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Turn That Screw a Little Tighter

By Larry Doyle on March 13, 2009 at 4:10 PM in American Consumers, Economy, FINRA, Sense on Cents (Larry Doyle blog), Wall Street

The screwing that Americans have taken on the development and marketing of the scam known as Auction Rate Preferred Securities (ARPS) continues. I have written at length on how the regulatory body, FINRA, actually owned $650 million in these screw securities at calendar year end 2006. I have persistently questioned how a regulatory body could possibly own a security which was knowingly mismarketed. Was FINRA negligent, complicit, or both? Did FINRA liquidate its position prior to the market imploding on all other owners? While many institutional owners of ARPS have been made whole, many retail clients are still left holding the bag.

Well, the screw that is ARPS just got turned another notch tighter. It turns out that the issuers of ARPS (municipalities, hospitals, colleges and universities, et al) are contractually obligated to pay an ongoing underwriting fee to the Wall Street banks despite the fact that these regularly scheduled auctions no longer occur.

What did that underwriting fee amount to in the last year? A cool $211 million. While the issuers pay, who do you think really pays? Taxpayers Billed $211 Million in Auction-Rate Failure. That’s me and you!!

Meanwhile, the outfit that is supposed to police the market and the products sold in order to protect investors just so happened to have a $650 million position in these bonds. I wrote Let’s Really Question Ms. Schapiro, as she was the leader of FINRA when they had that position and is now the head of the SEC!! Is it any wonder why so many investors have lost such confidence in our markets. And still we pay!! The pain and indignity of this travesty with ARPS is just as great as the monetary fee charged.

What happened to FINRA’s bonds?? Do they still own them? If not when did they sell? To whom?? What price??

***Cross-posted from my blog, Sense on Cents. Come by and visit!

Doc99

Why are our Tax Dollars bailing out Dubai?
HARP

The financial crisis explained in simple terms…

Jerry is the proprietor of a bar in the United States . In order to increase sales, he decides to allow his loyal customers – most of whom are unemployed alcoholics – to drink now but pay later. He keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of customers flood into Jerry’s bar.

Taking advantage of his customers’ freedom from immediate payment constraints, Jerry increases his prices for wine and beer, the most-consumed beverages. His sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Jerry’s borrowing limit.

He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank’s corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager (subsequently, of course, fired due her negativity) of the bank, decides that slowly the
time has come to demand payment of the debts incurred by the drinkers at Jerry’s bar.

However they cannot pay back the debts.
Jerry cannot fulfill his loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %.

The suppliers of Jerry’s bar, having granted him generous payment due dates and having invested in the securities are faced with a new situation.

His wine supplier claims bankruptcy, his beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the NON-DRINKERS….

Finally an explanation I understand.
mountainaires

In other news:

The practice of using taxpayer dollars to trap top financial talent inside of zombie banks continues despite the public outrage and political backlash. It seems banks will stop at nothing to make sure that they capture as much of the bailout dollars for the personal benefit of their employees.

Here’s the latest outrage: Citigroup, which is only solvent because it has taken $45 billion from taxpayers and had its debt and asset values guaranteed by the government, is paying multimillion-dollar guaranteed bonuses for salesmen and traders it has hired in London and New York.

“The bonuses in London will be largely in cash, some as high as $2 million to $3 million, and a senior Citigroup trader in New York told a recruiter he was willing to hire with cash bonuses in the United States, the recruiter said, asking not to be identified because of a client confidentiality agreement,”

~Reuters

http://www.businessinsider.com/citi-paying-new-hires-millions-in-signing-bonuses-2009-3
http://noquarter foxyladi14

well that splains it,,even i can understand that,thanks..
http://www.senseoncents.com LD

What is wrong with this picture!!! The government is in the process of employing caps on compensation and these practices continue.

Neither the govt nor the people at Citi should be surprised at how livid the public is given these travesties.
FrenchNail

Larry, I did not know you also had been caught in the ARPS freeze!!!

I had to sale on the secondary market in July and left beaucoup money on the table. Nearly lost my primary residence in foreclosure because of the freeze.

I will NEVER EVER trust the system again. I am now trying to identify the real culprit to go after in court. Harris Investment Services and E-trade are both denying responsabilities in the lies they served me to buy those toxic securities.

I did not know that the former head of FINRA is now the head of the SEC, but somehow I am not surprised.
http://www.senseoncents.com LD

FrenchNail…In the spirit of full disclosure I never bought this product but I am so livid at the gross negligence and incompetence on behalf of the authorities who were supposed to be policing this stuff.

ARPS were a total scam perpetrated by Wall Street.

I have spoken with various outlets as well as government authorities in order to publicize the fact that FINRA owned a large block of these bonds. I think if I can get that broadcast publicly that it may put some pressure on the banks and underwriters to make people whole.

I am very hopeful that some developments will be forthcoming relatively soon. If so rest assured I will be promoting it loud and hard at Sense on Cents and NQ.

If you know of anybody who may own or did own ARPS, please spread the word about FINRA having owned bonds.

We’ll see what develops. Your story further inspires me!!
FrenchNail

I would not have emotionaly survided without Harry Newton Data warehousing of the facts and progresses at auctionratepreferreds.org.

Do you know him?
lark

Did you came up with that? Excellent show. An explanation I understand as well.
lark

I don’t think the public cares. Is all monopoly money.
http://www.senseoncents.com LD

I do not but I am going to the site right now. I’ll be back.
http://www.senseoncents.com LD

Thanks for that lead. I just wrote Harry a fairly detailed e-mail highlighting the fact that FINRA had a huge position in these bonds.

I hope Harry responds.

Thanks for the lead. That is some site.
TeakwoodKite

FrenchNail, might you have a link for
“Harry Newton Data warehousing”

I was tossed into google voicemail when searching the phrase.

Thanks.
http://www.senseoncents.com LD

http://www.auctionratepreferreds.org/

not trying to step in front of french nail but saw your request…more than you could ever possibly want to know about ARPS
TeakwoodKite

Thanks LD…so the “Harry Newton Data warehousing” is the proprietor of the link?

Again thanks. Apologies on my confusion.
FrenchNail

Harry is a character!!! Talked to him once. Not a PUMA though… campaigned for O. Oh well. Nobody is perfect.

His sister site on the economy is nice too. technologyinvestor.com
HARP

No. Someone sent it to me.
LD

French Nail….Thanks for the lead with Harry. He has already responded to my e-mail and hopefully we will speak soon.

Hopefully we can collectively highlight FINRA’s incompetence and publicize the fact that they owned a LOT of these bonds. Did they front run the public in selling their bonds?

I look forward to continuing the chase on this story.

Thanks again for the lead.