The WSJ.com reports on the varied approaches of brokers at Merrill to selling auction rate securities to investors… this is an important story because the vast majority of fixed income is “placed” with investors… there is very little “self directed investing” in retail fixed income… not yet I mean…
~~~~ ” …Not all brokers, of course, recommended auction-rate securities to their clients.
“It’s just one of those things that I’ve avoided,” said one Merrill Lynch broker who kept his clients’ invested in “plain vanilla, high-quality” bonds even as Merrill and other firms offered increasingly esoteric, boom-time securities like auction-rates, which carried richer terms than money-market funds or Treasury bills.
“When we start looking at all this other stuff, it’s not real appealing to me,” he said.
Still other brokers say they suspected that auction-rates could mean trouble since firms offered slightly more compensation to advisors who sold the bonds – a reminder of eras when brokers were paid much more to sell firms’ in-house investments, like proprietary mutual funds, than firms paid them for selling investments from outside their firms.
“When there is an added incentive to sell an investment product,” said a Merrill broker who did not sell auction-rates, “it’s not typically a good thing.”
“The compensation didn’t change our financial advisors’ approach to ARS. The only reason our advisors sold auction-rate securities: They believed they were good investments for clients willing to trade some liquidity for higher return,” said a spokesperson for Merrill Lynch.” ~~~~
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US banks near auction rate settlement
By Joanna Chung and Francesco Guerrera in New York
Published: August 14 2008 03:00 | Last updated: August 14 2008 03:00
JPMorgan and Morgan Stanley were last night nearing settlements with regulators to buy back billions of dollars worth of auction rate securities from investors, people briefed on the negotiations said.
The two banks, which are also likely to pay fines, would become the latest groups to give in to pressure from regulators.
JPMorgan’s clients hold about $5bn in ARS, of which $3bn belongs to retail investors. Morgan Stanley said this week that it was willing to buy back about $4.5bn in ARS.
The banks declined to comment on the details of the talks, but the settlements would come on the heels of similar agreements made by Citigroup and UBS with state and federal regulators last week.
Citi and UBS said they would buy back more than $26bn in ARS and pay fines of $250m. Merrill Lynch and Wachovia are also in discussions with regulators.
The banking industry’s willingness to buy back the illiquid securities underscores its desire to draw a line under a controversy that has sparked dozens of state and federal investigations and numerous lawsuits by regulators and investors.
Regulators have accused banks of misrepresenting ARS as liquid, cash-like instruments. The collapse of the $330bn market in Februaryhighlighted the risk in the long-term securities, whose interest rates are periodically reset at auctions.
Citigroup and UBS - two of the biggest participants in the ARS market - last week became the first banks to settle with regulators, without admitting or denying wrongdoing. The settlements raised the likelihood that other firms would follow suit.
Merrill voluntarily offered to buy back ARS, saying it expected its retail clients to have about $10bn of the debt instruments when it would start repurchasing them in January.
Regulators are reviewing the bank’s proposal. Andrew Cuomo, the New York attorney-general, said Merrill’s programme “fails to contain certain investor protection safeguards”. Merrill declined to comment.
Meanwhile, Wachovia, whose clients hold about $9.5bn in ARS, was also continuing talks with regulators yesterday. Mr Cuomo told JPMorgan, Morgan Stanley and Wachovia on Monday to enter into “immediate talks” to resolve the probes. The settlements with banks are being negotiated with Mr Cuomo, the US Securities and Exchange Commission and a task-force of 12 state securities regulators.
http://www.ft.com/cms/s/0/0f7fe87e-69a3-11dd-91bd-0000779fd18c.html?nclick_check=1
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