Wall Street warns state about auction-rate securities but ignores the small investor
In the weeks before the auction-rate securities market collapsed, five Wall Street firms warned the state of Massachusetts of the danger. But small investors were kept in the dark about the looming crisis and when the market failed on Feb. 13, they were taken by surprise.
According to a Boston Globe article written by Beth Healy, “State was warned on securities,” UBS Financial Services Inc., JP Morgan Securities Inc., Lehman Brothers, Morgan Stanley, Bear Stearns Cos., and Merrill Lynch & Co. all knew the market was in distress.
Documents obtained by the newspaper through a public records request reveal that the firms warned the state treasurer's office about the dire condition of the auction-rate securities market in the weeks before the collapse.
“As early as Jan. 10, Bear Stearns…told the state in a presentation: ‘As discussed in previous meetings,’ credit and liquidity concerns have ‘resulted in a dislocation in the market for auction rate securities.’“On Jan. 15, Lehman Brothers warned that brokerage firms were using their own money to keep auctions from failing. But it noted ‘severe constraints’ on the firms’ balance sheets.
“On Feb. 11, two days before the market froze, JP Morgan sent research to the state that offered the bluntest assessment yet: ‘We would not be surprised if these recent failed auctions began to breed like rats, begetting more fails…’”
And in an aptly named memo, “Smelling Rats,” JP Morgan wrote:
“If the pace of failed auctions increases, there will be widespread market impact.”
Unfortunately, even as Wall Street warned the state, it ignored small investors who had been told the securities were “as safe as cash.” To this day, auction-rate securities investors find themselves owning frozen assets.
Auction-rate securities investors who wish to discuss their rights against any broker-dealer may contact Carey & Danis toll-free at 800-721-2519 or fill out our online contact form
