Investors harmed by the current auction-rate market meltdown accuse Wall Street of hiding the recognized risks of the securities from them. According to a June 26, Bloomberg article, some investors are even comparing this crisis to the dot-com scandal involving former Merrill Lynch analyst Henry Blodget.
Many wonder why brokers did not see the impending catastrophe for the market. But, according to recent reports they actually were aware.
To date, at least 24 proposed class action lawsuits have been filed against brokerages. A nine-state task force is also investigating how these firms went about marketing the securities to clients. Among the task force is
One investor claims her broker at UBS recommended investing in auction-rate securities last December. At the same time UBS is reported to having told an issuer of these securities that the $330 billion market was in danger of collapsing. Shortly thereafter, dealers who underwrote and managed the market for over 20 years were forced to stop buying as last resorts due to the escalating mortgage losses in February.
Over the past two decades, auction-rate bonds have allowed local governments, hospitals and universities to borrow money for the long term at cheap, short-term rates because they would resell the debt at upcoming auctions every seven, 28 or 35 days.
As light continues to shine on the problems associated with the auction-rate collapse, it becomes clearer every day that some on Wall Street were well aware of the potential issues with these products before the auctions themselves started to fail.