Since the 1980s, the major firms and banks have been convincing their clients to invest in the supposedly safe and liquid auction-rate securities market, and at the same time, committing their own money to make sure the auction-rate market operated smoothly. Due to concerns over credit exposure early this year, these firms disappeared at the auctions, leaving thousands of investors holding securities they cannot sell. When asked who held such securities, the firms quibble and answer that it was wealthy individuals.
Joe Mysak at Bloomberg News suspect the real reason the securities firms gave this answer was to marginalize an entire group of investors they now find expendable. This group, individuals with less than $10 million net worth, isn’t wealthy enough for Wall Street securities firms to care about them. There are firms that don’t even want you to walk in the door with less than $25 million or $50 million. These companies, such as Merrill Lynch, UBS AG, Bank of America and Citigroup, are the same ones that claim to specialize in retail or individual, investors.
States and investors are responding to this outrageousness with government probes and class-action lawsuits and arbitration claims.
Last week, Massachusetts subpoenaed UBS, Merrill Lynch and Bank of America for information on how they sold auction-rate securities and informed their clients of the risks. Mysak suspects what prompted Massachusetts to action weren’t complaints from wealthy investors who are catered to by big firms.
The truth is most investors don’t bring enough money to a brokerage firm for them to justify the expense of an account manager. That also seems to be the reason why these firms can afford to ignore and alienate the thousands of investors who hold these auction-rate securities.
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