holding
them for some period of time,'' McMillan said.
Debbie
Cunningham, chief investment officer at Federated Investors Inc.,
said it was too early to tell whether she would invest in the new
product.
"I'm
hoping by the beginning of May there will be more substantive information
to review,'' she said in an e-mail.
Pittsburgh-based
Federated is the fourth largest U.S. manager of money-market funds,
with $225 million in assets.
To
contact the reporter on this story: Christopher Condon in Boston
at ccondon4@bloomberg.net
+++++
Sunday
evening April 20
A
Progress Report (update 2)
by Harry Newton
Keeping
this web site up to date is a lot of work. I hope you fellow sufferers
appreciate my work.
Where
do we all stand? I still have $3.5 million of ARPS -- all Nuveen
tax-frees. I'm receiving my interest. No problem there. I could
probably sell them privately or on the Restricted Securities
Trading Network (see on the right). But I'd take a 12% loss.
At present, I don't believe that's necessary because I do have a
modicum of faith that Nuveen will redeem my ARPS (hopefully within
the next year) at full value.
Until
then, my broker (like most brokers) will lend me cash money against
my ARPS. But the loan may come due before my ARPS are redeemed.
Then I'd be forced to scrounge for the money elsewhere (difficult)
or sell my ARPS at a forced sale and take a loss.
Fortunately
I'm not a corporation and not forced to mark the value of my ARPS
on my balance down to what they're sellable today for. The only
"shareholder" I have is my wife and she's always more
upbeat about these things than I am.
As
this thing has evolved, I can understand why Goldman Sachs, Citigroup
and others stepped away from the auctions, letting them fail. They
simply didn't want more securities they couldn't sell (except at
a loss) on their balance sheets.
The
under-reported part of all this is the pressure the clients (like
you and I) have put on our brokers and they, in turn, have put on
the issuers, like Nuveen, BlackRock, Eaton Vance, etc. My relationship
with my broker will never be the same again. By putting me into
these junky ARPS, he's lost a lot of my trust. And I believe thousands
of clients are telling their brokers the same thing -- perhaps in
stronger words. Maybe they're telling their brokers that they intend
never to give them one penny's worth of business until their ARPS
become liquid and they can sell them.
I
believe that many brokers are saying the same thing to the issuers.
"Stay out of our offices. Don't even think of having
us sell any of your new financial products until you get our clients
our of this ARPS mess." (And you should encourage your
broker to say this to his issuers.)
It's
clear that some of the issuers are feeling this pressure more than
others. And it's also clear that we ought to be continuing the pressure,
reminding our brokers and our issuers every day of how we feel.
We
also ought to be applying pressure via the courts, the regulatory
authorities, the Attorneys-General of the states we live in, etc.
Oringally
I wrote, "Legally, we don't have much of a leg to stand on.
But morally, our legs are solid. We all got sold a bill of goods.
So, the answer now is Pressure. Pressure. Pressure."
Ove
the weekend, I received this email from a man whose family has over
$50 million stuck in ARPS:
We
appreciate all your effort to keep people informed and taking
appropriate action. In terms of the legal side, I actually think
the overall legal case against the banks/brokers is quite strong.
I respectfully disagree with the statement on your recent posting
that said legally we don't have much to stand on.. See the quote
below from former SEC Commission attorney (in the Bloomberg article
following). Also, most of the attorneys that handle arbitration
we speak to say these are cases with clarity that they usually
do not have in their cases. To go from "cash" all the
way to "illiquid" is an easy story to tell for them.
The cases they work on usually don't have that clarity. I am also
very happy to see the Martin Act invoked by Attorney-General Andrew
Cuomo as it carries with it broad powers including possible criminal
charges. I am hoping this leverage helps level the playing field
against these brokers etc. It appears to have done so in the past.
Since
legal actions take this, I believe that our pressures as ARPS holders
are critical. We need to write to our state Attorneys-General telling
them of the bill of goods we were sold. We also need to continue
the pressures on our brokers and insist that they bring pressure
on the issuers.
"OK,
Harry, I understand the pressure, but will be work?"
The
answer is absolutely YES. Each of the issuers have at least a dozen
viable ways of getting us our money at par. Why they're not getting
us our money faster is the sixty four dollar question. I suspect
the slowness is a combination of three factors:
1.
Lawyers wanting to protect their clients and their fees, i.e. the
lawyers' fees.
2.
The newness of it all. ARPS have to be converted into securities
money market funds will be allowed to buy, etc.
3.
The fact that capital markets are almost as locked as our ARPS.
We have a major credit crunch going on. Banks and finance companies
are not lending. They're scared. Bankers are not known for their
risk-taking. Too many got burned in the sub-prime / CDO etc. disaster
and that isn't finished. Finding the billions needed to redeem the
$60 billion of ARPS is not easy in a credit crunch.
The
end conclusion: I'm optimistic. I'm keeping up the pressure. I'm
keeping my legal options open. And I'm keeping myself up-to-date.
Which means writing this column. Let me have your thoughts and stories.
|
April
21
Auction-rate securities a struggle for Nuveen
Firm works to liquefy $15 billion worth of shares issued to boost fund
yields
By Brooke Southall at InvestmentNews
Nuveen
Investments LLC is working to liquefy $15 billion of preferred auction-rate
securities issued by 100 of its closed-end funds.
The market
for the preferred securities, which were sold to individual investors
as a higher-yielding alternative to money market funds, has been frozen
for weeks as broker-dealers have ceased to conduct the auctions that determine
the securities' rate of interest.
The Chicago-based
closed-end-fund manager said that it is also working hard to explain to
investors why they may have to wait months to receive cash for their securities
as a solution is hammered out.
Nuveen
said that it has held three conference calls with anxious financial advisers
since February and is handling about 1,000 phone calls a day to keep them
apprised of the liquidity crisis, according to Anne Kritzmire, a managing
director of the firm and head of its closed-end-fund business.
"People
are losing sleep here too," she said.
The preferred-auction-rate
problem has become a massive headache for Nuveen and BlackRock Inc. of
New York, the two giants in closed-end municipal bond funds, said
Cecilia Gordon, executive vice president of Thomas J. Herzfeld Advisors
Inc. of Miami, which follows closed-end funds.
"This
[mode of leverage] worked so well for so long that it became the favored
way for municipal bond funds to leverage themselves," she said.
Preferred
auction-rate securities were issued by the closed-end municipal bond funds
to help enhance performance. Proceeds from the sale of the preferred securities,
which were paying relatively low interest rates when issued, were reinvested
by the funds into higher-yielding municipal bonds to boost performance
to fund shareowners.
The preferred
shares were in-tended to be liquid investments, but large investment-banking
firms, which had conducted the auctions to determine the securities' interest
rate, have stopped conducting the auctions because of fears over the creditworthiness
of their counterparties.
The market
for the preferred shares has come to a standstill, leaving their holders
in limbo.
Last Tuesday,
BlackRock announced plans to cash out holders of its municipal funds'
preferred shares by raising $1 billion through the sale of tender option
bonds and $900 million through credit lines and reverse purchase agreements.
Nuveen has
no specific plan to refinance the $11 billion held in the preferred shares
of its muni bond funds, but it is telling advisers that it is trying to
create a preferred money market fund for the purpose.
"It's
a concept in the design phase, but we feel good enough about it to let
advisers know about it, Ms. Kritzmire said. "But [the liquidity problem]
ain't over till it's over."
On April
1, Nuveen announced a refinancing effort that would raise $714 million
to provide about 70% of the liquidity needed to holders of four closed-end
equity funds: Nuveen Multi-Strategy Income and Growth Fund (JPC), Nuveen
Real Estate Income Fund (JRS), Nuveen Tax-Advantaged Total Return Strategy
Fund (JTA) and Nuveen Tax-Advantaged Dividend Growth Fund (JFP).
"This
is a massive problem," said Greg Phelps, principal with Red Rock
Private Wealth Consulting LLC in Las Vegas, whose clients are big holders
of the frozen Nuveen assets and who listened to the most recent conference
call April 3. "There were some really grumpy advisers [on the teleconference].
They were saying they need the liquidity for clients at tax time. 'How
do I pay my taxes?' 'I sell stocks at a loss.'"
Red Rock
manages $45 million.
While Nuveen
and investors in its funds and their securities are in a terrible bind,
the company did nothing wrong, said Steve Winks, principal with SrConsultant.com
of Richmond, Va.
"They're
impeccable," he said. "You can't find anything more reliable
than Nuveen. It's not Nuveen's fault [that the auctions are failing];
it's the fault of the [securities'] underwriters."
Because
of the actions of these underwriters, Nuveen will no longer rely on them
to create leverage in its closed-end funds, said Maria Schwieder, spokeswoman
for Nuveen.
"I
don't think there's any turning back to the old auction-style fund,"
she said.
Instead,
Nuveen will achieve leverage in its closed-end funds by borrowing from
banks, she said.
While refinancing
the preferred shares of the 13 funds that hold taxable bonds may unfreeze
them, the process won't work for the preferred shares of Nuveen's 87 municipal
bond funds, which account for $11.1 billion of the $15.4 billion of securities
that are affected by auction failures since March 12.
Since bank
borrowing will be more expensive than issuing preferred shares, there
will be little benefit from the leverage and yields on the closed-end
fund itself will decline, Ms. Kritzmire said.
Meanwhile,
because of the freeze, "my allocation is now out of whack,"
Mr. Phelps said. "It's a real mess."
E-mail Brooke
Southall at bsouthall@investmentnews.com.
April
20 from
The Los Angeles Times
States
ramp up probes of auction-rate debt mess
Good news
for investors trapped in so-called auction-rate securities: State regulators
are feeling your pain.
Andrewcuomo
The North American Securities Administrators Assn. today said regulators
in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire,
New Jersey, Texas and Washington were coordinating their probes of the
$330-billion market. And late in the day New York Atty. Gen. Andrew Cuomo
was reported to have subpoenaed 18 banks and brokerages about their involvement
in the securities.
Auction-rate
securities are a form of debt issued by many municipalities and closed-end
mutual funds in recent years. They are, in effect, long-term bonds masquerading
as short-term debt. The interest rate they pay typically is reset at weekly
or monthly auctions.
Brokers
often pitched the securities as equivalent to money market funds, but
with higher yields. As the credit crunch worsened this year, however,
many investors have pulled back from complex debt issues. As auction-rate
issues have failed to attract new buyers at their weekly or monthly rate
resets, most current owners of the securities have been told they’re
stuck with them.
That has
left thousands of investors unable to get their cash back, because brokerages
have refused to buy the securities from their clients, and only a small
number of municipal and fund issuers of the debt so far have been willing
or able to retire the securities via refinancing. To say investors are
infuriated is putting it mildly.
NASAA said
the state probes centered on sales practices and supervisory issues related
to auction-rate issues. "Our focus is to determine what conduct took
place at the point of sale -- what was potentially misrepresented and
omitted -- and our goal is securing for investors access to their cash
as requested," said Karen Tyler, NASAA president and securities commissioner
of North Dakota.
"If
the product was represented to be a cash equivalent going in, it must
be treated as a cash equivalent coming out," she said.
April
18
Auction-Bond
Probes Widen as Cuomo Subpoenas 18 Firms (Update4)
By Michael
McDonald
April 18
(Bloomberg) -- Regulators are widening their probes into the collapse
of the auction-rate securities market as states from New York to Washington
scrutinize how Wall Street peddled the bonds to investors and issuers.
New York
Attorney General Andrew Cuomo subpoenaed 18 banks and securities firms
including UBS AG and Merrill Lynch & Co. in an investigation that
could lead to criminal charges, a person familiar with the probe said
yesterday. Officials from nine other states formed a task force to determine
whether brokers misrepresented the debt as an alternative to money-market
investments when they sold it to individuals.
"To
have subpoenas and the threat of criminal investigations raised suggests
that somebody has made up their mind that there really are abuses there,''
said Donald Langevoort, a former U.S. Securities and Exchange Commission
attorney who now teaches securities law at Georgetown University in Washington.
"It certainly suggests something more than regulatory curiosity.''
Officials
are increasing their scrutiny after the $330 billion auction-rate market
seized up in February amid the fallout from the subprime mortgage slump,
leaving some issuers paying rates as high as 20 percent and investors
frozen in the debt. The SEC's inspections office sent letters to the biggest
sellers of auction-rate securities this month seeking the names of customers
who purchased the notes and the identities of brokers who sold them, according
to information obtained by Bloomberg News.
Investor
Complaints
"We're
all getting complaints on a daily basis from retail investors and they
all have the same the story: they were told by their brokers these were
safe as cash and they're not,'' said Bryan Lantagne, the securities division
director for Massachusetts Secretary of State William Galvin and head
of the task force.
In New York,
Cuomo is also asking for information about how bankers persuaded borrowers
to issue the bonds and how the securities firms decided when to stop bidding
in mid-February, the person familiar with the probe said. Dealers had
routinely bought unwanted bonds at auctions to prevent failures for two
decades.
The subpoenas
were issued under the Martin Act, the person familiar with the probe said,
giving New York investigators the ability to file criminal charges. The
banks Cuomo subpoenaed include Merrill, UBS and JPMorgan Chase & Co.,
the person said.
Kris Kagel,
a spokesman for Zurich-based UBS, and Tasha Pelio for New York-based JPMorgan
declined to comment, while Mark Herr, a spokesman for New York-based Merrill,
said the company doesn't comment on regulatory matters.
Stock-Probe
Echoes
Auction-rate
securities are long-term bonds whose interest resets every seven, 28 or
35 days at bidding run by a dealer. They were sold by municipalities,
student loan corporations and closed-end funds, most of whom insured the
debt against default. Dealers collect fees of about 0.25 percentage point.
Unlike Treasuries
or stocks, there is no daily source of information about auction-rate
bonds. Issuers have relied on Wall Street dealers to be buyers of last
resort when bidders couldn't be found, though the banks weren't obligated
to do so.
Since the
first of the securities were sold in 1984 for American Express Co., the
market has expanded as the bonds offered a higher-yielding alternative
to money funds.
Past
Investigations
The probe
is the third in the market. New York-based Lehman Brothers Holdings Inc.
was fined $850,000 in 1995 by the SEC for manipulating auctions conducted
for American Express. Almost two years ago, 15 securities firms paid the
SEC $13 million to settle claims of bid-rigging. The banks neither admitted
nor denied wrongdoing. The SEC also imposed new rules on the market after
the settlement.
"They
believe they've seen smoke and somebody's complained to them,'' said Thomas
Curran, a lawyer at Ganfer & Shore LLP in New York, regarding the
latest probe. "Now they're going to see if there's fire behind the
smoke.''
The SEC
requires dealers to disclose that they may use insider knowledge to place
bids, though they don't have to say how frequently they bid or how much.
Dealers also aren't obligated to disclose rates on auction debt when the
securities trade.
Demand for
auction debt waned this year as investors grew skittish of purchasing
securities backed by insurers whose own creditworthiness is under pressure
because of subprime-related losses. As buyers backed away, dealers who
ran auctions refused to purchase unwanted securities, resulting in thousands
of failures.
Penalty
Rates
When an
auction fails, rates are set at a penalty level spelled out in bond documents
and investors who wanted to sell are left holding the securities. More
than 60 percent of public auctions held each day since Feb. 13 have failed,
according to Bloomberg data.
The average
rate on seven-day securities jumped as high as 6.89 percent on Feb. 20
from 3.65 percent on average last year. It has since declined to 5.14
percent.
"I
don't think anyone ever imagined that these auctions would fail,'' said
Jorge Irizarry, president of the Government Development Bank of Puerto
Rico, whose interest costs rose to as high as 12 percent on failed auction
debt.
Puerto Rico
is planning to convert all of its $643 million in auction bonds to other
securities by month-end, joining states, cities, hospitals and colleges
who have converted or are planning to replace at least $43.1 billion of
the securities by next month, according to data compiled by Bloomberg.
Never
Again
Citigroup
Inc., the biggest underwriter of municipal auction debt from 2000 to 2007,
this week predicted the market will "cease to exist.''
"Obviously
we would never go into the auction-rate market again,'' said David Verinder,
chief financial officer at Sarasota Memorial Hospital in Sarasota, Florida,
which recently converted $165 million in auction debt.
Citigroup
today said it took $1.5 billion of writedowns on auction debt in the first
quarter as it posted its second straight quarterly loss. UBS last month
cut the value of auction securities held by its customers by about 5 percent.
Galvin's
office in Massachusetts subpoenaed information from UBS, Merrill and Bank
of America Corp. regarding the sale of the securities to investors in
the state.
In addition
to Massachusetts, the state task force includes Florida, Georgia, Illinois,
Missouri, New Hampshire, New Jersey, Texas and Washington, according to
the North American Securities Administrators Association. Other states
are prepared to participate in the task force, Lantagne said.
Federal
Regulators
The SEC
said last week it is working with the Financial Industry Regulatory Authority
to examine firms' disclosures to clients who purchased the bonds.
Besides
Citigroup, UBS, Merrill, JPMorgan, and Bank of America were among the
10 biggest underwriters of auction-rate debt from 2000 to 2007. The other
five are Lehman, Bear Stearns Cos., Goldman Sachs Group Inc., Morgan Stanley
and RBC Dain Rauscher.
Spokespeople
at Lehman, Bear Stearns, Goldman, Morgan Stanley and Citigroup declined
to comment. Chris Nietupski, a spokesman for RBC Dain Rauscher, didn't
return a call seeking comment, nor did Shirley Norton of Charlotte, North
Carolina- based Bank of America.
To contact
the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.
April 18
Auction
Rate Agony
By Rich Duprey,
The Motley Fool
"It's
just like cash." Investors may have heard that phrase from their
investment advisors or financial planners, but as they're coming to find
out, "just like" cash is still regrettably far from actual cash.
Palm (Nasdaq:
PALM) and MetroPCS (NYSE: PCS) have been burned in recent weeks by their
holdings in auction rate securities (ARS). These investments supposedly
offered better rates than Treasury bills and money market accounts, and
could be accessed just as readily. Chasing yields to get higher returns,
these companies suddenly found that they couldn't get their money out
when the credit markets seized. Just as fool's gold duped Gold Rush-era
miners, ARS have tripped up modern day investors with their "fool's
cash."
ARS?
Aargh!
Auction-rate securities, as their name suggests, have their interest rates
set at auction every few weeks. Until February, there had been a fairly
robust market for such securities; if the occasional auction failed --
meaning no one was buying the paper -- the investment houses themselves
would buy them. That all changed as credit became more dear. Now, when
the auctions failed, the investment houses refused to buy them, either.
Money that was supposed to be "just like cash" became worthless,
at least in the near term, since the holders of these securities no longer
were able to access those funds.
Like a bank
that shuts its windows during a run, the credit markets slammed the door
to investors who wanted their money back.
The damage
done
Palm's $25 million writedown on ARS holdings inflated its third-quarter
loss from $32 million to $57 million. MetroPCS took an $83 million loss
on its own auction rate securities in its fourth quarter. Other companies
are evaluating their own ARS situations.
Large corporations
like these will probably get their money back, since the bonds underlying
the securities typically have long-term maturities. Intuit (Nasdaq: INTU),
for example, isn't taking any writedowns (as of late March), confident
that the bonds carry top risk ratings, and that the auctions will eventually
open. Bed Bath & Beyond (Nasdaq: BBBY), per its latest conference
call, is taking only a minor charge for the auction rate securities it
holds.
The same
long-term outlook can't be said for individual investors who were put
into these investments by advisors and planners. They believed that ARS
were just like cash, but unlike a multimillion-dollar corporation, they
don't have the same ability to wait out the credit crunch. Many of these
people don't need the cash now -- they needed it yesterday.
Winners
and losers
Some companies that sold their clients these investments have likely damaged
their reputations. And when the thaw does occur, there will be a real
run on cash from their assets under management. Firms like Nuveen Investments,
BlackRock (NYSE: BLK), and Eaton Vance, for example, have some $40 billion
tied up in ARS, all in all. Firms like Charles Schwab (Nasdaq: SCHW),
which has practically nothing invested in the debt, might expect to benefit
at those less fortunate companies' expense.
While many
individuals relied upon their planners' advice to guide them, the same
can't be said of Palm, Bed Bath & Beyond, and Monster Worldwide (Nasdaq:
MNST). They should have seen this coming, but they left their money in
place anyway. Now they find their expansion plans hindered, because they
can't amass the resources to fund that growth.
Like the
signs posted behind some registers at mom-and-pop stores note: "In
God we trust; all others pay cash."
Further
Foolishness that never loses value:
April 18
from the May 2008 issue of SmartMoney magazine
The
"Other Cash Crisis"
Wall Street
has turned a plain-vanilla product into a nightmare for investors.
by
James B. Stewart
have
a simple message for Wall Street: Do the right thing. I say this both
as a client and as a shareholder, and as someone who has recommended the
stocks of big investment banks on many occasions. In
owning and recommending these shares, I am primarily concerned with integrity
-- trust in the foundation on which financial institutions rest. But recent
events have shaken my confidence.
Like millions of other investors, I parked my cash in something that was
sold to me as a money market fund. It appears on my account statement
under the heading "other cash." I've owned shares for years,
withdrawing cash as needed. There are several varieties of these cash
alternatives. In my case they were called auction rate preferred shares
(ARPS), which are shares in a closed-end mutual fund that owns various
kinds of triple-A-rated bonds. There was little or no risk to the principal,
because rates were set at regular auctions. There's never been a default
on an interest payment. For 20 years the auctions continued without incident.
Then in February the auctions failed. Goldman Sachs and Citigroup stopped
bidding and every other major Wall Street firm following their lead. Liquidity
evaporated.
The
main point of a money-market fund or cash alternative is ready access
to cash. In my case and that of many investors, that access vanished.
The assets were frozen, unredeemable. When I called a Merill Lynch broker
to ask whether the failed auctions had any effect on my account, I was
told I was stuck. The only relief Merrill offered was a margin loan against
my assets. In other words, I would have to pay interest to get to my own
money -- which is infuriating, simple on principle.
For
many the situation is much word. Since first writing of my plights on
SmartMoney.com, I've heard from dozens of worried investors. Some don't
know how they'll pay their taxes. Others have canceled home purchases.
Business owners say they can't meet their payrolls. ARPS and similar securities
constitute an $80 billion market; many people owned them without even
realizing it. And it could get worse: As credit woes spread concerns are
mounting that the more ubiquitous money-market unds could face a similar
freeze.
Wall
Street's silence has been deafening. ARPS investors tell me they're heard
no explanation from their brokers. Their statements still carry the shares
at face value, as though nothing happened.
So
I called Goldman Sachs, the firm whose withdrawal from the market helped
trigger the squeeze. I explained that I was a Goldman shareholder as well
as a journalist, that I had recommended Goldman stock and had long admired
the firm for its professionalism and integrity. I wanted to understand
the firm's point of view. Had Goldman notified its clients? Was it helping
clients in need? Was it working to solve this crisis? A spokesman for
Goldman called the next day. "I'm sorry we won't be able to help
you." I was incredulous. The firm had no comment at all? I also called
Morgan Stanley, in part because I had hear from a disproportionate number
(of) disgruntled Morgan Stanley clients. Its spokesperson was slightly
more forthcoming, but he, too, said the company couldn't do much to offer
relief to clients.
A
few firms deserve credit for redeeming their clients' shares. Scotland's
Aberdeen Asset Management redeemed $30 million in ARPS; Eaton Vance redeemed
$1.6 billion. Nuveen Securities, one of the largest issuers, said it was
working to redeem its $15.4 billion in ARPS and hoped to begin by the
end of March. Stranded investors should keep the pressure on the firms
and brokers who sold them these products.
There
are at least a few smaller firms that saw the risks emerging and urged
clients to avoid ARPS. One is SVB Financial Group, based in Santa Clara,
Calif, which serves primarily corporate clients.. In a prescient comment
last August, the firm warned of liquidity risks in the auction market.
Head portfolio manager Joe Morgan told me he took clients our of ARPS
four years ago and has avoid them since. Another laurel goes to LCM Capital
Management in Chicago, a money management firm that has been warning its
clients about risks in nearly all cash-alternative vehicles. Managing
partners, John Nowicki and Gary Wozny told me they moved their clients
out of all non-Treasury money market funds last year after subprime-mortgage
issues first surfaced.
The
ARPS crisis should have a solution, which should also help stave off panic
in markets for other supposedly liquid securities. Despite tremors in
the municipal bond market, the underlying securities are sound. There
have been any defaults; interest is still being paid. The problem is liquidity
and liquidity is a function of confidence. If I were Treasury Secretary
Hank Paulson, I'd be reading the riot act to Goldman, Citigroup, Merrill
and the others who abandoned the auctions they creeated. If these firms
took billions in faltering CDOs and SIVs onto their balance sheets, why
not this triple-A-rated paper? In addition, a government backstop may
be necessary -- not a bailout, but a promise to step in if bonds default.
Once liquidity is restored, there should be no loss to any of the participants,
including the investors now stuck with securities they can't sell.
What's
important is that something be done -- fast. I believe the firms themselves
would like to do right by their clients, but they need to emerge from
their moated fortresses with explanations and solutions. This is an opportunity
to demonstrate courage, leadership and confidence in the financial system
-- and win back the loyalty of a generation of customers. Trust once lost,
is very difficult to restore.
April
18
Someday
Maybe We'll All Need
'Family Office' Bankers
by Joe Mysak of Bloomberg
April
18 (Bloomberg) -- Alexandra Lebenthal calls them the "Lost Affluent.''
As chief
executive of the new Lebenthal & Co., she is trademarking the term
to describe "the $2 million to $20 million investor who isn't well
served at the large brokerage houses and is too small for the ultra-affluent
private banks.''
Just how
ill-served that investor is became clear earlier this year as big brokerages
stopped supporting the auction-rate securities market they created.
The auctions
failed when the firms stopped bidding, forcing bond issuers to pay higher
interest rates and leaving thousands of investors unable to sell their
securities.
The auction-rate
market will soon cease to exist, analyst Prashant Bhatia wrote in Citigroup
Inc.'s North American Investment Daily research note on Tuesday.
The analyst
estimated that the earnings impact on dealers and asset managers would
be very small. "Potential reputational impact could be material if
issues are not quickly resolved,'' he cautioned. ``Basically, clients
could stop using the services of their brokerage and/or asset management
firms as a result of a loss of trust.''
That's what
I've been hearing every week from readers who have anywhere from $50,000
to several million dollars that, in effect, is frozen in their brokerage
accounts. They had relied on brokers to invest their money in a safe cash-equivalent.
Now they find themselves locked into an investment that is anything but.
Skipping
Fine Print
These people
didn't read the fine print. They didn't read the prospectus, nor even
the promotional brochures which spelled out that auctions might fail --
though they rarely described what might happen next. The brochures, of
course, never brought up what might happen in the sort of catastrophic,
never-ending failure we have today.
These investors
instead relied on their brokers, and now rue the day. They thought their
money would command a certain level of attention and respect and service.
Evidently,
they were wrong. It looks like the brokers that sold them this stuff also
didn't read the documents that spelled out the risks of auction-rate securities.
Still, the
"Lost Affluent''? You've got to be kidding. Is that like the "Lost
Generation''?
I originally
visited Alex Lebenthal because I thought the story of how she bought back
her name was a pretty good one. I've also known her father, Jim, since
1981 and thought it might be nice to stop by for a chat.
Unretiring
Lebenthals
The family
sold Lebenthal & Co., a municipal bond specialist founded in 1925,
to Mony Group Inc. in 2001. Merrill Lynch & Co. bought Mony's Advest
brokerage unit in 2005 and then retired the Lebenthal name.
The Lebenthals
didn't want to stay retired. In 2006, Alex and her father started Alexandra
& James, a "multiple-family office'' to cater to the needs of
the "Lost Affluent.'' (Really rich people don't do mundane things
like write checks or put stamps on bills. They have people do that for
them in "family offices.'')
Lebenthal
& Co. reopened its doors as a broker-dealer in March after the family
paid Merrill $1,000 to get the name back.
The more
mail I got from auction-rate securities holders, the more I wanted to
know about this "family office'' business. For most people, a "family
office'' is located just off the rec room, right?
How Many
Wealthy?
I asked
Alex about how big this group of the "Lost Affluent'' was. She said
that, according to the Family Office Exchange, a Chicago-based advisory
firm to such firms and their consultants, there are 1.3 million families
with wealth of $10 million to $25 million. That's money they can invest,
not including residences and such.
Ruth Easterling
of the Family Office Exchange said they didn't have data on the "lower-end
market segment,'' those with between $2 million and $10 million to invest.
I bet it's a lot bigger than anyone thinks.
The Internal
Revenue Service says there are almost 3 million taxpayers with adjusted
gross incomes of between $200,000 and $500,000. I bet we're talking about
a multiple of that 3 million figure if we talk about people having accumulated
wealth of between $2 million and $10 million. Six million? Ten million?
Twenty million?
Alex Lebenthal
has 50 clients so far in her "multiple family office'' who pay annual
advisory fees of 1 percent on the first $5 million of market value under
management, and hourly fees of between $90 and $360 for services ranging
from bookkeeping and bill-paying to managing medical claims.
As for the
holders of auction-rate securities who have experienced what amounts to
a bank failure, though it may yet prove temporary: Investors have made
clear to me that once they get the money from their brokers, they're gone.
All this
makes me wonder how many Wall Street securities firms will still have
individual investor customers in three years.
(Joe Mysak
is a Bloomberg News columnist. The opinions expressed are his own.) To
contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net.
April
17
Cuomo
Subpoenas Banks in Auction Probe,
Person Says (Update1)
By
Michael Quint and Michael McDonald
April 17
(Bloomberg) -- New York Attorney General Andrew Cuomo's office issued
subpoenas to 18 banks and securities firms as part of a criminal probe
into the marketing of auction-rate bonds to investors and issuers, a person
familiar with the investigation said.
The subpoenas
were issued under the Martin Act, which gives New York investigators broad
powers. John Milgram, a spokesman for Cuomo's office, declined to comment.
Securities regulators in nine other states led by Massachusetts separately
today said they formed a task force as they investigate the auction market.
"We're
all getting complaints on a daily basis from retail investors and they
all have the same the story: they were told by their brokers these were
safe as cash and they're not,'' said Bryan Lantagne, the securities division
director for Massachusetts Secretary of State William Galvin and head
of the task force.
Regulatory
scrutiny of Wall Street has been growing since the $330 billion auction-rate
market collapsed in February, leaving some issuers paying higher penalty
rates and investors unable to sell their securities. The Securities and
Exchange Commission last week said it is working with the Financial Industry
Regulatory Authority, which oversees brokerages, to examine firms' disclosures
to clients who purchased the bonds.
The Massachusetts
Secretary of State's office said on March 28 that it subpoenaed information
from UBS AG, Merrill Lynch & Co. and Bank of America Corp. regarding
the sale of the securities to investors in the state. A number of individuals
have also filed lawsuits against Wall Street banks that sold the bonds.
Auction-rate
securities are long-term bonds sold by municipalities, student loan corporations
and closed-end funds with interest rates that are reset on a weekly or
monthly basis. Much of the debt was guaranteed by bond insurance companies
that also backed subprime mortgage-related securities.
Demand for
the debt fell earlier this year after AAA rated bond insurers were downgraded
because of their subprime guarantees. Wall Street banks running the auctions
stopped stepping in to buy the bonds in February when there weren't enough
bidders, permitting thousands of failures that triggered rates as high
as 22 percent.
Cuomo is
also asking for information about how bankers persuaded borrowers to issue
the bonds and how the banks came to decide when to stop bidding in mid-February,
the person fami |
