Yesterday, Bloomberg News reported that Wall Street banks may be permitted to fund their auction-rate securities settlements with federal and state regulators using monies provided by the Fed. According to published reports, Wall Street banks may borrow as much as $100 billion from the Fed in order to fund settlements for their allegedly fraudulent activities in selling auction-rate securities.
Bloomberg’s story quoted David Kotok, Chief Investment Officer at Cumberland Advisors, Inc., who stated that, by borrowing through the Fed, Wall Street banks can save up to 75% of the interest charges which would be associated with market rate borrowing. “If a brokerage firm like Merrill uses its access to the Fed, the interest rate attached to the cost of funding the ARS buy back is currently estimated at 2.25%.” If, on the other hand, Merrill were forced to seek funds from market sources, their costs could be as high as 8 to 9%. If such loans are provided by the Fed, presumably the Fed would receive the firms’ illiquid auction-rate securities (long-term notes paying below market interest rates) as security for the loans thus putting further burdens on the American taxpayer.
This arrangement would effectively foist much of the costs associated with Wall Street’s misconduct off on the American taxpayer. Such an arrangement is contrary to all logic and reason. Why should Main Street America be forced to bear the brunt of Wall Street’s abuses? Once again, it appears that Washington’s special interest groups and policymakers have lost touch with reality in sending the message that indeed “misconduct does pay”, at least in big business.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and individual investors in auction-rate securities cases. For further information, please contact us.