What happened...why is the market broken.  What is the NY attorney

general investigating as reported in the WSJ?   

[quote user="dakk37"]

What happened...why is the market broken.  What is the NY attorney

general investigating as reported in the WSJ?   

[/quote]

The market is broken because the investment banks that used to bid in the auctions when not enough buyers showed up stopped doing so because of their liquidity issues.  That caused auctions to fail.

The NY attorney general is investigating to see if laws on disclosures to investors were followed.  These securities were marketed to investors as cash equivalents the same as money markets only with higher yields.

IMO there will be a fine distinction drawn that will shift any prospective liability to securities firms rather than the funds or issuers: As KCallie writes above, (in some cases) "these securities were marketed to investors as cash equivalents...."  If proven, the investor might get some relief because they were sold unsuitable investments.  However, the actual risk disclosures in prospectus/offering language (provided on behalf of the fund or issuer) are generally very clear and in most cases probably bulletproof.

Dick

[quote user="capecod"]

However, the actual risk disclosures in prospectus/offering language (provided on behalf of the fund or issuer) are generally very clear and in most cases probably bulletproof.

[/quote]

Retail investors were not provided with those prospectus/offering documents.  I agree, though, that liability lies with the brokers/investment banks who sold these instruments to retail investors.

It seems there has been very little press/public

discussion of this market. On one hand, the

sellers should compensate for mis-selling -even selling

corporate bonds as municipals. 

On the other, where were the regulators?

Also, bond issuers who have locked investors

into unsaleable securities with an arcanely set

interest rate running at .6, 1 or 1.something percent

are abusing their position

 

 

 

 

 

I might be skeptical but chances are that the government is looking to pin the blame on someone other than themselves. The fact that a lot of the ARS issuers are municipalities and quasi-government entities lends credence to this view.

 If I had to guess, I would imagine that everyone knew what they were doing. Those reaching for higher yields likely knew that ARS is different from a normal bond or t-bill. Those issuing the ARS also also knew that their costs were lower with the ARS than with other means (otherwise these muncipalities/closed-end funds/etc wouldn't have used them in the first place)....

All - As a ML client, whose statements continue to show these as as other cash, perhaps if you were to read some of the personal stories of people who were told by their advisors that this was the same as cash and it didn't matter which one you owned, you would see that the issue is one of fraud.  Try one of the stock blogs.  But more importantly, if you do read the prospectus, you will be amazed that this was every considered allowable business, as all the power and knowledge about price and volume is known in advance by the auction house (who is the broker), who has a vested interest as one of the buyers / sellers.  This structure was never on the up and up and the investigators now looking into the selling practices should back up and look at their 2006 decision on this product and wonder if maybe that is when they should have pulled the plug, rather than letting the brokerages do it.

I agree with your points. We are stuck hoping that state attorneys general,

the SEC, etc. can/ will clean up the mess.   

It's sad that in the 21st century we still have this kind of 19th century

fraud in the US. I would also have hoped that Morningstar, with its emphasis on

'stewardship' would have made some public noise about this issue

on behalf of members/clients. 

[quote user="dakk37"]

I agree with your points. We are stuck hoping that state attorneys general,

the SEC, etc. can/ will clean up the mess.   

It's sad that in the 21st century we still have this kind of 19th century

fraud in the US. I would also have hoped that Morningstar, with its emphasis on

'stewardship' would have made some public noise about this issue

on behalf of members/clients. 

[/quote]

I posted this on another thread. 

CEF being sued over auction rate preferred shares

Post #2510676

http://money.cnn.com/news/newsfeeds/articles/marketwire/0389319.htm