What the Auction Rate Securities Settlement Doesn’t Do

The New York State Attorney General and the other regulators participating in the auction rate securities (ARS) settlement talks are surely to be commended for their action and diplomacy. Auction rate securities clearly were fraudulently marketed to investors and without the regulatory pressure and investigations; there would be no light at the end of the tunnel. And lest anyone think Wall Street is owning up to its mistakes, know the real reason banks have come to the table are the potentially ruinous emails and evidence that would have surfaced had an investigation continued. The emails that surfaced at Merrill Lynch and UBS showing ARSs were sold to unsuspecting investors while internally it was clear the market was poised to collapse is the tip of the iceberg in all likelihood.

But putting Wall Street’s disingenuous generosity aside for the moment, based on details of that have emerged, it seems to fall short of true retribution for the fraud which occurred…and I’m not referring to Goldman Sachs’ apparent non-participation.

First off, though it appears that brokerages will be buying back auction rate securities over the course of the next year, clients that suffered consequential damages are left out in the cold. Many of our clients were not able to close on transactions such as homes and tuitions because of the ARS market’s collapse. Non-profits were not able to meet their philanthropic obligations as well. Cases seeking to recover these consequential damages are likely to continue in arbitration.

Secondly, ARSs were fervently pitched to corporations as “cash equivalents,” so many very sophisticated CFOs and comptrollers tied up their free cash flows in these securities. Payrolls were missed, financing opportunities passed by and business operations were hampered. These claims will likely proceed as well.

Thirdly, some investors were able to sell their ARSs in the secondary market, usually at steep losses. It’s currently unclear whether they will be compensated for their losses.

And importantly, many angry investors moved their accounts to other firms; and burned brokers, switched firms because their brokerages pressured them into buying and selling auction rate securities. This seems to be a grey area as well. For example, if an investor left Merrill Lynch after getting ensnared in its ARS offerings, and moved his/her account to competitor, it is unclear whether that investor will be made good.

Finally, it appears that Wall Street will be customarily let off the hook by not admitting any wrong doing. At the very least, senior managers who oversaw the ARS market and were responsible for its marketing should be held responsible.

Indeed, when the dust settles on the auction rate securities settlements, its likely Wall Street’s problems won’t go away. As they say, the devils in the details.