John Singer discusses Auction Rate Securities
COPYRIGHT 2008 ASC Partners LLC
Original Source: HAPPY HOUR
GOMEZ: A "FOX Business Alert" for you, folks. U.S. Securities & Exchange Commission Chairman out today saying the investigations into the auction rate bond market collapse extend beyond the banks. He also emphasizes that nobody is getting a pass. Well to break it all down we welcome back to HAPPY HOUR, Singer Deutsch partner and HAPPY HOUR regular John Singer. Hello, good to see you again, sir.
JOHN SINGER, SINGER DEUTSCH LLP PARTNER & CO-FOUNDER: Good to see you. Good to see you...
(CROSSTALK)
GOMEZ: All right, I read all your Talking Points and everything. So the big issue here now is because, OK, you have the big investment banks, you have the UBS, Merrill, JPMorgan, Wachovia, et ceteras agreeing to buy back these auction rate securities. But now you have the smaller guys saying hey, does this mean we have to as well? Explain that.
SINGER: Correct. The Regional banks, OK, you have Oppenheimer, Raymond James, AMERITRADE, E-Trade and Fidelity, they sold auction rate securities to customers as well. The difference is they were not the underwriters. They were simply downstream sellers. So just to analogize it, they were the brokers not the dealers. The question is are they as culpable from a civil standpoint and from a regulatory standpoint as UBS, Merrill, Citigroup, JPMorgan, Wachovia and Morgan Stanley.
WILLARD: And these settlements are big enough to actually impact the balance sheets. I mean these are not just you know something you're whistling past the graveyard with. I mean there are some real issues if they start getting hit with...
SINGER: Absolutely.
GOMEZ: Yeah, I mean you're talking about...
SINGER: Absolutely.
GOMEZ: Let me just so our viewers understand, like TD AMERITRADE customers, 1.2 billion in auction rate securities. So they're saying hey, what about me? Am I going to get my money back? You know it is Raymond James clients, 1.3 billion.
SINGER: That's right.
GOMEZ: So there you go. I mean people are wondering what about those investors?
SINGER: Well you know, Raymond James and the regionals such as Oppenheimer, AMERITRADE and the rest you mentioned they marketed the securities the same way as the underwriters, the larger investment banks. They told their customers that these are cash equivalents -- cash or money market equivalents. They were not. Now they're trying to shirk responsibility by saying well, we didn't underwrite them. That doesn't matter. They still sold them...
GOMEZ: So you're saying they're responsible?
SINGER: They're still culpable. They made the same representations that UBS did. The only difference is, is that they were not the underwriters. That does not exonerate them from liability though, not by a long stretch.
BOLLING: Really, so they take these billions and billions of dollars of assets on the books or these kind of crazy convoluted things back onto the books, the penalty being $100 million, the $50 million penalties for the way they were marketed. I read somewhere where no one, no one who has done any of this is going to skate by, is going to sneak by. Is everyone on the Street going to be on the hook for some sort of penalty?
SINGER: I hope so. I mean right now the attorney general of New York and the NASAA, which is the North American Securities Administrator Association and the SEC have gone after the big fish. They have gone after the six big banks/underwriters. Now they're going to start moving downstream into the regionals and these guys should have a penalty too.
BOLLING: OK, so talk about that for one second. If you go from here to here, you're going to move downstream. Are you saying that the Regional banks were also victims of the same marketing ploy from the underwriter?
SINGER: No they weren't victims. They were perpetrators. It was the way in which they marketed these things, telling customers -- these were issued, by the way, by municipalities and student loan organizations and by closed end mutual funds. They were then packaged by the bigger banks. The downstream regional banks where they messed up was they didn't tell investors that these were not cash equivalent.
GOMEZ: But...
SINGER: They made the same misrepresentation.
GOMEZ: Stop right there, John. But at the time they were. They were as good as cash. And the whole market has been based auction rate securities...
SINGER: No.
GOMEZ: No, but hasn't it for years...
SINGER: They weren't....
GOMEZ: ... for years operated this way? And until -- there were problems then all of sudden everybody is changing their...
SINGER: Well...
(CROSSTALK)
SINGER: Wait. Wait. Wait. Wait.
(CROSSTALK)
WILLARD: It's been a Ponzi scheme the whole time and now it's over.
GOMEZ: Banks are doing it for years like this.
SINGER: You know he...
(CROSSTALK)
SINGER: I'll tell you...
GOMEZ: They've been doing it for years.
SINGER: He always agrees with me. I love this guy. For 23 years, OK, this auction rate market worked because as a matter of last resort the banks would step in. There were only 20 -- there were only 44 failed auctions since 1984. It was a slippery slope. It was waiting to happen. Once the credit crisis occurred in February of 08, UBS said you know what? We can't commit anymore money to this. We can't...
GOMEZ: No, but I mean...
(CROSSTALK)
GOMEZ: Answer my question though...
SINGER: It was an accident waiting to happen.
GOMEZ: Before we ran into problems in auction rates securities market they basically were marketed as cash because they were that liquid.
SINGER: Well...
GOMEZ: People were able to sell them, so they weren't really lying for the past 23 years. That has been the case.
SINGER: That's not true. They weren't cash. They were never cash...
(CROSSTALK)
GOMEZ: They were dollars...
SINGER: They were simply...
GOMEZ: ... but they were as liquid as cash.
SINGER: Right, but it was slippery slope. It was really a game that was a dangerous one. And finally, finally, it caught up with the banks. It was never cash.
WILLARD: I think where I'm seeing where she is coming from too, though, is she is talking about like if everybody is doing it then how do you decide who are the actual perpetrators and who are the victims?
GOMEZ: Well, Cody...
(CROSSTALK)
SINGER: I'll tell you how.
(CROSSTALK)
GOMEZ: It's almost like when we were talking about money market securities. OK, right now all the banks out there are marketing money market securities as cash...
SINGER: Right.
GOMEZ: ... as liquid as cash.
SINGER: Right.
GOMEZ: Once we encounter troubles in that market they won't be, so then we're going to go back and sue them and saying you've been lying for all these years?
(CROSSTALK)
SINGER: Let me just -- let me just answer what he said because -- Cody said because you raised a very, very good point. Who were the perpetrators? The perpetrators are the ones who marketed these things improperly. If I owned and a lot of people I know, by the way, own these auction rate securities. They were marketed just as safe as cash, with a slightly higher after tax yield.
(CROSSTALK)
WILLARD: Who in their right mind thinks oh I'm going to get free money.
SINGER: Well...
WILLARD: It's as good as cash, but that's no problem. I'm not taking anymore risk.
(CROSSTALK)
SINGER: I got tell you a lot of people...
(CROSSTALK)
SINGER: A lot of people did really believe that.
BOLLING: It's different though. I mean these guys were, they were selling these things as, you know, as liquid as cash and the reality was they never were. And they probably had documents -- disclosure documents saying they're not very liquid. There may be a situation where they might freeze up and you can't get your money, so...
(CROSSTALK)
BOLLING: I think what happened was...
SINGER: Yeah.
BOLLING: I really -- I'm a firm believer that Cuomo went after these guys because they knew they were vulnerable. I mean everyone signed a document saying hey, by the way, everyone signs it. You buy this. You could be stuck with it. I guarantee you that's in there somewhere. But by the fact that it's so negative, there's such a negative connotation right now going on with financials that he knew he had a victim.
GOMEZ: So bottom line, John...
(CROSSTALK)
GOMEZ: ... are the smaller Regional banks like the TD AMERITRADE, Oppenheimer, are they going to buy them back or they're going to -- is this going to go end up in court?
SINGER: Oh, no, they will not only buy them back, they will get fined too. They'll get fined as well.
WILLARD: And you know what's going to end up happening at the end? My tax dollars is going to bail out those banks, so I'm basically paying everybody.
GOMEZ: Well you never know who is really paying the shareholders of JPMorgan Chase, of TD AMERITRADE because they're the ones that they're losing more money if they invest in this company.
WILLARD: Right. Until I bail out JPMorgan, Lehman...
GOMEZ: John, thank you very much.
SINGER: Sure. My pleasure.
WILLARD: Thanks, man.
SINGER: Sure.
