New York Probes Auction Securities

Wall Street Journal ^ | 17 April 2008 | By LIZ RAPPAPORT

[shrinkermd]

...The Attorney General's office subpoenaed 18 institutions on Monday and Tuesday of this week, including some of Wall Street's biggest, such as UBS, Merrill Lynch and Goldman Sachs, according to a person familiar with the investigation. Mr. Cuomo's office has plans to send out additional subpoenas soon, says the person.

Mr. Cuomo's office considers the investigation an "industry case," meaning officials are looking into all aspects of the auction-rate business – from what municipalities or other issuers were told about auction rates as methods of cheap financing all the way down to their distribution, sales and marketing to consumers who believed they were buying a safe and easily sold investment.

Entities ranging from cities or schools to closed end mutual funds and student loan companies raised money in the auction rate securities market. They borrowed for long periods at lower, short-term interest rates because the rates reset weekly or monthly in a bidding process conducted by securities dealers. The $330 billion market virtually collapsed in February when many dealers chose to stop supporting the auctions with their own bids for the paper.

Investors, including individuals and corporations who sought extra yield in what they believed a cash-like, or liquid, security, are now stuck with securities they can't sell. Some of the bonds with failed auctions reset to higher rates, while others, depending on the terms of the bonds, reset to low rates, even 0% in some cases

[shrinkermd]

This is tough for an elderly man such as myself to understand. I do believe Senator McCain complained about this matter in the last week.

[snowsislander]

I would be very surprised if the disclosures for these products did not lay out all of these risks beforehand.

I am not sure what the Attorney General of New York State is looking for, and I wouldn't be surprised to find out that he doesn't either.

[JerseyHighlander]

There are already massive class action lawsuits in the works regarding this, Law firms are advertising in every financial industry media outlet they can buy advert space in.

[VegasCowboy]

I am not sure what the Attorney General of New York State is looking for, and I wouldn't be surprised to find out that he doesn't either.

He knows it'll get his name in the paper, and that's probably all that really matters.