Aug. 12 (Bloomberg) -- Never mind.
Or, in the words of Merrill Lynch & Co. Chief Executive Officer John Thain, ``Our clients have been caught in an unprecedented liquidity crisis. We are solving it by giving them the option of selling their positions back to us.''
Thain said these words on Aug. 7, after the firm announced it would offer to buy back $10 billion in auction-rate securities from individual investors beginning in January.
The Merrill offer came the same day Citigroup Inc. reached an agreement with regulators to buy back the auction-rate paper it sold to individuals, small businesses and charities, and the day before UBS AG reached a similar agreement to make its customers whole.
There: Auction-rate securities problem solved.
I love the way Thain put the whole episode in present tense, and how he put Merrill in the role of the knight on the white charger, coming to the rescue of investors. If you didn't know what happened, you might be tempted to believe it.
The only question I have for these securities firms' CEOs is: If you had it all to do over again, would you still have stopped supporting these auctions back in February, leaving thousands of customers with investments that they could see but not get their hands on?
`De Minimis'
Thain makes it sound like Merrill's clients were walking around one fine day and all of a sudden stepped in quicksand. He didn't even have the grace to say, ``Mistakes were made,'' which are weasel-words but at least convey that someone made a boo-boo.
The only problem Merrill's clients had was Merrill. The firm sold them auction-rate securities without really telling them how the auctions worked, or that they would stop working if Merrill stopped providing backup bids.
Investors thought they were buying an investment vehicle that was described to them as just like a money-market fund, except with a little more yield. Some brokers apparently didn't even know that their own firm propped up the market, according to the administrative complaint filed on July 31 against Merrill by Massachusetts Secretary of State William Galvin.
Asked what kind of an impact the buyback would have on its balance sheet, Citigroup spokesmen said, ``de minimis,'' a Latin expression meaning insignificant.
Can you imagine? ``De minimis''?
Blood Oath
Let's think about that. I'm sure the company wanted to downplay the impact of the settlement, and maybe sound a little bit flip and even dismissive about it, but what an unfortunate and insulting choice of words.
Thousands of investors at minimum were mightily inconvenienced because they couldn't get at their money.
Their brokers had nothing to tell them, and the firms themselves, at least to judge from the volume and intensity of e- mail I received on this subject, were eerily uncommunicative.
Because of all this, customers have sworn blood oaths against their brokers -- even ones whom they had worked with for years -- and now say they will never trust their securities firms in particular and big Wall Street firms in general ever again -- and this was ``de minimis''? If this was ``de minimis,'' then why was it so important for the big firms to blow up the auction-rate market six months ago?
I wonder, too, just how ``de minimis'' the hundreds of states and municipalities that have had to spend millions of dollars in higher interest and refinancing costs find this whole sorry episode.
Lost to History
Surely the saddest words that accompanied the Citigroup story were: ``Citigroup neither admitted nor denied allegations of wrongdoing.''
This is common practice in securities-firm settlements. The company in question sidesteps the guilt and embarrassment of owning up to its bad behavior.
Now lost to the narrative of ``Lessons Learned From the Great Auction-Rate Securities Freeze of 2008'' are hundreds of pages of e-mails, reports and memoranda that would have documented Citigroup's role in the disaster. I can't imagine that they would have looked very much different from the UBS and Merrill exhibits, but we'll never know.
With the biggest names in the auction-rate securities market now agreeing to provide investors with ``liquidity at par,'' as they call it, we can expect the others to follow suit. It will be interesting to see the next act of this performance, because, as you know, the show never ends. How will the auction-rate securities be repackaged for sale?
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net
Last Updated: August 12, 2008 00:01 EDT
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