A billion-dollar auction-rate securities nightmare continues to haunt St. Petersburg's Raymond James Financial.
While larger institutions like Bank of America are placating regulators and investors by buying back the hard-to-trade securities from customers, Raymond James chief executive Tom James told clients in a letter disclosed Monday that the company doesn't have access to financing to cover "anything near" the $1-billion outstanding owned by its clients.
And even if he could buy back the securities, James said regulators would not give his company credit for the securities because they are illiquid. James wrote that some large banks that have pledged to buy back securities "perhaps even with funds provided by the federal government for other purposes," but have not yet repurchased everything.
Auction-rate securities are long-term debt instrument designed to trade like short-term securities. They were issued by many municipalities and closed-end mutual funds, and often pitched to small investors as safe and easily redeemable. In early 2008, as the credit crunch intensified, the $300-billion auction-rate market froze, leaving investors unable to sell their holdings.
Regulators have been looking into how brokerage houses peddled the securities and profited from them.
In a lengthy Jan. 2 letter to clients filed Monday with the Securities and Exchange Commission, James alluded to other underwriters that allegedly knew that auctions were failing, suppressed research reports or employed executives who liquidated their own positions while still selling to clients. "To the best of my knowledge, we didn't participate in those types of acts," James wrote.
Raymond James' clients owned about $2.3-billion in the securities when they began failing en masse on Feb. 12, the company said. Since then, its clients' holdings have been cut to about $1-billion, of which $120-million is liquid, or will be called shortly.
In his Jan. 2 letter, James said he couldn't remember a significant number of failed auctions in auction-rate securities for almost 20 years. Over the past 60 days, he wrote, "the frequency of complaints and inquiries has understandably increased."
James said he understood clients could conduct business with whomever they wish. But he urged patience and understanding, noting that he personally still owns a large number of auction-rate securities. And he offered to make loans available on the securities for those in need of cash.
"When the financial markets stabilize and the economy improves, I expect these issues to be refinanced," James wrote. "While there can be no guarantees, I would anticipate the bulk of refinancings to occur in the coming year."
Raymond James shares closed Monday at $17.91, down 10 cents.