Christina Rexrode does a fairly good job catching up the Uptown paper of record on the auction-rate security thicket that ensnared Wachovia and BofA a couple months ago. The banks simply had brokers selling stuff they did not understand to customers who did know any better. Overall as much as $350b. worth of securities were put in the hands of investors, some of whom thought they getting into a money market account.
You know what comes next: Lawyers. And this where the Uptown paper does not make clear what is going on. The lawyers want investors holding these products to panic and attempt to sell them on a secondary market, thereby generating a real loss. A loss that can be added to other losses to form the basis of class-action lawsuits.
Perhaps that secondary market route makes sense for some folks who do absolutely need to have their cash back immediately. But they should not be any more blind to the motivations at work in a quick sale than they were when they purchased the stuff to begin with.
As for the banks, there’s bad and worse. Bad is having to make investors whole, worse is paying lawyers while you do that.
Bonus Observation: When do WB and BofA cut their dividends? Shareholders would go ape, true, and maybe a few funds dump the stock, but isn’t that the quickest and easiest way to raise capital in this environment?
Update: With Citi coming in slightly better than expected, the pressure is on BofA next week.
