Whether done voluntarily, as in the case of Merrill Lynch, or as the result of settlements with regulators, as with
Citigroup, JPMorgan Chase, Morgan Stanley,
UBS and Wachovia, the buy-backs of failed auction rate securities that giant Wall Street firms have agreed to undertake are significant.
In dollar terms alone, the agreements are staggering.
Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley, all of New York, Zurich, Switzerland-based
UBS AG and Charlotte, N.C.-based Wachovia Corp. will buy back $41.8 billion worth of auction rate bonds from clients and pay a combined $360 million in fines. The fines are the punishment that the Securities and Exchange Commission and state regulators, notably New York Attorney General Andrew Cuomo, meted out for the firms' having promoted the securities — which were issued by municipalities, colleges and mutual funds in an effort to enhance returns — as safe alternatives to money market funds.
Perhaps in a move to stay one step ahead of the regulators, Merrill Lynch & Co. Inc. of New York said that it would buy back $10 billion of the securities from customers.
While the penalties imposed for the ARS transgressions aren't as onerous as the $5 billion paid to settle mutual fund abuses or the $1.4 billion paid in connection with equity research probes, the buybacks represent a watershed for Wall Street.
Never before have securities firms done a "make good" of such epic proportions.
For holders of the failed securities — mostly individuals, businesses and small institutions — the repurchases are welcome financially and a sign that large securities firms recognized their breach of fair-business-conduct rules.
Reputable businesses stand behind their products and services. When those products or services significantly fail to deliver on their stated or implied warranty, the seller typically tries to satisfy the customer with a replacement or a return of the purchase price.
As consumers, we have come to expect such commercial behavior. As investors, we understand we assume risk when we purchase financial instruments, and don't expect sellers to compensate us for market vagaries.
Nevertheless, we expect a level of fair dealing, which the securities laws recognize and require of broker-dealers. In the case of failed ARS securities, the weight of regulation and public opinion has forced Wall Street's largest firms to do right by their customers.
However expensive the settlements and buybacks may be, they are a necessary price to pay if the giants want to retain their brand value and continue their franchise as dealers in public markets.
As a way of doing business, the principle of putting the client first is often easier to espouse than execute. In the ARS situation, the drive for short-term profits apparently jumped to the head of the line.
Now that large firms are putting their money where their principles are, let's hope that this rededication to the individual investor continues and that the lessons of the ARS mess are heeded.
