The Wall Street Journal reported today that the "downstream sellers" of auction-rate securities ("ARS") -- the brokerage firms that sold ARS but neither underwrote them nor ran the auctions -- are denying any responsibility for the ARS crisis. Oppenheimer and Co. says that the investment banks that underwrote ARS are 100 percent to blame and should have to buy them back from Oppenheimer's own brokerage customers. Firms like Oppenheimer argue that the underwriters concealed risks from them.
I agree that the underwriters are largely to blame for the ARS debacle. But it strikes me as absurd that firms like Oppenheimer and Raymond James are saying that they were completely in the dark. Oppenheimer and Raymond James were not exactly babes in the wood -- these firms have investment banking divisions and Mathematics Ph.Ds on their staffs who analyze structured finance markets. It appears that firms like Oppenheimer and Raymond James purposefully ignored problems with these securities because they were receiving very large sales commissions.
Posted by Paul Malmfeldt on August 19, 2008.
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