The real numbers to look at in the auction-rate securities settlements are the ones in thousands, not billions. By the time this is finished, and we’re probably months away from that, it looks like securities firms will return money to more than 200,000 individual investors.
And prepare to kiss them goodbye. The ultimate loser in the auction-rate market collapse is going to be the US securities brokerage business.
It is hard to see how the dealers involved are going to retain the customers they treated so cavalierly in February, when they decided to stop supporting auctions and blew up the market. That was their right, of course. The dealers weren’t obliged to participate in auctions.
Yet they did so for more than two decades, and everyone got used to it. It became a historical convention. When people look back at this epic collapse in years to come, they will probably conclude that the auction market was a victim of its own success. It got too big, and, evidently, too scary for its creators.
And so they decided to alienate all their customers. Why they did so hasn’t yet been adequately explained. Did they, the top officers of the securities companies, really think their customers could be separated from their money for any length of time and not complain?
Or did they think they could pressure the issuers of the paper into refinancing, and so at least provide those stiffed customers with a timetable for the return of their cash?
Survival at stake
Or did they just decide the survival of their firms was at stake, and that individual investors were expendable? None of these possibilities quite makes sense. This we know: The securities industry for years has had a divided relationship with individual investors. Some firms wanted nothing to do with “retail”.
Others kept raising the obnoxious minimum amounts of cash their customers had to have on hand. Still others treated those customers like little fee machines, nickel-and-diming them at every turn.
At the same time, of course, the big securities firms advertised almost endlessly, emphasizing trust and reputation, and how they could take care of you if you were their client. Those ads showed a world of ease and comfort.
Not pretty
It was a seductive picture, and now, we see, illusory. It turns out that the financial-services firms are all aiming at the same relatively tiny sliver of customers, those with a net worth of — what?
Is it $10 million? $20 million? Higher? Now those illusions are shattered.
The thousands of investors who will be reunited with their cash are now disabused of the notion that a brokerage account means they have arrived, and that they are about to participate in the democratisation of capital that they had heard or read so much about.
And they all know that, no matter how the companies themselves spin it, none of them would see a single dollar if the states hadn’t forced the firms to cough up the cash, and in the most humiliating way possible — by pulling back the curtain and revealing what was going on backstage. It wasn’t a pretty sight.
It is passing strange that this disaster occurred not with stocks or bonds, but with something called auction-rate securities, that were touted — securities professionals hate the word, which connotes a gamble — as safe cash-equivalents. Or, as Merrill Lynch & Co. put it in December 2007, ``We remain convinced that auction market preferred of closed-end funds are a conservatives’ conservative security with respect to credit risk.’’
The real question in the months ahead is where the wistful victims of the Great Auction Securities Freeze of 2008 are going to take their money. If I were a betting man, I’d bet that you are going to see a lot of that money going home to local banks, if not under mattresses.
Losing 100,000 or 200,000 customers or more is one thing. How are the major securities firms going to win new customers with this debacle behind them?
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
