Bloomberg News reports that two more big banks -- JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS) have made offers of $7 billion to 30,000 holders of Auction Rate Securities (ARS) -- those long-term securities whose yields reset in weekly auctions until the auctions failed this February. JPMorgan and Morgan Stanley also agreed to $60 million worth of fines. This brings to five the number of large firms that have settled so far. The Wall Street Journal reports that of the big firms that have yet to settle, Goldman Sachs (NYSE: GS) is proving to be among the most unhelpful to its clients.
Meanwhile, the Wall Street Journal's James Stewart, who first got me writing about the ARS catastrophe, has finally broken his silence. And he seems to think that the ARS mess is much worse than he originally thought back in February. Stewart was shocked that brokers were unloading this toxic waste on customers so they could get it off of their books and out of the accounts of their executives. Stewart's reaction struck me as surprisingly naive -- particularly considering his long track record of reporting on Wall Street misdeeds.
Nevertheless, the problems with the frozen ARS continue to stress out investors who fell victim to Wall Street's chicanery. Among the top 10 municipal ARS issuers, the following have yet to offer any restitution to ARS holders (the value of their 2007 ARS issuance is in parentheses):
- Goldman Sachs ($4.3 B)
- Bank of America (NYSE: BAC) ($3.7 B)
- RBC Capital Markets ($1.2 B)
- Lehman Brothers (NYSE: LEH) ($1.1 B)
- Wachovia (NYSE: WB) ($0.6 B)
There are many other small and medium sized firms that are still holding up their investors. But I am somewhat surprised that Goldman is keeping its high net worth clients in ARS limbo. The Journal quotes Carl Everett, an adviser to Accel Partners and a former high tech executive, whose ARS froze in February (pun intended).
But last Friday, Goldman told Everett that "it will not buy back his" ARS. The Journal quotes Everett as saying, "That's disappointing to me -- my expectation is for the Goldman Sachs brand. My expectation for that is they would honor their position and statement of these securities as cash and cash equivalents."
As Stewart pointed out, while the short-term costs to do the right thing for ARS investors will be high, the long-term cost will be the loss of trust. I have posted many times about this and wonder why anyone would pay a broker to put the firm's interests ahead of those of its clients.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
