Vinny’s Blog

Updated : August 2nd 2008.

NY to file fraud charges against Citigroup

New York State Attorney General notifies banking giant of intent to file charges over sale of troubled auction-rate securities and claims Citi destroyed documents.

These are some of the best banking practices……….enjoy………..

http://money.cnn.com/2008/08/01/news/companies/citigroup_cuomo/index.htm?postversion=2008080117

—Wrote earlier ————-

Let us revisit auction rate securities. I wrote about them a while ago back in April [ see previous post here http://www.diwakars.com/wordpress/?p=150 ]

This is yet another mess ! besides SubPrime..

Below is extract from my previous post in case you have trouble remembering what are auction rate securities, you may want to read article written earlier just to refresh your memory about them.

In short and in a simple example this can probably be explained as follows Let us say there is a 30 year loan ( otherwise called debt/bond etc). Now, instead of setting the interest rate right at the beginning of the loan for entire 30 years. We hold a meeting (auction) every 7, 28, or 35 days and let market decide in that meeting (auction) what the interest rate is going to be for the next every 7, 28, or 35 days. And we do this regularly till the length of the loan (debt).

So months later where are we in terms of Auction Rate Securities ?

Banks Say Auction-Rate Investors Can’t Have Money (Update1)

June 6 (Bloomberg) Franklin Biddar wants his money, and says Bank of America Corp. won’t let him have it.

The 65-year-old real estate investor from Toms River, New Jersey, said he hasn’t had access to cash the bank invested for him in auction-rate preferred shares ever since the market seized up in mid-February. Even when Biddar agreed to sell $100,000 worth of the securities to Fieldstone Capital Group, Charlotte, North Carolina-based Bank of America wouldn’t release the bonds, saying the transaction wasn’t in his interest, he said.

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 got me into these securities that are supposed to be as safe as a money market, and now they won’t get me out.

Bank of America, UBS AG, Wachovia Corp. and at least four dozen other firms that sold $330 billion of securities with rates set through periodic bidding are thwarting attempts to create a secondary market that would allow investors to access their cash, according to investors. Dealers claim they are saving customers from needless losses on securities they marketed as similar to cash-like instruments.

http://www.bloomberg.com/apps/news?pid=20601213&sid=aAH2ChDscVkA&refer=home

How did Franklin and others got into Auction Rate Securities ?

June 27 (Bloomberg) UBS AG was attempting to liquidate an $11 billion albatross of auction-rate bonds by selling the debt to individual investors as the market for the securities started to collapse, according to company e-mails.

While executives at the Zurich-based bank identified the hazards of auction-rate securities in August, they simultaneously began to mobilize the troops, holding more than a dozen conference calls with salesmen and giving them new marketing materials to promote the bonds, according to e-mails from David Shulman, the head of UBS’s municipal securities group. The pressure is on to move inventory, he said in an Aug. 30 note.

http://www.bloomberg.com/apps/news?pid=20601087&sid=axgTYn5VA3R0&refer=home

What is the situation now ? What about customer’s money ?

Law Suit of course what else !

Wachovia Securities raided in auction rate probe

Hundreds of Missouri investors have called my office because of inability to access their money. They were told these investments were safe and easy to cash in, but now they cannot run their business, make medical payments, or pay school tuition, Carnahan said in a written statement.

Missouri said it subpoenaed more than a dozen Wachovia Securities agents and executives after receiving more than 70 complaints over four months, concerning in excess of $40 million in frozen investments.

http://biz.yahoo.com/rb/080717/wachovia_probe.html

UBS hit with New York auction-rate security suit

The lawsuit charges UBS (UBS) with falsely marketing and selling auction-rate securities as safe, cash-equivalent investments at a time when the market for these securities was under severe strain.

Today we bring the first nationwide lawsuit against UBS, seeking to recover billions of dollars for customers and sending a resounding message to the rest of the industry that this type of deceptive behavior will not be tolerated, Cuomo said.

The state’s investigation also revealed that top UBS executives sold off approximately $21 million of their personal holdings of auction-rate securities, after they learned of troubles in this segment of the market.

You can’t have two sets of rules - one set of rules for customers and one for senior officials, said Cuomo.

As of February, UBS had more than 50,000 customer accounts holding about $25 billion in auction rate securities.

Instead of purchasing them, banks allegedly sold those investments to average individual investors so as not to have to take them onto their books. Financial institutions like UBS have denied such claims, saying that their brokers fully disclosed the risks associated with these investments.

http://money.cnn.com/2008/07/24/markets/cuomo_securities/index.htm?postversion=2008072412

This is yet another example of top class banking practices in world’s greatest country. Bank itself was pulling out of investment ( Instead of purchasing them’) because it fears a collapse but at the same time it sold most of them to it’s own clients ( banks allegedly sold those investments to average individual investors’) and pushed them into trouble instead. Those loyal customers got treated really badly, there mistake ? they trusted their banker.

Auction rate security market is very bigit’s $330 billion big.

The MSRB began looking for ways to provide investors more information about short-term securities after the $330 billion auction-rate market collapsed in February. Dealers withdrew support, leaving investors trapped in securities they couldn’t sell and some issuers unable to refinance the debt.

http://www.bloomberg.com/apps/news?pid=20601087&sid=acfrU5QPt5aw&refer=home

Law suites are fine, but because there is so much money involved it will take years before investors may see relief. Specially these days when money is getting tighter. Mean while during the law suit years banks will still be enjoying the loot.

One thing is clear if you are not thorough with your investment decisions don’t count on someone else to protect it for you.

[These are my views about auction rate securities, you need not agree with them, investment decisions should not be based upon material you read here, for that you must seek professional help.]