Add Wachovia to the list of banks that have agreed to buy back auction rate securities. Investors claimed that these securities were marketed to them as safe as cash, but when the market froze they became worthless.
New York State Attorney General Andrew Cuomo has been working hard to ensure that investors, including municipalities and government agencies, get their money back after the investments failed. This is a good thing, because banks should suffer the consequences of what may be fraudulent sales tactics. But it makes one ask, why were the securities sold as essentially risk-free in the first place?
I understand the concept of caveat emptor, but investors need more protection than a dealer’s word that an investment is safe and appropriate. Yes, there is the prospectus of course. But here’s the shocking news — most people don’t read them. Since these documents are written in as obfuscating a manner as possible, is it reasonable to ask if investment firms are hoping that people succumb to the MEGO (my eyes glaze over) effect?
And since the banking and financial services industries are so interconnected, even someone who diligently decides to avoid investments that he or she doesn’t understand (hey, it works for Warren Buffett) can’t steer entirely clear of risk-laden investments. Even putting your money in a savings account with a pitiful interest rate is placing it in a bank that invests in risky derivatives.
So it’s hardly fair to say, “Read the prospectus,” because these documents only appear to exist as a way for banks to cover their … assets.
What’s the solution? There’s always going to be a tension between risky investments and safe investments, and between what’s good for the buyer and what’s good for the seller. Tighter regulations, maybe plain English documents, and tougher consequences for dealers that cross the line from overzealous to illegal would help.
Because, seriously, we can’t keep having do-overs like the current situation.
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