By: Matthew Arndt, CFA, CPA, CFP | November 27, 2009 | Bad Products & Services, Wall Street Ethics
Wells Fargo is ready to pay $1.4 Billion for its involvement in an Auction-Rate Securities scam. In an settlement that includes an arrangement with California Attorney General Jerry Brown, the San Francisco-based banker has agreed to repurchase billions in illiquid auction rate securities… “Wells Fargo convinced thousands of investors to purchase auction-rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold,” Brown said.
It’s really a simple question… Why would anyone continue to do business (i.e. invest) with a bank that was complicit in cheating investors? “Fool me once, shame on you; Fool me twice, shame on me”. By continuing to do business with financial institutions and investment advisers involved in such a questionable and deplorable act, investors are allowing themselves to be fooled for the third, fourth or fifth time.
It’s popular to blame lack of regulation, or it’s easy to diffuse culpability by saying everyone did it (this is NOT true). It boils down to this: if we as investors do not fix it by cutting our ties to those who violated our trust, then we are ultimately to blame.
2 Responses to “Fool Me Once, Shame on You!”
Matthew Arndt, CFA, CPA, CFP
December 7th, 2009 at 9:04 am
These were pitched as safe alternatives to cash when they are really long-term securities. The banks held weekly auctions to set the interest rates and give investors the option of selling their securities. The auctions failed, the banks refused to support these auctions, and investors funds were frozen. The banks were not legally obligated to make markets or give investors a price where they would buy the ARS’s back. These types of instruments largely depend on new investors showing up to buy the securities much like a Ponzi scheme. ARS’s were issued by municipalities, close-end mutual funds, student loan companies, corporations, etc. The bidding process appears to have been corrupt and lacking transparency. Many advisers who did not do their homework placed their clients’ savings in these products.
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Jimmy the Greek
November 30th, 2009 at 8:08 pm
I heard that Auction Rate Securities were represented as CD alternatives to investors and then the firms participating(underwriting) in the process stopped supporting the weekly auctions.