Wednesday, November 18, 2009

Wells Fargo repaying its clients $1.3 Billion over auction rate securities ("ARS")

I wrote over the summer regarding New York Attorney General Cuomo's continuing campaign for state governor, that then was taking the form of threatening litigation against Charles Schwab for refusing to take responsibility or pay liability to compensate investor loss on auction rates securities ("ARS").

Briefly, the hullabaloo on ARS ... they were (the ARS market collapsed in February 2008) a financial product with variable interest rates that were determined at auction. They were represented by the banking industry as liquid; that despite the instruments frequently coming in the form of debt bonds assigned lengthy time periods, that investors would always be able to sell the ARS at the next auction. Auctions can and do fail, however: if there are not enough buyers and sellers participating, the auction fails and ARS holders are prevented from making their allegedly liquid assets liquid.

Dealbreaker posted today that Wells Fargo has bitten the bullet and is repaying clients who bought the product, to a tune of $1.9 billion. The bank is also paying a penalty of $1.9 million for misrepresenting to clients the product's liquidity. Keep in mind that Wells Fargo sold nearly $3 billion in ARS.
Wells' agreement was reached with the state securities regulators from California, Georgia, Missouri, Oregon, Texas, Utah, and Washington. The $1.9 million penalty fee is to be distributed to these states.

Back to Schwab quickly: Chuck came out angry and swinging at Cuomo over the summer, but there has been little indication from either party since of any escalation of the matter. I don't think for a moment that means the matter is closed, and perhaps the recent payments by Wells Fargo will recall to Cuomo his initial endeavor.

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