While the sudden collapse of the auction-rate securities market was a surprise for individual investors and their financial advisors, it seems that Wall Street firms were aware of potential problems with the student loan auction-rate market months before the market freeze occurred in February 2008. According to a report by Ian Salisbury in The Wall Street Journal, broker?dealers such as UBS, Citigroup and Bank of America requested in late 2007 that student-loan authorities issues waivers that would make these auction-rate securities easier to sell.
Such a behind-the-scenes move clearly demonstrates that Wall Street firms were struggling to keep the auction-rate market afloat for months before the existence of the problems became public knowledge. In other words, the firms knew of the upcoming storm and kept the investing public in the dark. This conduct raises serious questions of what exactly Wall Street firms were telling their clients about the emerging risks in the auction-rate markets. As often happens, Wall Street firms found themselves with conflicted loyalties between the issuers and the investors. In this case, Wall Street chose to work with the issuers and not the investing public.
Individual investors who bought auction-rate securities right up until the market froze in mid-February had no inkling of the trouble that was brewing. Marilyn Gales, an accountant in Long Beach, New York, and her husband bought $375,000 in student-loan auction-rate securities on February 11, 2008 through UBS. Ms. Gales said, “This was sold as totally liquid. We were told nothing” about the waivers being issued by student loan authorities. Other investors in auction-rate securities have also asserted that they were told they were safe, cash equivalents.
UBS, Citigroup, and Bank of America each declined to answer questions for The Wall Street Journal.
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