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Show me that the money's not frozen

Deceased comedian Freddie Prinze would tell people "ees not my job." That should be the new catch phrase of Raymond James Financial and a bunch of other investment firms who sold auction-rate securities to their customers as an easily accessible place to put money but, now that the market for those securities has frozen, won't make good on those assurances. They say it's not their responsibility.

What are auction-rate securities? Good question. Just don't buy any right now.

Auction-rate securities were typically pitched by investment firms to their wealthy clients as safe, liquid and cashlike — the money market equivalent for the rich. They are actually long-term securities but because banks held auctions on them weekly or monthly, marketers of auction-rate securities told buyers that they could be sold at any time. That was until February 2008, when the $330 billion auction-rate securities market seized up and auctions started failing by the hundreds. No buyers, no liquidity.

It was one of those "yikes" moments we've seen so many times since the financial meltdown, when once again the financial whizzes who made a mint selling packaged debt didn't understand the risks and hurt a lot of people. But at least this time investors didn't lose out entirely. The securities continued paying interest — and at a higher "fail" rate — even if they couldn't be sold. The problem for investors has been that they don't have access to what they were told was ready money.

What do they do when college tuition comes due or some other big expense and the money is locked up, as it has been for the last 18 months? Some investors have had to sell at a loss.

Here's what should have happened when the market froze: Every investment firm that sold these securities as liquid investments should have ponied up the dough for buybacks.

But that would have been the right thing to do, and we know that the ethically challenged world of finance only does the right thing when a government regulator is breathing down its neck.

Enter government regulator. With complaints flooding into the Securities and Exchange Commission and state regulators, auction-rate securities settlements have now netted about $61 billion in buybacks, with civil penalties totaling nearly $600 million. Those that settled include units of Citigroup, Bank of America, Wachovia and JP-Morgan Chase.

Hello, America's rich people, here's government looking out for you, while your trusted free-market money adviser refused to make good on the claims he made. Just something you may want to consider the next time you call for shrinking government to the point that it can be drowned in a bathtub.

But there is a lot more to be done, because numerous firms are resisting government pressure to do right by their customers.

Raymond James is one of those holdouts. As New York Times business columnist Gretchen Morgenson pointed out last week, the St. Petersburg-based firm has left its clients stuck with about $800 million in illiquid auction-rate securities.

CEO Thomas James explained in a letter in January to the firm's customers that it is "doing everything we can to obtain liquidity as quickly as possible."

They are "doing everything" yet more than half a year later, still no deal.

The firm says it is not responsible and the issuer of the auction-rate securities should be doing the buybacks. James' letter also says that customers were told of the "remote possibility of auction failure" in disclosures. But it appears that customers missed that bit, since angry investors have complained to regulators and both the SEC and Florida's Office of Financial Regulation are investigating.

Raymond James says it doesn't have access to financing to cover a redemption that size. But Morgenson made the point that the firm saw fit to raise its dividend 10 percent last year, which benefited James nicely since he owns 12.2 percent of its shares outstanding. Rewarding shareholders while stiffing customers. Nice.

Bill Reilly, chief of Florida's bureau of securities regulation, says that his agency is leading a multistate effort to investigate Raymond James' auction-rate securities activities. Well, it has been a year. What's the verdict? People with hundreds of millions of dollars in frozen assets are waiting for their relief to be somebody's job.

Show me that the money's not frozen 08/08/09 [Last modified: Saturday, August 8, 2009 4:30am]
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