Settlements between regulators and banks over the improper sale of auction-rate securities have slowed to a trickle, raising concern among investors holding $135 billion of the debt that they will be left out.
Ed Dowling, a 53-year-old clothing manufacturer from Huntington, New York, bought $2.6 million of the securities from Oppenheimer & Co. on the belief that the investments were as safe as money-market funds and easy to buy and sell. He's been stuck with most of the debt since the $330 billion auction-rate market collapsed in February, sparking a series of regulatory probes into how brokerages marketed the long-term securities.
State and federal regulators including New York state Attorney General Andrew Cuomo vowed to pursue dozens of brokerages in August after they forced eight Wall Street banks, including Citigroup Inc. and UBS AG, to agree to buy back about $45 billion of auction-rate securities. Since the initial flurry, 12 mostly smaller firms have agreed to redeem $8 billion in debt.
``It's great that they got money back for those investors,'' said Dowling, who was planning to use the money to build a new house in Huntington, on Long Island. ``A large portion of the problem hasn't been resolved, the portion I'm involved with.''
States, student-loan agencies and closed-end mutual funds sold the securities, locking in short-term rates on obligations due in 20 years or more. The long-term bonds had interest rates set at weekly or monthly auctions run by New York-based Citigroup, UBS in Zurich and the other large underwriters.
February Collapse
Municipal auction-rate securities yielded three-quarters of a percentage point less, on average, than long-term, fixed-rate bonds in 2007, according to industry indexes. The yields were a quarter of a percentage point or more above conventional money- market funds, indexes show.
The market unraveled in February. Dealers who supported auctions for two decades with their own money suddenly pulled back to preserve capital amid the mortgage slump that led to $662 billion of credit losses and writedowns worldwide.
That left investors unable to sell securities that were pitched as cash equivalents and borrowers paying penalty interest rates as high as 20 percent after auctions failed to find enough buyers.
To escape the high rates, borrowers refinanced or offered to buy back at least $142 billion of the securities, according to data compiled by Bloomberg News. Regulators forced brokerages to agree to redeem another $53 billion, leaving individuals and institutional investors stuck with about $135 billion.
Corporations owned $41 billion of auction-rate debt at the end of September, according to a survey by Chicago-based Treasury Strategies Inc. These large institutional investors were excluded from the buybacks required in the settlements.
`More Complicated'
Getting large Wall Street underwriters to buy back securities was easier because they managed the auctions and created the products, said Massachusetts Secretary of State William Galvin, who led probes into UBS and Merrill Lynch & Co. of New York. Investigations into brokerages that essentially resold the bonds will take longer, he said.
``It's obvious that we haven't had anything to announce recently,'' Galvin said. ``It's a more complicated fact pattern. It's more complicated, but it's not impossible.''
New York's Cuomo, who announced almost all the settlements with the large Wall Street banks over three weeks in August, said at the time his office had subpoenaed about 25 firms, including Oppenheimer's parent, Toronto-based Oppenheimer Holdings Inc., TD Ameritrade Holding Corp. and Charles Schwab Corp. ``We're working our way down the list,'' he said on Aug. 15.
Other Probes
TD Ameritrade, based in Omaha, Nebraska, continues ``to cooperate with regulators and other industry officials regarding their inquiries related to this issue,'' spokeswoman Kim Hillyer said. Greg Gable, a spokesman for Charles Schwab in San Francisco, declined to comment.
Cuomo also said in August he was investigating individuals at the firms that sold the securities. Alex Detrick, a spokesman for the New York state regulator, declined to comment on the status of the probes.
In the two months since the first auction-rate settlements, Cuomo has opened investigations into financial markets amid the global credit crisis that led to the collapse of Lehman Brothers Holdings Inc. on Sept. 15. He's probing short-selling of financial-company shares, the market for credit-default swaps and spending at New York-based insurer American International Group Inc., which received an $85 billion federal bailout.
Short sellers attempt to profit by selling borrowed securities and repurchasing them later at a lower price and returning them to the holder.
`Task Force'
Massachusetts still has people committed to auction-rate probes, Galvin said. Rex Staples, the general counsel of the North American Securities Administrators Association in Washington, said states are still coordinating investigations, an effort that began earlier this year.
``We still have a task force constituted, and there are still ongoing investigations,'' Staples said.
The effort to force regional brokerages to buy back securities stalled because firms are under pressure to preserve capital after Lehman's fall prompted a meltdown in credit markets, said Mike Nicholas, co-chief executive of the Regional Bond Dealers Association in Alexandria, Virginia. The group estimates regional dealers resold $60 billion of the debt.
Interest on some of Dowling's holdings soared as high as 12.5 percent two weeks ago, as average yields on municipal auction-rate debt surpassed the records reached when the market imploded in February. For him, that's cold comfort.
`My Money'
``Listen, it's my money, it was sold to me as liquid cash,'' said Dowling, who has $2 million of the securities left after $600,000 was refinanced. ``What it's paying is totally irrelevant.''
Brian Maddox, an outside spokesman for Oppenheimer with Financial Dynamics in New York, said the firm continues ``to explore all options available'' for its customers.
Greg McNelley, a 56-year-old investor from San Juan Capistrano, California, remains stuck with $350,000 of student- loan auction-rate securities he bought from San Francisco-based Wells Fargo & Co., which hasn't agreed to buy back auction-rate securities.
``I am just fit to be tied,'' said McNelley, who retired from his job at a health-maintenance organization. ``I was counting on this money to supplement my income.''
Wells Fargo is working ``closely with our clients to address their liquidity needs'' by offering holders loans, spokeswoman Kathleen Golden said.
Latest Accords
The Financial Industry Regulatory Authority announced yesterday that a Bank of New York Mellon Corp. unit and two brokerages in California and Illinois will buy back more than $60 million of the securities.
Finra, a self-regulatory agency based in Washington, revealed settlements with five firms on Sept. 18 and opened more than 50 additional investigations, and ``more are expected.'' The regulator has questioned more than 200 companies and conducted sweeps of firms distributing the bonds, it said. Nancy Condon, a spokeswoman, declined to elaborate.
The U.S. Securities and Exchange Commission participated in the settlements with the large underwriters.
``Distributing dealers that were not part of underwriting or managing the auctions didn't know any more about the market than the investors,'' said Nicholas of the Regional Bond Dealers Association.
