New York AG Andrew Cuomo, in our opinion, is striking a good balance between hard-arse prosecutor and free-market realist. Unlike his predecessor, who never saw a voter who hadn’t been swindled, Cuomo is quick to say that if people speculate and get burned then that’s their own fault. Cuomo is right about this and right to draw a distinction between speculation and auction-rate securities, which were often bought and sold as an equivalent of cash.
If banks understood and made clients aware of the risks of ARS and the clients bought them anyway, then there’s no foul: When you roll the dice and lose you have no one to blame but yourself. In this case, however, we suspect that banks either underestimated or ignored the risks of ARS (negligence)–or, in some cases, actually misrepresented them (fraud).
In the latter cases, Cuomo’s solution is a good one: Ask the banks to make clients whole by buying the ARS back at par. Citi and UBS have agreed to do this. Other banks, such as Merrill Lynch (MER), haven’t.
We have no idea what the facts are in the Merrill case (as nor, we suspect, does anyone else opining about the the firm’s guilt), and if Merrill thinks it adequately represented the risks of ARS and clients bought them anyway, we don’t blame it for not settling. Judging from Cuomo’s appearance on CNBC this morning, however, his patience has run out:
Mark Haines: HERE NOW IN A CNBC EXCLUSIVE, NEW YORK STATE ATTORNEY GENERAL ANDREW CUOMO. GOOD MORNING, SIR. THANKS SO MUCH FOR BEING WITH US.
Andrew Cuomo: MY PLEASURE. THANKS FOR HAVING ME.
Haines: HOW MUCH CAN YOU TELL US ABOUT WHERE THIS INVESTIGATION IS, WHICH I I ASSUME WILL TURN INTO SOME SORT OF DISCIPLINARY ACTION OR SOME SORT OF COURT ACTION?
Cuomo: WELL, OUR MAIN GOAL HERE IS TO FIX THE PROBLEM. THE OLD ADAGE IS YOU FOLLOW THE MONEY IN A CASE. HERE WE’RE FOLLOWING THE PEOPLE. AND IF YOU LOOK AT THE WAY WE’RE PROCEEDING WITH THE INVESTIGATION, WE’RE STARTING WITH THE LARGEST BANKS IN TERMS OF NUMBER OF PEOPLE INVOLVED, PEOPLE WHO BOUGHT THESE AUCTION RATE SECURITIES, AND WE’RE WORKING OUR WAY DOWN THE LIST. WE’RE NOW FOCUSING ON SOME OF THE MID-SIZED PLAYERS IN THE MARKET, AS YOU MENTIONED, GOLDMAN, DEUTSCHE BANK, BANK OF AMERICA .
Haines: WHAT’S THE VIOLATION? I MEAN, WERE THESE SECURITIES MISREPRESENTED TO THE CUSTOMERS OR WHAT?
Cuomo: SHORT ANSWER, YES, OR THAT’S THE THEORY OF OUR CASE. BECAUSE MAKE NO MISTAKE, IF A PERSON BUYS A SECURITY AND LOSES MONEY, WELL, WELCOME TO THE MARKETPLACE.
Cuomo: WE ONLY GET INVOLVED TO PROTECT THE CONSUMER IF THERE WAS ILLEGAL VIOLATION, IF THERE WAS A FRAUDULENT VIOLATION, IF THERE WAS A MISREPRESENTATION, IF THEY WERE SOLD SOMETHING THAT TURNED OUT NOT TO BE TRUE. AND THAT’S WHAT WE’RE LOOKING AT IN THIS CASE. AND AS YOU ALLUDED TO, MY PREFERENCE IS ALWAYS TO SETTLE AND RESOLVE THE ISSUE AND MOVE ON. AND WE’VE BEEN TRYING TO DO THAT. THERE ARE SOME BANKS WE’VE BEEN UNABLE TO DO THAT WITH, AND AT ONE POINT, WHEN YOU TRY TO SETTLE AND YOU CAN’T SETTLE AND YOU REACH A POINT OF IMPASSE, THEN YOU HAVE NO CHOICE BUT TO GO TO LITIGATION. BUT WHENEVER I HAVE AN OPTION, I TRY TO SETTLE. WE HAVE WITH CITI, WITH UBS, JPMORGAN, MORGAN STANLEY, WACHOVIA. SO, WE’RE MORE THAN REASONABLE AS I THINK THE SETTLEMENTS HAVE SHOWN.
CNBC’s Erin Burnett: ALL RIGHT. NOW, THE OVERALL TOTAL BACK THE LAST TIME WE WENT THROUGH SOMETHING LIKE THIS WITH WALL STREET WAS THE CHINESE WALL BETWEEN RESEARCH AND INVESTMENT BANKING, ABOUT $1.2 BILLION IN FINES. YOU’RE ALREADY GETTING UP THERE WITH THE COMPANIES YOU’VE SETTLED WITH. MOST PEOPLE EXPECT THE OVERALL TALLY IN TERMS OF FINES WILL BE MUCH HIGHER THAN $1.2 BILLION OR $1.3 BILLION. IS THAT RIGHT?
Cuomo: IT COULD BE. IN TRUTH, MY FIRST FOCUS IS TO GET PEOPLE THEIR MONEY BACK.YOU HAVE HUNDREDS OF THOUSANDS OF PEOPLE HOLDING THESE SECURITIES, WHO THOUGHT THEY WERE BUYING A TWO-WEEK, THREE-WEEK, FOUR-WEEK SECURITY, WHO HAVE NOW BEEN LOCKED UP FOR SIX OR SEVEN MONTHS. AND THOSE ARE THE PEOPLE I REPRESENT, AND THEY’RE SAYING, I WANT MY MONEY BACK. I WAS SOLD A CASH EQUIVALENT — LIKE CASH. I NEED MY MONEY BACK. THAT’S THE FIRST PRIORITY. THE PENALTIES, I THINK ARE ALSO APPROPRIATE, AND WE HAVE LEVIED PENALTIES, BUT FIRST I WANTTO GET PEOPLE THEIR MONEY BACK.
Burnett: RIGHT. NOW WHAT ABOUT MERRILL LYNCH? I KNOW YOU HAD GIVEN THEM A FIVE-DAY WINDOW TO RESPOND. MERRILL LYNCH HAS NOT SETTLED, THEY HAVE NOT BEEN ON THE LIST. ARE YOU NOW GOING TO COURT WITH MERRILL LYNCH, AND WHAT MAKES THEIR CASE DIFFERENT THAN CITI OR ANYONE ELSE WHO SAID, FINE, WE’LL SETTLE?
Cuomo: WELL, MERRILL IS A PROBLEM BECAUSE THEY WERE ONE OF THE LARGEST SELLER OF THESE SECURITIES. BASICALLY, CITI, UBS, AND MERRILL WERE THE THREE TOP AND WE SETTLED WITH CITI AND UBS. I’VE BEEN TRYING TO SETTLE WITH MERRILL FOR WEEKS FOR WEEKS. WE’VE BEEN UNABLE TO REACH A SETTLEMENT.
I SENT THEM A LETTER LAST WEEK THAT SAID, BASICALLY, IT’S WHAT WE CALL A LETTER OF IMMINENT THREAT, THAT WE WILL TAKE FIVE DAYS, WE’LL TRY TO SETTLE FOR ANOTHER FIVE DAYS. IF WE DON’T SETTLE, THEN WE’RE AT AN IMPASSE.
TODAY IS THE LAST DAY.IF WE DON’T SETTLE TODAY, TOMORROW AT THIS TIME WE’LL BE IN COURT.
AND AGAIN, I DON’T LIKE TO GO TO COURT. I LIKE TO RESOLVE A PROBLEM. I LIKE TO GET IT DONE QUICKLY, GET PEOPLE THEIR MONEY BACK. THAT’S WHAT THIS IS ALL ABOUT, RESTORE CONFIDENCE IN THE MARKET. THAT’S WHAT THIS IS ALL ABOUT.
BUT, AT ONE POINT, ENOUGH IS ENOUGH. I HAVE SHOWN REASONABLENESS.
I HAVE SETTLED WITH A LOT OF BANKS.
Burnett: SO, BY THE END OF THE DAY, WE’LL KNOW.
Haines: YOU’RE A PUSSYCAT.
Cuomo: THANK YOU. THAT’S WHAT I’VE ALWAYS WANTED TO BE.
Haines: ADDRESS A LARGER QUESTION HERE, WHICH I KNOW YOU’RE GOING TO DODGE, BUT I’VE GOT TO ASK IT. FIRST WE HAD THE RESEARCH MESS, NOW WE’VE GOT THIS AUCTION RATE SECURITY MESS. WHAT’S GOING ON ON WALL STREET ? IT’S LIKE RECOMMEND PER ROOM FULL OF BAD APPLES HERE. AS SOON AS YOU TURN AWAY, THEY GET IN TROUBLE SOMEWHERE ELSE.
Cuomo: WELL, I THINK THERE IS A BALANCE, AND I THINK THE REGULATORS ACTUALLY HELP THE MARKETPLACE. I THINK I CAN HELP THE MARKETPLACE. BECAUSE THE MARKETPLACE LEFT UNCHECKED CAN GET OVERAGGRESSIVE AND HYPERACTIVE, AND ONE COMPANY’S DOING THIS, SO YOU START TO DO THIS. THE REGULATORS DRAW THE LINES ON THE FIELD, AND THEY CALL FOULS. AND I THINK THAT ACTUALLY HELPS THE MARKETPLACE LONG-TERM. I KNOW WHAT HELPS INVESTOR CONFIDENCE.YOU HAVE HUNDREDS OF THOUSANDS OF PEOPLE WHO BOUGHT THESE AUCTION RATE SECURITIES AND ARE NOW LOCKED IN, AND THEY BELIEVE THEY WERE DEFRAUDED, AND THIS IS AN INVESTOR’S WORST NIGHTMARE. I BUY A SECURITY, I WAS DEFRAUDED.WHO’S GOING TO HELP ME? AND HAVING THE ATTORNEY GENERAL’S OFFICE, THE OTHER REGULATORS SAY THE SYSTEM WORKS ULTIMATELY, IF YOU WERE DEFRAUDED, WE’LL STEP IN, THAT HELPS INVESTOR CONFIDENCE. INVESTOR CONFIDENCE ULTIMATELY HELPS THE ENTIRE MARKETPLACE.
Burnett: A LOT OF INVESTORS SAID THAT, THAT THIS IS SIGNIFICANT BECAUSE IT INVOLVES RETAIL INVESTORS WHO BECAME A PREY OF THE MARKET OVERALL AFTER –
Haines: WE HAVE TO LEAVE IT THERE, BUT THANK YOU VERY MUCH FOR YOUR TIME.
Cuomo: MY PLEASURE.
Haines: NEW YORK ATTORNEY GENERAL ANDREW CUOMO.
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