Imagine your broker parked your funds in an account that he said would be as safe as a money market fund but offer slightly higher yields. If you went for that line, you might now be among those who hold the $330 billion worth of Auction Rate Securities (ARS) whose weekly price-setting auctions stopped working in February. Now, Bloomberg News reports that those who are trying to get at their funds through arbitration will be lucky to receive 22 cents on the dollar.
I first began posting on the ARS market back in February. Since then 5,482 comments have appeared from people trying to unfreeze their funds from what their brokers told them were safe investments. Massachusetts and New York have sued one of the ARS hawkers -- UBS AG (NYSE: UBS) -- thanks to e-mails that indicated that when the ARS auctions failed, UBS decided to dump this toxic waste on individual investors rather than take the losses on its own books. New York's attorney general found that UBS executives sold $21 million worth of their ARS holdings before launching this campaign to dump them on the public.
Many are now trying to get their money back through a process called arbitration. If your claim is above $50,000 you will face a panel of three judges, two "public" and one of whom represents the ARS industry. Bloomberg reports that the process for choosing the panelists virtually assures that consumers will be judged by a representative of the industry that defrauded them. So it's no wonder that arbitration rulings have given investors enormous haircuts.
How big? Bloomberg reports that the win rate for consumers has been declining and now stands at about 50-50. Consumers won 53% of their arbitrated cases in 2001 but only 36% in 2007 -- that figure has improved so far in 2008 to 47%. That means that so far in 2008, 53% of consumers get nothing at all and 47% get something.
Sounds like pretty good odds, no? Perhaps so -- until you consider how big that something is. Bloomberg reports that a study of arbitration rewards found that they "peaked in 1998, at 38 cents on the dollar, falling to 22 cents in 2004." If there is any silver lining in this it is that some ARS holders have gotten the option of taking 80 cents on the dollar from their broker and then going to arbitration to try to recover the other 20 cents.
So if that investor has $100,000 in ARPs, she might get $80,000 back, and if arbitration yields 22 cents on the dollar, she gets $4,400 more (22% of the $20,000). But when you take into account the mental anguish of having your life savings frozen for months with no clear path to getting them back and you couple that with the cost of paying lawyers to wrangle with an arbitration panel that's tilted against you, it makes me wonder why anyone would ever again pay a broker to handle their money.
Do you pay a broker? If so, why?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
7-31-2008 @ 5:47AM
scottwired said...
I have $1.2mm (down from $2million a few months ago, when some of my ARS's redeemed a portion). My soon-to-be-ex broker is Morgan Stanley, asset managers i've been with for five years. My explicit instructions were to stay conservative, stay in cash, be liquid. ARS's, I was told, were liquid to the extent it could take as many as seven days to liquidate. Sounds pretty liquid to me, so yes, i'll take the 100 basis points over money markets, sure. I was but a small investor with this group -- only 8 million in assets. So I figured if the well-heeled were safely in ARS's, so could I be. Now I am desperately trying to turn this garbage into cash. I can't sleep at night, my future lies in their incapable, deceiving hands, and I got all that for about $30k/year in management fees. I am in the process of firing Morgan and moving my assets to Schwab, where I can self direct. My Morgan guy claims he was caught completely off guard by this crisis. I say, you're paid to not be off guard -- I can be off-guard on my own, for free. You're the expert, figure it out. Needless to say, I am done with private wealth management brokers forever. It's a crisis of confidence, and if you don't trust your broker, you have nothing.
8-10-2008 @ 10:06PM
Robert said...
I sold my company in January of this year and put the entire first (and largest) payment in my bank of 11 years, JP Morgan Chase Manhattan. Nothing safer than a bank right? didn't even think twice. Didn't know what an ARS was until May when I tried to move the money to checking and checked my online banking balance and found the money not there. Imagine my panic.
These guys never disclosed it was at risk, EVER or I would NEVER, EVER have done this. It would have stayed in savings. The extra point not worth it you know? Same as a money market but with higher interest and you just needed 7 days notice to get your money Chase said.
Try 27 years, when these Student Loan Muni bonds mature. There is my retirement as far as I'm concerned. Only thing is I spent 7 years of blood, sweat and tears, literal tears slaving at a business, so I could sell it and finally relax for a couple years.
I had my money for about a month then Wall Street Hijacked it. I will do EVERYTHING within my power to make sure Wall Street and the banking industry pays for this. I will speak out and am planning on doing a documentary on this (I'm a TV producer). These greedy people never help anybody that I can tell and they are morally bankrupt. Living in NYC I almost can't stomach these fake tan, custom suite, manicured nails, arrogant little wussies.
My Merrill Lynch guy lied and said he got his clients all out and saw it coming. Well, now ML is getting investigated. They are all liars I guess.
JP Morgan Chase is on every corner in NYC like Starbucks. Sucking up real estate, buying Bear Stearns, but won't help their customers out of this mess, though it would only cost them $3 billion.
I'm angry, not flash in the plan irritated angry, I'm forever changed and deep down inside and DANGEROUSLY pissed off.
I hope Cuomo does the right thing and investigates JP Morgan Chase next..If he doesn't, you have to ask yourself "why".. since they did exactly what UPS, Citi and Merrill did.
The media is a powerful tool.. and revenge is best served cold.