Investors burned in auction-rate meltdown

[DogPoundPup]

Source: The Charlotte Observer

State regulators inspect Wachovia Securities' HQ in Missouri in the latest fallout of market's collapse. Eileen Selkis had some money left over from selling her house in Connecticut, and she knew she couldn't afford to lose any of it.

She says her broker at Wachovia Securities pointed out that she could get a good return – better than the money market account it was in – by moving it to something called auction-rate securities.

The higher interest rate was appealing, but Selkis wanted to make sure she'd be able to access her money easily.

“They're as good as liquid cash,” she recalls her broker telling her, in late 2006. “You can get to your principal any time; you just need to let me know about seven days ahead.”

That was before the market for those securities began to dry up in February, another result of the tumultuous state of the financial services industry. That means that many investors can't sell their holdings and get their money out of those securities, and they allege that brokers understated the risks of such investments.

Major financial institutions across the country – including Charlotte's Bank of America and Wachovia – are facing lawsuits and regulatory inquiries over how they marketed those securities. The latest twist came Thursday, when securities regulators from Missouri and other states showed up to inspect the St. Louis headquarters of Wachovia Securities, seeking documents and other records related to the sale of such bonds.

Read more: http://www.charlotte.com/business/story/717880.html

[aspergris]

1. keereist

anybody who seeks a few extra basis points of yield HAS to realize that there is only ONE 'risk free' investment and that's govt. bonds taken to maturity or money market funds that invest in govt. bonds.

the only thing that's "as good as cash" is cash. Not that cash is necessarily good since it can deflate too (and lord knows the USD has).

Auction-rate securities are NOT safe like a money market, and IF they marketed these securities as such, they should face serious sanctions.

[Lance_Boyle]

7. I'd be willing to bet

that the paperwork associated with each trade said something to the effect of "not a bank deposit" and "not FDIC insured."

If your broker says "it's just like cash in your savings account" but the trade confirmation says "not FDIC insured - may lose value," you'd think someone would bring that discrepancy to the broker's attention, cancel the transaction, buy a fucking CD, and find a different broker. But some people, I guess, would rather buy the shit anyway, on the hopes that they can sue their broker to recover when it flops. Caveat emptor.

[HereSince1628]

2. I spent my childhood and adolescence listening to "bad old days"

stories about the depression from my parents. I was gonna have it so easy because they (the Greatest Generation) had fixed things so this couldn't happen again. At least in their lifetimes, rest their souls."

IT" didn't happen but it seems other things just as bad did.

[WriteDown]

3. Nowhere near a depression....

May get there, but we need to keep a little perspective.

[aspergris]

5. yes

there are several economic myths

1) It can't happen again . Not only CAN it. But economic cycles *bubbles, recessions,booms, etc. happen with amazing frequency throughout history

2) It's different this time

3) OMG you can't lose money doing X

We've had a nice pullback in the markets. Fwiw, when dow was 14k, I was hoping for a 2-3k pullback, which we have gotten. It was SORELY needed.

Could we go lower. Absolutely

Are there some phenomenal values and trading/investment opp's out there?

absolutely.

but one thing IS clear. this is nowhere NEAR the great depression. People are freaking and the dow has pulled back a FRACTION of what it lost in a matter of DAYS in 1929.

And people were leveraged 5:1 and higher through bucket shops in those days

perspective is gooooood

[Kweli4Real]

8. I, too, heard the stories ...

And many of the things that went wrong were "fixed" ... But over the last 70 years, we have sat by a watched our representatives dismantle not only the protective regulations, but the safe nets as well.

[WriteDown]

Investments....

By definition there are risks and rewards. Too many people are under the illusion that all investments pay off.

[WriteDown]

4. Investments....

By definition there are risks and rewards. Too many people are under the illusion that all investments pay off.

[dipsydoodle]

6. Most things which sound too good to be true

are infact too good to be true.

[bemildred]

9. Brokers are salespersons, same as used-cars, insurance, and mortgages.

I don't want to be too hard on this woman, but you ought NEVER believe what a broker says just because he said it.

I do wonder what "liquid cash" is too, but I'm pretty sure it is not seven days notice to get your money.