BusinessWeek has provided investors a valuable public service by reading through rafts of e-mails subpoenaed by Massachusetts and New York in their suits against UBS AG (NYSE: UBS). Its analysis reveals that the collapse of the $330 billion Auction Rate Securities (ARS) market -- in which customers bought what they were told were cash-like investments with slightly higher yields that reset in weekly auctions -- did not collapse in the way that ARS peddlers claimed. And this difference between what BusinessWeek reveals and what ARS peddlers claim could put the peddlers in deep legal yogurt.
ARS peddlers claim the weekly auctions were going great until February 2008 when they suddenly failed. BusinessWeek found that ARS auctions began failing over two years earlier than the ARS peddlers claimed. Specifically, it found that "from January 2006 through February 2008, UBS bought securities at 88% of the 30,000 auctions it ran" because not enough buyers showed up at the auctions. And UBS and 15 other brokerages failed to disclose that they were propping up the auctions. As a result, in 2006, the SEC fined those brokerages $13 million -- including Citigroup (NYSE: C) and Merrill Lynch & Co. (NYSE: MER) -- for "failing to disclose that they sometimes supported the auctions."
Despite their efforts to support the auctions, ARS inventories accumulated on brokers' books. By August 2007, UBS's inventory had tripled to $3 billion, from $1 billion in March 2007. David Shulman, the UBS executive in charge, mobilized his 850 brokers to dump the ARSs from UBS' books to its private client accounts. But Shulman, who is on-leave from UBS, front-ran that trade. As BusinessWeek reported, "Only hours earlier, Shulman had moved to cut his personal exposure. E-mails show that UBS's compliance department cleared him to sell $475,000 worth of auction-rate securities from his own account."
UBS and New York State are at odds as to the remedy. BusinessWeek reports that on July 15, UBS announced a plan to buy as many as $3.5 billion of its ARSs at full value -- excluding the ARSs backed by student-loans. New York Attorney General Andrew Cuomo wants UBS to buy back all $25 billion UBS customers' ARSs.
The moral of the story is that consumers' interests are usually at odds with those of commissioned brokers. The broker wants to sell products that will generate the highest commissions. The consumer wants to preserve capital and -- in some cases -- to take some risk and make higher than average returns. The ARS scam should make all investors think twice about whether it makes sense to give brokers access to their money.
Update. Bloomberg News reports that Massachusetts has just announced a lawsuit against Merrill for ARS fraud which states, in part, "Time after time, when confronted with conflicts of interest, Merrill Lynch was consistent in that it placed its own interests ahead of its investor clients." Bloomberg also wrote that Massachusetts wants Merrill to "'make good' on sales of now-frozen holdings, compensate investors who sold their bonds or shares at a loss and pay an unspecified fine."
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 @ 6:03PM
Carl said...
It's good to know that as a "preferred" private bank client of UBS my bankers are staying up late at night to figure out how to seperate me from my money.
The hell with an above market rate of return, how about capital preservation!! How about not getting screwed by these crooks. As far as the staff in Compliance that ok'ed Shulman's dumping, I hope they were fired with ZERO SEVERENCE..
I'd rather have someone pull a gun on me and take my wallet because at least I saw the thief !!!
7-31-2008 @ 6:41PM
william lindblad said...
Peter, since you wrote this, does it tell you what it is telling me?
I assume that you are correct in reporting and if so, than the SEC knew full well that there were good sized problems in the financial system. Since this was back in 2006 it would remain a puzzle as to why an alarm was not sounded, at least to other government entities, like the Fed and Treasury? Interestingly Greenspan was on today's late segment of CNBC and among his comments were the fact that the government cannot let Wall St. have a major failure. As you say socialization?
What I see and read is slowly making a case that government, over many branches, knew that problems were coming - and did nothing. All that is emerging seems to imply that the SEC, OFHEO and Fed are little more than puppets to Wall St. and the banking industry. This is starting to look like the Eastern Roman Empire, ca. 350 ad. Incompetence, corruption and imports all over.
8-01-2008 @ 4:19PM
David Huston said...
Why would anyone think that the Bush Administration, and particularly the "regulators" selected by Bush, would lift a finger to regulate or, God forbid, help consumers out (which way did you come in)? You may recall that Bush and his henchmen don't believe in regulation; instead they say they're wholly in favor of free market forces at work. That is, unless their pals run into trouble, then let's let the public start bailing! In the meanwhile, Bush is trying to resshape our country into a fascist state.
8-03-2008 @ 10:06PM
joe said...
brokers are without a doubt always out to make the big commision..most of the time they already have the response prepard for when the stock they told you to buy goes down...even before you buy it...i know because i was a broker for 9 years and witnessed alot of unethical ....things.
8-02-2008 @ 9:03AM
winer20 said...
Our banker at Citi, not one there who put us in the ARS garbage, told us after the auctions fell apart that the banks had been buying up 30-40% of the market on a regular basis, and that "one week, the 3 biggest ones decided to stop buying." These banks did not reveal that they were the market! The criminality of these thieves should be punished with jail time, too.
8-02-2008 @ 3:39PM
Americas Watchdog said...
Hi Peter;
Thank you for your continued interest in the auction rate securities mess. Your blogs have helped push states like to New York into actually doing something. We think of you & Gretchen of the New York times as saints.
We have been trying to help consumers in this mess for almost 6 months & we do not hold out much hope for states actually forcing the stock brokers & banks into giving people 100% of their money back. But its a start.
Keep Up the great work
Thomas Martin
Americas Watchdog
8-12-2008 @ 4:51PM
poorschmud said...
isn't anything sacred anymore? now even swindlers and crooks can,t make a dishonest buck anymore!
8-18-2008 @ 11:35PM
Robert said...
The main blog on Auction Rate Securities is entitled "When the collapsed Auction Rate securities gets personal" and that is where you should blog.