Today’s Wall Street Journal reports that while the freeze in the auction-rate securities market struck many individual investors and their financial advisors as a surprise, Wall Street firms that marketed one type of auction security scrambled to prevent auction failures several months before the market collapsed.
Ian Salisbury writes that UBS AG, Citigroup Inc. and Bank of America requested at the end of last year that several student-loan authorities issue waivers that would make these securities easier to sell.
What this says is that Wall Street firms were aware of the potential for auction failures months before the failures began. The question then becomes what were these firms telling their brokerage clients about risk during this time.
Investors were sold auction-rate securities as liquid, cash equivalents. Once the auctions began failing, the market for these securities froze and investors have been left holding their investments ever since.
While the firms highlighted in the WSJ piece refused comment, it is likely that they will have to answer questions soon as investors who suffered losses start litigating their claims.