Thursday, July 24, 2008

Cuomo sues UBS

Blargh. You would think maybe in a post-Hookergate era the New York attorney general might pass on high profile but substantively suspect cases against Wall Street evildoers. "The Next Eliot Spitzer" as a brand is not what it once was.

Anyway this thing is just stupid. On the one hand, UBS almost certainly did what they're accused of, namely exaggerating the extent to which Auction Rate Securities (ARS) are like cash. On the other hand, my impression is that they weren't peddling this stuff to little old ladies who didn't understand what they were buying. A lot of big corporations owned these things because they paid high yields, and we're supposed to believe they didn't understand the "auction" concept? I mean if they tell you they trade in auctions you don't have to be too skeptical to ask what happens if no one bids (like, on account of a massive credit crisis of the sort we're experiencing).

Incidentally, what happens if no one bids isn't that bad! Their holders aren't able to sell them and get their principal back, which obviously is a problem if they need it right away, but the interest rates they earn go to a maximum penalty rate that was set when the bond was issued.

This process is extremely painful for the bond issuer, which for a lot of ARS is a city or state, who will look to refinance the debt as soon as possible, and when that happens the poor institutional investors who have been out of pocket will get their precious principal back (again, having been paid confiscatory interest rates for their trouble).

I have no love for UBS, but this a dumb/clearly politically motivated thing for the NY AG to be spending a lot of time and resources on. Caveat emptor.

h/t DealBreaker

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