Although brokers have welcomed the billions in auction rate securities buybacks announced by the big Wall Street firms in the past two weeks, they are still angry that it took six months for their companies to begin dealing with the fiasco.
Representatives say that they have suffered damaged reputations during the delay.
"It's about time," said a rep at Smith Barney, New York-based
Citigroup Inc.'s brokerage unit, who asked not to be identified.
"We all knew [this buyback] was going to happen," said a broker at
UBS Financial Services Inc. of New York, who also asked not to be identified.
UBS "waited too long" to take action, the broker said, adding: "I wasted a ton of time this year" dealing with clients who own the securities.
The delay in responding is all the more puzzling because the cost of the buybacks ultimately may prove to be minimal, brokers said.
Merrill Lynch & Co. Inc. of New York, for example, said that it doesn't expect its ARS redemptions to have a materially adverse impact on its capital ratios, liquidity or consolidated financial performance.
"Ultimately, there is no risk" to Morgan Stanley in repurchasing ARS, because the securities are generally high-quality assets, said a Midwest-based rep at the firm, who asked not to be identified.
KEPT IN THE DARK
Brokers said they were kept in the dark about the risk of auction failures.
State investigations have revealed that the industry knew last August that widespread auction failures were likely to occur.
Complaints filed by Massachusetts against UBS and Merrill Lynch, and a New York charge against UBS, also detail a series of firm-sponsored conference calls for retail brokers that sought to allay concerns about the ARS market.
The New York complaint quotes a UBS trading desk manager telling brokers in a Feb. 8 call: "We do not have reason to change our current practice [of supporting the auctions] when UBS is lead underwriter."
On Feb. 13, all the Wall Street dealers pulled out of ARS auctions.
"There was no intentional hiding or efforts to hide the facts regarding the risks inherent in ARS," UBS spokesman Kris Kagel said in a statement. "It is important to note that UBS was the last firm to stop supporting auctions."
At Merrill, a senior trader on the firm's auction desk warned in a January e-mail that if insured ARS issues failed, "one can make the assumption that it will spread to the other sectors of our market regardless of the insurer or the rating," according to the Massachusetts complaint. But in a Feb. 7 call with reps, a Merrill fixed- income analyst told brokers that the firm was committed to ARS and that although nothing was guaranteed, he didn't anticipate such a contagion scenario.
Merrill Lynch has said that the firm's analysts expressed their "honest belief" that ARS offered higher returns in exchange for less liquidity.
Merrill spokesman Mark Herr declined further comment on the complaint.
At Morgan Stanley, "there was no reference that I'm aware of to [an auction] failure," said the Morgan Stanley rep in the Midwest. "That's why [Morgan Stanley is] stepping up and making [clients] whole," the rep said.
A Morgan Stanley spokeswoman declined to comment.
Wachovia Securities LLC of St. Louis had an ARS call last January, said a broker at the firm, who asked not to be identified.
"I can tell you for sure that [risk of failed auctions] didn't come across in the conference call," the broker said.
Wachovia spokeswoman Teresa Dougherty declined to comment.
HURT BY ALLEGATIONS
Brokers also said they've been hurt by allegations, made by state regulators and in press reports, that they sold ARS for higher pay.
"Brokers get almost nothing on these," said a Merrill rep in the Southwest, who asked not to be identified.
The bad press has made "people think [we're] evil bastards" in selling ARS, the rep said.
At Merrill, brokers normally got a 0.125% gross trail on ARS assets, but in the second half of 2007, the firm briefly offered 0.25% to 1% on some issues, according to the complaint filed by Massachusetts. Those extra sales credits sparked an internal debate at the firm, according to an e-mail obtained by state investigators.
"The compensation didn't change our financial advisers' approach to ARS," said Merrill spokesman Mark Herr. "They believed they were good investments for clients willing to trade some liquidity for higher return."
Massachusetts said UBS reps got 0.25% in gross revenue on ARS issues — equal to the fee the firm receives for managing auctions. The firm also got a 1% underwriting fee.
"No one did it for the money," said the Wachovia rep, who added that he was paid less than 0.25% in gross.
Like other brokers, this rep said the amount of pay on ARS was minimal — not enough to merit attention.
PASSING THE BLAME?
Some observers, however, said that wirehouse reps may be feeling a bit too sorry for themselves.
Although Wall Street firms deserve to be "skewered" for the ARS problem, wirehouse brokers can't simply blame their companies for product failures, said David Peterson, a rep with Next Financial Group Inc. in Maple Grove, Minn., who manages about $40 million for clients.
"They should stop trying to sell an extra ... return [by] taking the extra risk," Mr. Peterson said.
But even plaintiff's attorneys who represent investors don't put the blame on brokers.
"There was failure [by firms] to disclose the risk," said David Robbins, a partner at Kaufmann Feiner Yamin Gildin & Robbins LLP of New York. Firms "know their brokers never had discussions with their clients about these products."
Firms have had to settle with regulators, Mr. Robbins said, "because they saw they could not defend these cases."
E-mail Dan Jamieson at [email protected].
