Raymond James has found itself in a tight spot on auction rate securities. Many of its customers still have funds frozen in the now permanently illiquid ARS and, unlike many of its rivals in the brokerage business, it cannot bail them out. The problem is simple: it’s customers hold $1 billion of ARS but the firm lacks the funds to buy them back. But if it doesn’t bail out customers, it risks losing them to rivals who were able to be more generous to clients caught holding ARS.
So what will Raymond James do? Well, you know the answer to this already. It is applying for TARP money to bolster its capital position so it can bail out customers while still meeting regulatory capital requirements.
The company “would have to have sufficient regulatory capital and cash or borrowing power to do so, and at present it does not have such capacity,” the firm said in its 10-K annual report filed with the Securities and Exchange Commission.
“Further, if such repurchases were made at par value there could be a market loss,” the company continued. “Any such loss could adversely affect the results of operations.”
Raymond James shares fell 23 per cent to close at $16.92 on Monday, giving up gains made in the last week when shares rallied from a five-year low. The stock is down 43 per cent this year.
Raymond James is one of many brokerages under fire from regulators over the handling of auction rate securities, a market that froze up in January amid a worsening credit crunch. Hundreds of thousands of Americans suddenly were stuck with securities touted as cash equivalents.
State and U.S. officials have pushed big investment banks like UBS and Merrill Lynch to reimburse clients by repurchasing billions of dollars of auction-rates at face value. Raymond James, which did not underwrite ARS, resisted such buybacks.