More Trouble In Auction-Rate Securities Land

If you are a retail financial advisor at UBS and have client assets stuck in the auction-rate securities market, your new ad slogan might be: “UBS, You Are Pissed At Us.” That’s because the Wall Street Journal’s website is reporting that UBS is marking down the value of auction-rate securities held by individuals in their brokerage accounts. The markdowns were scheduled this afternoon, and will cut the value from between 2 percent and 20 percent of the value of the securities. The market for “resets,” as the market is sometimes known, has frozen up after the credit ratings of bond insurers were put on review. In the absence of other buyers, few banks want to put up their own capital to buy the securities, experts say. As a result, retail financial advisors have had the unpleasant task of telling their wealthy clients that they couldn’t access their own money.

If you are a retail financial advisor at UBS and have client assets stuck in the auction-rate securities market, your new ad slogan might be: “UBS, You Are Pissed At Us.” That’s because the Wall Street Journal’s website is reporting that UBS is marking down the value of auction-rate securities held by individuals in their brokerage accounts. The markdowns were scheduled this afternoon, and will cut the value from between 2 percent and 20 percent of the value of the securities. The market for “resets,” as the market is sometimes known, has frozen up after the credit ratings of bond insurers were put on review. In the absence of other buyers, few banks want to put up their own capital to buy the securities, experts say. As a result, retail financial advisors have had the unpleasant task of telling their wealthy clients that they couldn’t access their own money.

Advisors we spoke to over the last few weeks generally downplayed the problem, saying their clients were making more money on junk-like yields for the money, since auctions were only successful if they paid out extraordinarily high interest rates. One advisor said that his clients were irritated, but not overly mad, because the client was earning around 18 percent on New York/New Jersey Port Authority debt—considered a safe bet.

For those clients who were going to tap their accounts to pay taxes, brokerages were offering loans at Libor, many advisors said.

It’s hard to tell if this problem is unique to UBS. But one Smith Barney rep said, “If it isn’t, it’s gonna be a f**king nightmare.” The advisor said that until recently he had several million’s worth of client money in the auction market, but was able to get most of his clients’ money out at par over the last two weeks. That is, most—but not all. “They should just redeem this stuff at par,” the broker said. “We were never, ever—ever, ever—told that these things could fail.”

Asked if he ever told his clients that they could lose money in the reset market, the rep said, “No. Never. No. That’s how the product was explained to us. It’s as good as a money market.” He also said access to the reset market “was a great prospecting tool” when meeting with wealthy potential clients. “Nobody ever thought these could lose money,” he said.

Which is why the State of Massachusetts Secretary of State is investigating the sales practices of auction-rate securities, according to a Bloomberg report. According to the story, Secretary of State William Galvin issued subpoenas to UBS, Merrill Lynch and Bank of America Securities, to learn how these securities were presented to individual clients in the state.

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