More stellar PR for BofA, Wachovia, and every other outfit which sold financial products without first figuring out what they were selling. Via Bloomberg:
Franklin Biddar wants his money, and says Bank of America Corp. won’t let him have it.
The 65-year-old real estate investor from Toms River, New Jersey, said he hasn’t had access to cash the bank invested for him in auction-rate preferred shares ever since the market seized up in mid-February. Even when Biddar agreed to sell $100,000 worth of the securities to Fieldstone Capital Group, Charlotte, North Carolina-based Bank of America wouldn’t release the bonds, saying the transaction wasn’t in his interest, he said.
“I can’t do anything,” said Biddar, who was so eager to unlock his money that he was willing to accept 11 percent less than what he paid for the securities. “Bank of America got me into these securities that are supposed to be as safe as a money market, and now they won’t get me out.”
The banks — clearly fearing they are about to be sued by investors — are not commenting on the situation with auction-rate securities. In sum, the securities were sold as being liquid when in fact their liquidity totally depended on banks and brokerages stepping up to make a market. They are unwilling to do so now, hoarding capital to deal with their own balance-sheet issues, and what secondary markets that exist guarantee fire-sale prices. This means investors will see losses, which screams lawsuit to the banks. Hence they are hoping the whole thing just goes away.
But it isn’t.
Not according to one of Wachovia’s own economists. The credit crunch continues to spiral out from those very investors trying to re-coup their own funds from illiquid investments:
“There are a lot of businesses and individuals that are going to find that their access to credit is a lot more limited than it used to be and it’s a lot more expensive,” said Mark Vitner, a senior economist with Wachovia, a large national bank headquartered in Charlotte, N.C. “And the reason why is the lessened ability to securitize these loans and sell them in the secondary market. That lack of liquidity is being priced into all new loans.”
This gets us back to the Fed furiously trying to fix this blockage with additional lending of its own to the banks. As such, there is a capital squeeze, capital being a precursor to credit. Banks need more capital in order to secure any additional credit. But credit cannot be priced without reference to risk. You cannot price your credit properly unless you know the risk.
Unless you are Ken Thompson. In which case you plunge ahead regardless.
