Dick Bove: Citigroup's Auction Rate Settlement "No Good"

re: Auction Rate Securities You can't tell me that a lot of wall street brokers didn't sell this junk, otherwise Citi and Merrill wouldn't have caved into pressure with the State AG. These companies routinely market instruments their brokers don't understand or don't want to understand in any depth. These securities are risky and have always been risky. Let this be a lesson to those seeking the highest yield. Maybe you should think twice before making investments in atypical derivitives. One would think investors pursuing a higher return would know of the inherent risks in these securities in the first place.

If Dick Bove is representative of the thinking at Ladenburg Thalmann, I am happy to say I would never want to be one of the 200,000 assset and wealth management clients their web site boasts about. Mr. Bove obviously is not oriented toward retail clients as his statement guarantees that he will not be successful in providing customer service.

Why are you guys complaining...you are getting top yield on your money right now. Next time read your material given to you. I'm in ARPs and I'm sitting great. If you put money you needed short term in the market, that is your own greedy fault. People always want to make the quick buck. When told of the risk, you don't listen and want the highest, best yielding or returning product. I bet most of you are jumping in to buy commodities because of their returns....typical investor. So go ahead and hire a lawyer...he/she will be walking away with your money. No...I'm not a Financial Advisor nor do I work for a financial firm. Before I give my money to people, I research the product first.

What about JP Morgan Chase? I am in the exact situation as thousands of Citibank customers and I thought I was dealing with MY Bank NOT an exotic investment arm of my bank. My Rep and my "relationship manager" at Chase came in together to recommend a higher % on my money and since it was presented as liquid as cash, why not get an extra % point on cash for 30 days or so? Try 30 years now! I'm ready to buy a condo and start a new business (employing a couple of people) but no can do while the money is frozen earning pathetic interest rates (wondering why the economy sucking, this doesn't help). Chase Manhattan generously offered to give me a loan on 80% of MY MONEY at low interest rates. Thanks Chase for loaning me my own money. Now thanks to this debacle they can't even return a phone call for a simple banking question without running it through their lawyers first. And I'm not even suing them.. yet. Mr. Cuomo, what are you doing about JP Morgan Chase? When are they going to be forced to "Man up" to their fraudulent activities? It tells you a lot about an industry when the government has to force them to right a wrong. In my business, you screw someone over like this, you go out of business. In the banking business I guess ethics must be legislated. Glad I'm not a banker.

This really is no big deal, as soon as the auction market starts up in full again, maybe 90-180 days, they can sell them back into the market at par and make the accrued interest in the interim. What is wrong is that Citi, Mer, etc. made about 100 bp on these transactions, so on $17b they made between $170mm in commission. Big numbers, but they are basically taking $17b in cash on the balance sheet and converting it to $17b in ARS.

The deception that Citibank and others are being charged with was not really the basic initial sales pitch that brokers used to sell ARS to clients. Though there is plain and plentiful evidence that brokers did overstate the liquiid nature of ARS and often left out mention of the possibility of auction failures, it wasn’t this that investigators held up to dealers so as to compel them to settle. The real transgression by dealers happened when things began to fall apart in the ARS market. The SEC conducted a broad and well-publicized investigation of the auction market in early 2005 that resulted in fifteen securities firms paying $13 million to settle charges of bid-rigging. But the SEC apparently forgot to check back on how things were going in the auction markets, for, starting in early 2005 and just after the start of the investigation, illiquidity issues began to crop up in the ARS market and the dealers were back in there entering artificial orders to keep the market alive, though they didn't share this information with investors. The reason dealers needed to step in at that time was because the financial audit community decided at the beginning of 2005 that ARS could no longer be classified as cash equivalents, prompting an excess of selling, especially from corporate cash investors whom the rule change affected the most. This caused dealers to have to buy at auction to prevent failures to an extent greater than had been the historic case and thus, excluding the artificial demand from backstopping dealers, there was an underlying imbalance of sellers and buyers well before outright auction failures in 2007. There was further and far greater dislocation of this kind at auctions as a result of CDO-backed ARS (about 6% of the total market) failing in August of 2007 and things simply snowballed from there. And this is where the bases for the deception and fraud charges were born. Dealers did not share with investors the dramatic and overwhelming extent to which they were backstopping auctions. By my estimate, based on conversations I had with ARS traders in the fall of 2007, the street was long about 25% of the total market and had investors been made aware of this, many would have decided to fold their ARS cards. But dealers were loathe to make this disclosure for fear of accelerating what they already knew was a possibility – widespread failed auctions. It was a Catch-22. A further deceptive omission on the dealers’ part was the little known fact that their investment bankers had since the early fall of 2007 been going to their issuer clients and exhorting them to temporarily raise the maximum allowable auction rates that were defined in their bond indentures. Many issuers agreed to do just that so as to give dealers some breathing room to clear the auctions at the inordinately high rates that the dealers themselves were setting in order to attract more buyers. The deception here was that the bankers and the traders never told the brokers and their investor clients about these emergency measures. Had they done so, again, there would have been more evidence available to investors that the ARS market was overwhelmed and could easily crack. Thus, it was not the basic initial sale of ARS to investors but these omissions and the redoubled sales efforts that further omitted these facts that are at the core of the authorities’ charges of fraud and misleading sales practices. The SEC, the NY AG, and other parties to the ARS investigation had the dealers cold. And the dealers knew it. While it is a viable theorization that investors could and should have known the risks of ARS that were outlined in the accompanying official statements, no prospectus would have outlined dealer deception, fraud, and misleading sales practices for investors. Mark Conner Principal Corporate Treasury Investment Consulting LLC

Dick Bove has his head in the sand. He obviously has not had his life savings tied up in these ARS for the past 5 months. He is missing the whole point here. There is supposed to be honest, trusting,repsonsible licensed financial advisors working in a clients best interest. I was never told my cash was being put into some long term instrument. I was told this is the most conservative safe possible place to put your cash and it is better than the money market becuase it pays 1% more and it is better than a CD becuase you do not have to lock it up. You can get your cash any 7 days you need it. I was told it was backed by UBS for up to $500K. These FA's specifically seeked out people like me that are not sophisticated in the corporate world and had no clue that our world is being run by corrupt businesses selling deceptive products to line their own pockets. In my opinion they should all be prosecuted and their licenses should be revoked for life.

Good Lord, this guy is "Wall Street's Top Analyst?" More like Top Mouth-Piece. Either he's uninformed, or completely biased. To borrow a phase, "only on Fox." Next time, this guy should opine about a topic that he actually understands. But I won't bother to read such drivel.

The ARS market collapsed in February 2008, not 2007.

I don't know if it is Mr. Bove or the author of this article but there is nothing to substantiate Mr. Bove's assertions that Cit should not have caved. I was sold "cash equivalents" by my financial Advisor. As Citi was calling these investments safe with one hand with the other they were trying to dump the toxic investments. Inorder not to damage their balance sheet they encouraged FA's to push this product. If that isn't fraud what is it? What does Mr. Bove think Citi should have done? fought this out. Cit was dead wrong. Citi was criminally wrong. Citi didn't have a chance to win the case should it have gone to court. What was their defense "oops I accidentally erased these tapes so we shouldn't be punished." Mr. Bove is the the south end of a horse headed north.

Only on FOX! Citi has to RESCIND the transactions because of they were out and out FRAUDULENT. Citi took people's CASH and put it into valueless paper with NO DISCLOSURE. Then it walked away from the market for the valueless paper, which IT controlled, and left its clients holding it. Citi has layers and layers of white glove lawyers working its defense. No expense is spared. Does Fox, or Mr. Bove, really think those lawyers would give up all their future fees for a "raw deal" if Citi had any realistic defense to this settlement?

hey it sounds to me like you are saying IF the banks can dump billions of there bad debt on the public that they should get away with this thinking.. I almost agree with you BUT I have this problem with bankers and there responsibility to the trillion dollars of bad loans that the bankers made with the thought they they would not be responsible for bad loans made to people.... well I got this problem with people not manning up to the mess that they made.. I know i am OLD!!! and think that it is important to be accountable for ones own life.. well bad me but if a banker THINKS i want to pay for his mistake he is mistaken and i do NOT want to pay for his golden parachute... what i want is for bankers and stockholders to take the hit for there terrible policies ... I am sorry that accountability is something that i find lacking in todays business thinking but who cares. anyway in the end the govt is going to bail out the bankers and regulations are going tto come back..

Mr. Bove was obviously not a victim of the fraudulent practices of Citigroup or Merrill Lynch and no doubt had no fund caught up in the ARS mess. The citing of write-downs in this article has nothing to do with the buy-back since these companies will not be writing down this purchase, rather in the end they will actually make money from it.