Mirable Dictu! Regulators (Belatedly) Step to the Plate (Auction Rate Securities Edition)

Before you get too excited, the current display of regulatory vigor is almost certainly motivated by a desire to protect turf rather than new-found solicitude for investors’ welfare.

Bloomberg reports that the Financial Industry Regulator Authority will start on-site inspections of 40 brokerage firms regarding their participation in the auction rate securities meltdown. Wow! Action!

Not really. We have seen this movie before. New York attorney general, using the Maritn Act, goes after a financial firm miscreant. Financial regulator, asleep at the switch during the bad behavior and indifferent to pleas of victims, wakes up, bellows that it is none of the AG’s business and he should leave, and then makes half-hearted efforts to look Responsible and In Charge. NY AG presses onward unless he is somehow leashed and collared.

The difference from the standard script is that the regulator in question appears to be mounting a vigorous response. But that may be necessary to appear credible given the number of investors affected and the delay in making any kind of move.

From Bloomberg:

U.S. regulators will start on-site inspections next week of about 40 brokerages involved in sales of auction-rate securities, stepping up a nationwide inquiry into whether the firms failed to warn clients the market was collapsing, a person familiar with the matter said.

The Financial Industry Regulator Authority, which regulates almost 5,100 brokerages, wrote to the firms this month seeking detailed records, said the person, who reviewed the letters. New York Attorney General Andrew Cuomo said yesterday he had subpoenaed firms including Fidelity Investments, Charles Schwab Corp. and Oppenheimer Holdings Inc. in a parallel probe…

Finra’s sweep focuses on firms that haven’t yet settled regulatory probes and have the largest client holdings of auction- rate debt, the person said. That includes national, regional and boutique firms, as well as brokerages affiliated with banks or insurers.

The Washington-based watchdog is examining whether the companies conducted due diligence on the products, ensured that brokers understood them and explained risks to customers. Investigators are scrutinizing the firms’ communications with banks that ran the auctions, following up on signs that brokerages placed bids to help support the sales.

The regulator is demanding spreadsheets on bids submitted for the products and clients’ holdings, the person said. It wants copies of training and marketing materials and is seeking the firms’ risk analyses and the results of internal investigations.

Perhaps having a better read on the state of play, the Wall Street Journal’s piece on the auction-rate securities investigations mentions both NY AG Andrew Cuomo’s efforts and FIRA’s (as did Bloomberg) but gives Cuomo’s more prominence and column inches:

The New York attorney general’s office turned up the heat Wednesday on financial firms that sold auction-rate securities and haven’t settled with regulators.

Attorney General Andrew Cuomo’s office is stepping up its probe of three banks: Bank of America Corp., Goldman Sachs Group Inc. and Deutsche Bank AG, which underwrote and sold the securities, issued by municipalities and others. The market collapsed in February when Wall Street firms stopped supporting it with their own bids, leaving customers unable to cash out.

Meanwhile, Mr. Cuomo’s office also cast doubt on protests from brokers like Fidelity Investments and Oppenheimer & Co., which asserted recently that as merely sellers of these securities and not dealers in the auctions themselves, they were unaware of the market’s problems and shouldn’t be forced to buy back billions of dollars of securities from their clients.

In the widened probe targeting the three firms, Mr. Cuomo’s office has been gathering more documents, conducting witness interviews and assigning more lawyers to investigate the companies’ auction-rate operations. Settlement discussions with the firms and with other regulators investigating these firms have also ramped up, people in the office say.

A two paragraph mention of FIRA comes after five more paragraphs on the New York initiative.

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  1. Anonymous

    Extreme high net worth gets hit with this problem

    Thus, a much more “aggressive” stance.

    I posit that this has teeth due to the level of people illiquid and screwed.

  2. doc holiday

    This is the flip side of The Katrina disaster response, i.e, someone feels the need to put on a dog and pony show, to hide incompetency, collusion, corruption, nepotism, ignorance, retardation, gullibility, passive aggressive discretionary abuse, etc…

  3. doc holiday

    One more thing to link to Katrina.

    The wealthy people here that were chasing yields and looking for new ways to be greedy, were very much like the poor people in Katrina, in that they both ignored risk, warnings, reality and thus failed to accept the fact that all individuals are accountable for their actions, and that to be in denial about this or to be in a stupor like a meth addict and to place yourself at risk — will put you in a position where in general, you get what you deserve for being retarded and not using the brain cells that God has leased out to you.

    We should also recall that my old friend Einstein suggested that God does not play dice with the universe, but in this lotto-driven casino society where there is a plague of retarded thinking, and a tsunami wave of attention deficit zombies, perhaps God has simply allowed us to collectively change the odds of life , by allowing the act of free will to alter the old odds of how this game is played — by allowing nepotism to play a central role in who is in charge of the casinos. The obvious example is FEMAs poster child Brown, who was told by the leader of our golden society, that he had done “a heck of a job”.

    When we view this example in the context of the current regulation shortfall, the chain of nepotism that resulted in retarded people regulating retarded people has resulted in a CDO Squared Era of chaos, where the casino called America is now in debt to God for the tune of $5000 Gazillion, Bahzillion! The only way out is to issue more synthetic illusions and to hope that God has infinite patience and an endless sense of humor. meanwhile, the devil is in the details and waiting to embrace his servants that are currently busy with the systemic destruction of America.

    Re: This land is your land, this land is my land
    From California, to the New York Island
    From the redwood forest, to the gulf stream waters
    This land was made for you and me

    As I was walking a ribbon of highway
    I saw above me an endless skyway
    I saw below me a golden valley
    This land was made for you and me


    I’ve roamed and rambled and I’ve followed my footsteps
    To the sparkling sands of her diamond deserts
    And all around me a voice was sounding
    This land was made for you and me

    Thanks Woody!!

  4. Anonymous

    Woody’s song never made much sense to me until I finally saw the last two verses:

    “As I was walkin’ – I saw a sign there
    And that sign said – no tress passin’
    But on the other side …. it didn’t say nothin!
    Now that side was made for you and me!


    In the squares of the city – In the shadow of the steeple
    Near the relief office – I see my people
    And some are grumblin’ and some are wonderin’
    If this land’s still made for you and me.”

    There’s a growing sense that both sides of the fence aren’t made for you and me – that more and more of the country’s wealth, opportunity and hope has been cordoned off for the upper 1 or 2% of the population with the power to take and take and take.

  5. Anonymous


    Thanks for adding that. In these days, the pop singers talk about change, but like politicians, they all want a bigger audience, more pay and no accountability!

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