The Auction Rate Securities Settlements: An Illusion of Regulation

Merrill Lynch proclaims that it "...demonstrates its commitments to clients and shareholders through the firm's emphasis on excellence, integrity and ethical behavior."

This week it joined a who's who list of its prestigious brethren in agreeing to buy back auction rate securities it sold to its retail clients. The settling firms now include Citigroup, JP Morgan Chase, Morgan Stanley, UBS, Wachovia, Goldman Sachs and Deutsche Bank, all of whom profess to greatly value their relationship with the clients they victimized.

In a spin noteworthy for its audacity, Robert J. McCann, president of Global Wealth Management at Merrill, stated: "We have been working on behalf of our clients since this liquidity problem began. We will continue to work actively across the industry, as well as with our financial advisors, to ensure that we continue to serve our clients well."

All of the settling firms "neither admitted nor denied allegations of wrong doing", which is lawyer speak for permitting them to defend private lawsuits by third parties who would otherwise be entitled to use the settlement as evidence of liability.

This escape hatch is meaningful, because the settling defendants have agreed to purchase back only ARS sold to their clients. Why not do the right thing and purchase back all the ARS that were sold to all investors who were harmed because these firms perpetuated the myth of a legitimate auction?

These investors, who make up the bulk of the $330 billion ARS market, will need to prove their claims in private arbitration proceedings, before industry panels, where they are unlikely to be awarded any meaningful damages.

Effective regulation of this rogue industry will only be forthcoming with the involvement of U.S. Attorneys, who have been remarkably passive to date, leaving the heavy lifting to William Galvin, the Secretary of the Commonwealth of Massachusetts and Andrew M. Cuomo, the Attorney General of New York.

If the conduct that resulted in these settlements is true, then these firms should be prosecuted for violating the Racketeer Influenced and Corrupt Organizations Act (RICO). This criminal statute is applicable to securities frauds. It would permit a charge of racketeering, with fines of up to $25,000 and jail sentences of up to 20 years in prison for each count. If convicted, defendants would be required to disgorge all profits generated from their illegal activity.

This would be meaningful regulation. Anything less is merely an illusion.

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Comments

[Sundialsvc4]

I don't think it's too hard to "decipher" a market that is based on the buying-and-selling of TOILET paper.

Let's just "call a spade a spade." A worthless piece of paper is just that. It doesn't really matter who the sucker was, or why he decided to buy it. The crime of "fraud" is legend. It's been with us for thousands of years.

[zizyphus]

I am no economist, but even I can see that banks are run like organized crime, with the collusion of the Justice Department.

[theeconomicfractalist]

What's Next? Devolution of Asset Valuations

All the occurrences that are cited are mere epiphenomena of the ongoing necessary progression of the mechanistic quantum US and global macroeconomic asset collapse. Plain in sight, in front of all eyes, few perceive the very simple quantum laws that characterize the global macroeconomic system of wages, asset valuation, asset production, asset supply, debt facilitation and total debt.. The global macroeconomy is an elegantly simple and limited feedback system that is defined in quantum evolution of asset valuations proceeding to asymptotic growth saturation and asymptotic decay saturation.areas. This new science has predicted the exact 11 October 2007 nominal high for the US Wilshire, proxy for the world equity summation value, defining a final fractal sequence starting in October 1998 that original commenced in 1858. Since 1998 US GDP growth has been literally pushed a on a string of debt that has created a collapsing mirage of asset growth and where gross debt has been confused as a asset. Put away the newspapers, the internet economic blogs ,and the daily coincidental publicized rationals for daily lower fractal order of growth and decay and observe only, quietly and silently, the longer term valuations fractals that are the true reflective quantum progression of a declining global money supply - as nonrepayable debt is integrated and summated in an exactly reflective asset valuation market. Kindly visit: Lammert's The Economic Fractalist at http://www.economicfractalist.com/blog/?page_id=2.

[CAPTAINSKIPPY]

Might this slow, slow inaction have any connection to how the Justice Department has operated for the last 8 years with the Bush implementation of "deregulation"?

[Halsey]

Finally yesterday a client of mine who bought auction rates at Morgan Stanley...got her money !....

and yes...."they" did this to avoid the lawsuits....as much as it cost to redeem these securities...it was NOTHING compared to what they'd have to have paid in arbitratio­n....smart move guys....

the whole mess is disgusting...

[Rule Of Law]

Dan, good to see you broaden your focus from funds to the issues of the day. This sort of political activism is much needed in the economic sphere, which, for anyone paying attention, is the only part of government that really matters--follow the money has never been as true as it is right now!

But be careful; a few more columns like this one and you'll get to be as radicalized as Bondad. :)