Bloomberg News reports that Merrill Lynch & Co., Inc. (NYSE: MER) has extended its Auction Rate Securities (ARS) redemption offer in response to what I thought was pressure from New York Attorney General Andrew Cuomo who threatened to take Merrill to court. But what is interesting is that Massachusetts Secretary of State William Galvin was the one who announced the settlement.
While the politics of this intrigue me, those who held Merrill ARSs (pun intended) care about the terms of the settlement. Bloomberg reports that Merrill "will begin the buyback on October 15 for individuals, nonprofits and small business with $3 million or less on deposit. Redemptions for clients with $100 million or less start on January 15." This Merrill deal adds to the one it announced on August 7 -- a voluntary buyback of $10 billion worth of ARS. Merrill has a total of "30,000 clients who held an estimated $12 billion" according to Bloomberg.
This leaves many major ARS issuers lagging behind their peers. Here are four holdouts (with their 2007 municipal ARS issuance in parentheses):
CNNMoney notes that Morgan Stanley said it would offer to repurchase all ARS "held by individuals, charities and small and medium-sized business with accounts of $10 million or less at the bank." Morgan Stanley will begin to start buying back $4.5 billion worth of ARS on September 30th and will "make its best effort to provide liquidity solutions" for institutional investors by the end of 2009. But New York attorney general Andrew Cuomo is not satisfied with Morgan Stanley's proposal.
Meanwhile, the list of big ARS issuers that have not settled grows shorter. Here are six holdouts (with their 2007 municipal ARS issuance in parentheses):
Merrill Lynch & Co., Inc. (NYSE: MER) announced that it would follow Citigroup, Inc. (NYSE: C) in redeeming its Auction Rate Securities (ARS). Unlike Citi -- which plans to redeem $7 billion worth of ARS by November -- Merrill will take its sweet time. According to MarketWatch, from January 15, 2009, and through January 15, 2010, Merrill will "offer to buy at par" $10 billion worth of ARS it sold to 30,000 retail clients.
This is good news and it should get the ball rolling. But there are still at least $300 billion ARS which are not yet redeemed. The list of issuers reads like a who's who of the banking world. For instance, the Wall Street Journal reports that the top 10 municipal ARS issuers at the end of 2007 were as follows:
BusinessWeek reports that Wall Street has its eye on a new pot of cash -- your pension. And it's a mighty big pot -- $2.3 trillion. But Wall Street is not looking at the entire pension industry, just a $500 billion portion known as "frozen plans" that are closed to new employees and whose benefits are capped. McKinsey forecasts that frozen plans will triple to a hefty $1.5 trillion by 2013.
As usual, Wall Street's plan to buy these frozen pensions will line its own pockets and it will help companies as well. For example, if Wall Street charged a 2% management fee, that alone would generate $30 billion in revenues by 2013 if it bought all the frozen plans, but that fee income is probably the tip of the iceberg.
Companies are eager to dump their frozen pension plans. Why? These limping plans weigh down corporate balance sheet and new accounting rules will require companies to mark the value of their pension assets to market each quarter. In a down market, that could wipe out a company's operating profits.
After reading an interview in the New York Times with Merrill Lynch & Co. (NYSE: MER) CEO John Thain, I began to wonder whether Wall Street, as it currently exists, needs to change.
What's wrong with Wall Street? Here are five things:
Rewards employees, not shareholders - It pays as much as 76% of its revenues to the people who work there (e.g., in 2006 Merrill paid $17 billion in compensation and its revenue totaled $22.4 billion). That pay is linked to revenue, not how much money their deals make for customers. This encourages them to close big deals fast rather than paying attention to quality.
Puts its own interests ahead of its clients' - One need look no further than how firms pushed their toxic Auction Rate Securities (ARS) off their books and into the accounts of individual investors.
Absorbs talent that could solve more important problems - That money sucks up the world's brightest minds. Those MIT PhDs could have been inventing ways to lessen our dependence on oil and gas instead of Collateralized Debt Obligations (CDOs).
The Washington Times reports that Phil Gramm, UBS AG (NYSE: UBS) vice chairman and senior economic advisor to John McCain (R.-AZ), thinks we're a nation of whiners. Gramm's UBS is a leader on three important fronts in the effort to destroy the U.S. economy: the $1.3 trillion subprime mortgage catastrophe, the $330 billion Auction Rate Securities (ARS) freeze, and a tax evasion scheme of unknown magnitude.
The Washington Times quotes Gramm as saying: "We have sort of become a nation of whiners. You just hear this constant whining." UBS probably pays Gramm well for his services so I can see where he's coming from. He is making money and he's the only one who matters. But if you think he is helping McCain, think about these things:
The Wall Street Journal reports that the $330 billion auction rate securities (ARS) scandal, which since February has frozen the funds of investors who thought they were getting a low risk place to park their cash, has finally generated its first criminal probe. The charge is that two Credit Suisse brokers lied "to investors about how they placed their money into short-term securities."
I have been following the ARS scandal since February when I first became aware of the situation. Since then, my post has generated 5,036 comments from people whose money has been frozen thanks to the collapse of the weekly auctions that were intended to set the yields on these municipal bonds. These commenters are trying to team up to figure out how best to get back their money.
The Journal reports that the Justice Department's U.S. attorney's office for New York's Eastern District, represents the first known criminal matter stemming from the crumbling ARS market. Up until then, the lawsuits were of a civil nature -- seeking class-action status and more than 80 individual arbitration claims. But a criminal probe based on lying could result in cash damages and jail terms for these brokers.
Bloomberg News reports that 10 of the biggest names in investment banking are blocking investors from getting their hands on their share of the $330 billion Auction Rate Securities (ARS) that they were told was as safe as a money market fund.
I first posted about this back in February and now it has 4,325 comments from people trying to get at their money. Bloomberg quotes one victim of frozen ARS syndrome: Franklin Biddar, a 65-year old real estate investor who can't get his $100,000. "I can't do anything," said Biddar, who was so eager to unlock his money that he was willing to accept 11 percent less than what he paid for the securities. "Bank of America (NYSE: BAC) got me into these securities that are supposed to be as safe as a money market, and now they won't get me out."
Here's a list of the banks involved in this money blocking operation and the volume of municipal ARSs they issued between 2001 and 2007:
Auction-rate securities, which traded regularly since 1985 and were sold to many investors as "cash equivalents", hit a pocket which no one expected. The banks which ran the auctions shut them down because they did not want any of the underlying securities on their balance sheets. Now companies and individuals who bought the paper cannot readily get their money back.
Ultra-aggressive NY State Attorney General Andrew Cuomo, clearly hoping to become the state's governor one day, has launched a huge probe into why the banks killed the market. According toThe Wall Street Journal, "Mr. Cuomo's office sent subpoenas to 18 institutions on Monday and Tuesday seeking information on their auction-rate-securities." Firms including Merrill Lynch (NYSE:MER) and Citigroup (NYSE:C) have been asked for documents.
Two legal issues face big banks and brokerages involved in the auction-rate market. The first is whether they had an obligation to keep a market open which had operated successfully for over two decades. They fundamentally left their clients holding the bag.
The second potential charge is much more significant. Did brokerage houses represent to clients that the paper was virtually the same as cash, redeemable at any time? If so, buyers of the securities may make a series of claims involving fraud. Several suits have already been filed.
In a market which was over $300 billion dollars, the potential liabilities are substantial. It is just the kind of case than can get a guy elected to higher office.
Douglas A. McIntyre is an editor at 247wallst.com.
Bloomberg News reports that Merrill Lynch & Co., Inc. (NYSE: MER) has extended its Auction Rate Securities (ARS) redemption offer in response to what I thought was pressure from New York Attorney General Andrew Cuomo who threatened to take Merrill to court. But what is interesting is that Massachusetts Secretary of State William Galvin was the one who announced the settlement.
Auction-rate securities, which traded regularly since 1985 and were sold to many investors as "cash equivalents", hit a pocket which no one expected. The banks which ran the auctions shut them down because they did not want any of the underlying securities on their balance sheets. Now companies and individuals who bought the paper cannot readily get their money back.
Big 3 CEOs drive to Washington to suck up to Congress
GM and Ford ready weak pitches for taxpayer bucks
Cramer on BloggingStocks: A troika of opportunity and trouble 
