The recent debacle in the auction-rate securities market has resulted in much finger pointing. Investors are pointing their fingers at brokers. Brokers are pointing finegrs at marketers. Marketers are pointing their fingers at traders. They all should be pointing fingers at themselves.
Why? Let's discuss. Investors ae upset because they were, (allegedly) told by brokers that auction rate securities can be liquidated on the auction date. Brokers are upset becasue marketers told them the same thing, plus, that auctions at our firm (insert name here) never fail. Marketers are upset claiming that they were only doing their jobs marketing the product and were merely stating past performance. Blame can be spread around here.
1) If you are an investor, didn't you wonder what the actual maturity of your security was? Were you told that auctions always go off? If so, you were either lied to or were given information by someone who was lied to. Your liquidity was dependent on other investors willing to buy your ARS. This is just like any other security.
2) If you are a financial advisor, shame on you (unless you were lied to). Did you ask about the final maturity, failed auctions etc.? The prospectus definitely discussed this.
3) If you are a marketer of ARS and did not disclose the possibility of auction failures with brokers, you were negligent and irresponsible. I don't care what you were told to say or what you thought you should say. Brokers and clients should have been warned that acutions can and do fail, albeit rarely. You could have mentioned penalty rates to which investors are entitled, but the possibility of failed auctions should have been discussed.
Although I wil not cut brokers too much slack (the have a responsibility to their clients)., I will come down the hardest on sales and marketing people. Too many do not know what they are selling. They read a script and push whatever they are told to push. Sorry, I was only following orders did not cut it at Nuremburg and it doesn't cut it here.
I have been told by brokers that when some brokers and managers called prior to auction failures asking if ARS were really long-term securities in disguise, many were actually yelled at for merely askimg the question.
The truth is that ARS are in fact perpetual securities which can, in most cases, be used as a money market substitute. Investors are paid higher yields for incurring the risk of failed auctions. Investors are also rewarded for failed auctions by receiving a higher "penalty rate". Some penalty rates are sufficently high that the issuer is motivated to retire this paper. Othes do not have a terribly high penalty rate. This means that these securities could be around for a while. At least until a successful auction.
If you need a money market, inevest in a money market. There is no such thing as a free lunch or free yield.
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