Morgan Stanley’s Auction-Rate Securities Proposal ? “Too Little, Too Late”


Late yesterday, Morgan Stanley announced its intent to settle auction-rate securities claims with retail clients (identified as individual customers, charitable organizations and small businesses with accounts of $10 million or less) who purchased auction-rate securities from Morgan Stanley. Under Morgan Stanley’s proposal, beginning no later than September 30, 2008, it will repurchase auction-rate securities that it sold before February 13, 2008 at par value. In addition, Morgan Stanley will reimburse retail clients for any losses that they sustained from selling auction-rate securities. Morgan Stanley also vaguely announced that it will seek solutions for larger institutional investors prior to December 31, 2009.

State regulators responded quickly, saying that Morgan Stanley’s announcement was a positive first step but was not sufficient to resolve the regulators’ claims against Morgan Stanley. Previous actions by the regulators indicate that the regulators are demanding that all major firms follow the precedents set by UBS and Citigroup in resolving claims. These precedents would require remaining Wall Street banks to repurchase auction-rate securities from individual retail customers, charities, and small businesses, reimburse such clients for any losses that they sustained by selling after February 12, 2008, set up a resolution process for customers who sustained unusual damages, and pay significant fines for their misconduct.

The precedents being set by earlier settlements appear to leave it up to larger corporate, pension and other institutions to fend for themselves. The only thing that the Wall Street banks are agreeing to do for these investors is use their “best efforts” or “seek solutions” for these investors. Thus such investors are left hoping that something positive will happen over the next two years in the auction-rate securities market or taking action to protect their rights.